UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2021
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
(State or other jurisdiction of
incorporation or organization)
84-0904275
(I.R.S. Employer
Identification No.)
10910 Domain Drive, Suite 300, Austin, TX
(Address of principal executive offices)
78758
(Zip Code)
Registrant’s phone number, including area code (512) 777-3800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
HNGR
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report x
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
The aggregate market value of common stock held by non-affiliates on June 30, 2021, was approximately $950.3 million.
As of February 16, 2022, the registrant had 38,716,040 shares of its Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the registrant’s definitive proxy statement or amendment hereto to be filed within 120 days after the
close of the fiscal year covered by this annual report.
INDEX
Hanger, Inc.
Part I
Item 1. Business
1
Item 1A. Risk Factors
15
Item 1B. Unresolved Staff Comments
27
Item 2. Properties
27
Item 3. Legal Proceedings
28
Item 4. Mine Safety Disclosures
28
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
29
Item 6. Reserved
30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
58
Item 8. Financial Statements and Supplementary Data
59
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
106
Item 9A. Controls and Procedures
106
Item 9B. Other Information
107
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspection
107
Part III
Item 10. Directors, Executive Officers and Corporate Governance
108
Item 11. Executive Compensation
108
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
108
Item 13. Certain Relationships and Related Transactions, and Director Independence
108
Item 14. Principal Accountant Fees and Services
108
Part IV
Item 15. Exhibits and Financial Statement Schedules
109
Item 16. Form 10-K Summary
111
Signatures
112
i
PART I
ITEM 1. BUSINESS.
Business Overview
General
Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients
with disabilities or injuries, and we and our predecessor companies have provided orthotic and prosthetic (“O&P”) services for nearly 160 years. We provide O&P
services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and
clinic settings. We operate through two segments - Patient Care and Products & Services.
Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in comprehensive, outcomes-based design, fabrication, and delivery of
custom O&P devices through 760 patient care clinics and 115 satellite locations in 47 states and the District of Columbia, as of December 31, 2021. We also
provide payor network contracting services to other O&P providers through this segment.
Our Products & Services segment is comprised of our distribution services and therapeutic solutions businesses. As a leading provider of O&P products in the
United States, we engage in the distribution of a broad catalog of branded and private label O&P devices, products, and components to independent O&P providers
nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies
and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately 4,000 skilled nursing and post-acute providers nationwide.
For the years ended December 31, 2021, 2020, and 2019, our net revenues were $1,120.5 million, $1,001.2 million, and $1,098.0 million, respectively. We
recorded net income of $42.0 million, $38.2 million, and $27.5 million for the years ended December 31, 2021, 2020, and 2019, respectively.
The following table summarizes the percentage of net revenues derived from each of our two operating segments:
For the Years Ended December 31,
2021
2020
2019
Patient Care
84.2 %
83.1 %
82.5 %
Products & Services
15.8 %
16.9 %
17.5 %
See Note S - “Segment and Related Information” to our consolidated financial statements in this Annual Report on Form 10-K for additional information about our
segments.
Industry Overview
As of 2019, we estimate that approximately $4.3 billion is spent in the United States each year for prescription-based O&P products and services through O&P
clinics. Orthotic devices, or “orthoses,” are externally applied devices used to modify the structural and functional characteristics of the neuromuscular and skeletal
system. These devices typically are provided to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities, or joints; injuries from
sports; or conditions such as cerebral palsy, scoliosis, and stroke. Prosthetic devices, or “prostheses,” are artificial devices that replace a missing limb or portion of
a limb. These devices are provided to patients with amputated or congenitally absent limbs to replace the function and appearance of a limb so that patients can
resume activities of daily living and work. The most prevalent causes for amputations are from complications due to diabetes, trauma associated with accidents,
physical injury, or infection.
The industry derives its primary revenue from the evaluation, fabrication, and fitting of custom O&P devices to serve patients needing both new and replacement
devices. Additionally, O&P clinics typically provide patients with other non-custom orthotic products, diabetic shoes and inserts, and support patients through the
repair and adjustment of their devices.
We believe our Patient Care segment currently accounts for approximately 24% of the market, providing a comprehensive portfolio of orthotic, prosthetic, and
post-operative solutions to patients in acute, post-acute, and patient care clinic settings.
1
We estimate that the next two largest providers of O&P services in the United States are Össur and the U.S. Department of Veterans Affairs (the “VA”), which we
believe operate 81 and 79 O&P clinics, respectively. In addition to serving on behalf of its covered veterans through their own facilities, in certain markets the VA
is also a client of Hanger Clinic. Approximately 10% of Hanger Clinic’s revenue is derived from services provided to veteran patients through contracts with the
VA.
The O&P patient care services market in the United States is highly fragmented and is characterized by regional and local independent O&P businesses operated
predominantly by independent operators, but also including two O&P product manufacturers with substantial international patient care services operations. We
estimate that our top ten competitors have an average of approximately 40 clinics each, with the smallest having 24 and the largest having 81 clinics. The
remainder of the market is served by individual practitioners and smaller regional or market-based firms with approximately twenty or fewer clinics. Based on this,
we do not believe that any single competitor accounts for 2.5% or more of the nation’s total estimated O&P clinic revenues.
The industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of
O&P devices. We anticipate that the demand for O&P services will continue to grow as the nation’s population increases, and as a result of several trends,
including the aging of the U.S. population, there will be an increase in the prevalence of disease-related disability and the demand for new and advanced devices.
We believe the typical replacement time for prosthetic devices is three to five years, while the typical replacement time for orthotic devices varies, depending on
the device.
We estimate that approximately $1.8 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components,
devices, and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P services. We estimate that our
distribution sales account for approximately 7% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).
We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be
approximately $150 million annually. We currently provide these products and services to approximately 25% of the estimated 15,000 SNFs located in the U.S.
We estimate the market for rehabilitation technologies, clinical programs, and training within the broader post-acute rehabilitation markets to be approximately
$400 million annually. We do not currently provide a meaningful amount of products and services to this broader market.
Business Strategy
Our goal is to be the provider of choice for patients, referring physicians, and customers seeking products and services that enhance human physical capabilities.
Our strategy is to pursue the creation of an integrated therapeutic solutions model that will have a strong focus in custom O&P and immediately adjacent markets
to provide our patients and customers with a spectrum of services that address their individual needs. To foster growth, we intend to focus on initiatives that will
differentiate Hanger from our competitors.
Government-led health care reform is driving significant changes to our business environment, with focus on lowering health care costs while improving patient
outcomes and satisfaction. As a result, our strategy is focused on enhancing the quality of care to elevate patient satisfaction, investing in processes and
technologies to measure and report on patient outcomes and connectedness, and further increasing our profile with referring health care providers and payors. In
addition, we are committed to reducing the cost of this care by undertaking several initiatives that include establishing device standards that provide the highest
function, durability, and comfort at the lowest cost, reconfiguring our supply chain and fabrication processes, streamlining internal administrative processes, and
reducing back-office functions performed within patient care clinics.
Business Description
Patient Care
Our Patient Care segment employs approximately 1,660 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which
are certified by either the American Board for Certification (“ABC”) or the Board of Certification of Orthotists and Prosthetists, which are the two boards that
certify O&P clinicians. To facilitate timely service to our patients, we also employ technicians, fitters, and other ancillary providers to assist our clinicians in the
performance of their duties. Through this segment, we additionally provide network contracting services to independent providers of O&P.
2
Patients are typically referred to Hanger Clinic by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then
consult with both the referring physician and the patient with a view toward assisting in the selection of an orthotic or prosthetic device to meet the patient’s needs.
O&P devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process,
and lower the cost of rehabilitation.
Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of
certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs. When
fabricating a device, our clinicians ascertain the specific requirements, componentry, and measurements necessary for the construction of the device. Custom
devices are constructed using componentry provided by a variety of third party manufacturers that specialize in O&P, coupled with sockets and other elements that
are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs. Our clinicians and technicians typically utilize
castings, electronic scans, and other techniques to fabricate items that are specialized for the patient. After fabricating the device, a fitting process is undertaken
and adjustments are made to ensure the achievement of proper alignment, fit, and patient comfort. The fitting process often involves several stages to successfully
achieve desired functional and cosmetic results.
Given the differing physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic, and other
needs of each individual patient, each fabricated prosthesis and orthosis is customized for each particular patient. These custom devices are commonly fabricated at
one of our regional or national fabrication facilities.
We have earned a reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort
and capability and can significantly enhance the rehabilitation process. We utilize multiple scanning and imaging technologies in the fabrication process,
depending on the patient’s individual needs, including our proprietary Insignia scanning system. The Insignia system scans the patient and produces an accurate
computer-generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.
In recent years, we have established a centralized revenue cycle management organization that assists our clinics in pre-authorization, patient eligibility, denial
management, collections, payor audit coordination, and other accounts receivable processes.
The principal reimbursement sources for our services are:
•
Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance
companies, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers,
workers’ compensation programs, third party administrators, and similar sources;
•
Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with
disabilities;
•
Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons
requiring financial assistance, regardless of age, which may supplement Medicare benefits for persons aged 65 or older requiring financial assistance;
and
•
the VA.
We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be reimbursed for our services. These
contracts usually have a stated term of one to three years and generally may be terminated without cause by either party on 60 to 90 days’ notice, or on 30 days’
notice if we have not complied with certain licensing, certification, program standards, Medicare or Medicaid requirements, or other regulatory requirements.
Reimbursement for services is typically based on a fee schedule negotiated with the third party payor that reflects various factors, including market conditions,
geographic area, and number of persons covered. Many of our commercial contracts are indexed to the commensurate Medicare fee schedule that relates to the
products or services being provided.
3
Government reimbursement, comprised of Medicare, Medicaid, and the VA, in the aggregate, accounted for approximately, 58.5%, 57.7%, and 57.5% of our net
revenue in 2021, 2020, and 2019, respectively. These payors set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each
year based on the Consumer Price Index for All Urban Consumers (“CPI-U”) unless Congress acts to change or eliminate the adjustment. The CPI-U is adjusted
further by an efficiency factor known as the “Productivity Adjustment” or the “Multi-Factor Productivity Adjustment” in order to determine the final rate
adjustment each year. The Medicare price adjustments for 2022, 2021, 2020, and 2019 were 5.1%, 0.2%, 0.9%, and 2.3%, respectively. There can be no assurance
that future adjustments will not reduce reimbursements for O&P services and products from these sources.
We, and the O&P industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive
Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits, Supplemental Medical Review Contractor (“SMRC”) audits, and Unified
Program Integrity Contractor (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, and SMRC audits are generally post-payment
audits. UPIC audits can be both pre- or post-payment audits, with a majority currently pre-payment. TPE audits replaced the previous Medicare Administrative
Contractor audits. Adverse post-payment audit determinations generally require Hanger to reimburse Medicare for payments previously made, while adverse pre-
payment audit determinations generally result in the denial of payment. In either case, we can request a redetermination or appeal, if we believe the adverse
determination is unwarranted, which can take an extensive period of time to resolve, currently up to six years or more.
Products & Services
Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we distribute branded and private label devices, products, and components to
independent O&P clinics and other customers. Through our wholly-owned subsidiary, Accelerated Care Plus Corp. (“ACP”), our therapeutic solutions business is a
leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute rehabilitation providers. Our value proposition is
to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence-based clinical programs, and ongoing
consultative education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex
conditions. We currently serve approximately 4,000 skilled nursing and post-acute providers nationwide. Through our SureFit subsidiary, we also manufacture and
sell therapeutic footwear for diabetic patients in the podiatric market. We also operate the Hanger Fabrication Network, which fabricates custom O&P devices for
our patient care clinics, as well as for independent O&P clinics.
Through our internal “supply chain” organization, we purchase, warehouse, and distribute over 350,000 active SKUs from approximately 750 different suppliers
through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and distribution facilities in Nevada, Georgia, Illinois, and Texas
provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days. In January 2022, we announced
plans to close the warehouse and distribution facilities in Illinois and Texas in the second quarter of 2022, consolidating their operations into our Georgia and
Nevada facilities.
Our supply chain organization enables us to:
•
centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;
•
better manage our patient care clinic inventory levels and improve inventory turns;
•
improve inventory quality control;
•
encourage our patient care clinics to use the most clinically appropriate products; and
•
coordinate new product development efforts with key vendors.
Effects of the COVID-19 Pandemic
We began to see a reduction in business volumes as a result of the COVID-19 pandemic starting in the last weeks of March 2020. As federal, state, and local
authorities implemented social distancing and suppression measures to respond to an increasing number of nationwide COVID-19 infections, we experienced a
decrease in our patient appointments and general business volumes. In response, during the last week of March 2020, we made certain changes to our operations,
implemented
4
a broad number of cost reduction measures, and delayed certain capital investment projects. Although our business volumes have shown gradual improvement
from their initial significant decline in mid-2020, the adverse impact of the COVID-19 pandemic on our business continued through the fourth quarter of 2021, and
into 2022. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic, including
temporary labor and cost reduction measures largely in place during the second and third quarters of 2020, may not be indicative of future financial and operational
performance. The volume effects, our operating responses, and the effects of COVID-19 on our financial condition are discussed in Item 1A. “Risk Factors,” Item
7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the “Financial Condition, Liquidity and Capital Resources”
sections below. Our results of operations for any quarter during the COVID-19 pandemic may not be indicative of results of operations that may be achieved for a
subsequent quarter or the full year, and may not be similar to results of operations experienced in prior years. In addition, results in any given period in 2021 may
be different than 2020 as a result of the depressed conditions in 2020 stemming from the COVID-19 pandemic.
Competition
The business of providing O&P patient care services is highly competitive in the markets in which we operate. In the prosthetic business, we compete with regional
and local O&P providers for referrals from physicians, therapists, employers, HMOs, PPOs, hospitals, rehabilitation centers, out-patient clinics, and insurance
companies on both a local and regional basis. In the orthotic business, we compete with other patient care service providers, including device manufacturers that
have independent sales forces, on the basis of quality and timeliness of patient care, location of patient care clinics, and pricing for services. Additionally, two
international O&P product manufacturers each own regional and local O&P patient care services business in the United States.
Although we serve a significant portion of the O&P patient care market, referral decisions made by surgeons, physicians, and other medical providers are generally
made on a local basis, based on their individual evaluation of the relative quality of care provided by us and our local market competitors. Therefore, our national
scale may not provide a competitive advantage in any particular market in which we operate.
We also compete with regional and local O&P providers for the retention and recruitment of qualified O&P clinicians. In some markets, the demand for clinicians
exceeds the supply of qualified persons.
Our Products & Services segment competes with other distributors, manufacturers that sell their products directly, and providers of equipment and services on a
regional and national basis that have similar sales forces and products. Some of our distributor competitors are also dedicated to the O&P industry, but many others
are large medical product distributors who also distribute O&P products, particularly orthotic products.
Competitive Strengths
We believe that the combination of the following competitive strengths will help us to grow our businesses by increasing our net revenues, net income and market
share:
•
Leading market position in both the O&P market place and the post-acute rehabilitation markets;
•
National scale of operations, which better enables us to:
•
establish our brand name and generate economies of scale;
•
identify and implement best practices throughout our organization;
•
consistently apply the rigorous claims documentation standards required for reimbursement and facilitate reimbursement through a revenue cycle
management organization;
•
collect, aggregate, and publish our statistically significant clinical outcomes and patient satisfaction data and metrics;
•
offer a single network solution to national and regional shared fabrication facilities;
•
identify, test, and deploy emerging technology; and
5
•
increase our influence on, and input into, regulatory trends;
•
Distribution of, and purchasing power for, O&P components and finished O&P products, which better enables us to:
•
negotiate greater volume-based purchasing discounts from manufacturers and freight providers;
•
manage Hanger Clinic inventory levels on a national scale through centralized purchasing controls;
•
access prefabricated and finished O&P products;
•
promote the usage by our patient care clinics of products that have met or exceeded Hanger Clinic standards of quality and patient care that also
expand our profit margins; and
•
expand the external client base of the distribution business in our Products & Services segment;
•
Proven ability to rapidly incorporate technological advances in the fitting and fabrication of O&P devices;
•
History of integrating small and medium sized O&P business acquisitions, including 168 O&P businesses between 1997 and 2021, representing
approximately 480 patient care clinics;
•
Highly trained clinicians, with whom we provide the highest level of continuing education and training through programs designed to inform them of
the latest technological developments in the O&P industry;
•
Experienced and committed management team; and
•
Beneficial government relations efforts, which enable us to educate legislators on the medical benefits and cost effectiveness of O&P services.
Suppliers
We purchase prefabricated O&P devices, components, and materials from hundreds of suppliers across the country, which are utilized by our clinicians and
technicians in the fabrication of O&P products. These devices, components, and materials are used in the products we offer in our patient care clinics throughout
the United States. As of December 31, 2021, one supplier accounted for 10% or more of our annual purchases, with 14.0% of our annual purchases by dollar
amount in 2021.
Sales and Marketing
In our Patient Care segment, our individual clinicians in local patient care clinics historically have conducted our sales and marketing efforts, primarily through
their interaction with and provision of prosthetic or orthotic services to the patients of referring surgeons, physicians, and other providers. Due primarily to the
fragmented nature of the O&P industry, the success of a particular patient care clinic has been largely a function of its local reputation for quality of care,
responsiveness, and length of service in the local communities.
To augment the efforts of the business segment personnel, we have developed a centralized sales and marketing department whose efforts target the following:
•
Marketing and Public Relations. Our objective is to increase the visibility of the “Hanger” brand by building relationships with major referral
sources. We also continue to explore creating alliances with certain vendors to market products and services on a nationwide basis.
•
Business Development. We have dedicated personnel in most of our operating regions who are responsible for arranging seminars, clinics, and
forums to educate and consult with patients and to increase the local community’s awareness of the “Hanger” brand. These business development
managers also meet with local referral and contract sources to help our clinicians develop new relationships in their markets.
We additionally provide certain insurance contract access and administrative services to independent O&P providers through our specialty health care company,
Linkia.
6
Marketing of our services is conducted on a national basis through a dedicated sales force, print and e-commerce catalogs, and exhibits at industry and medical
meetings and conventions. We use directed marketing to segments of the health care industry, such as orthopedic surgeons, vascular surgeons, physical and
occupational therapists, patient care managers, and podiatrists, by providing specialized catalogs focused on their medical specialty.
In our Products & Services segment, we employ dedicated sales professionals that call on independent O&P providers, as well as SNFs, and are generally
responsible for a geographic region or a specific product line.
Acquisition Strategy
Our strategy is to achieve long-term growth through disciplined diversification of our revenue streams, including geographic expansion or the broadening of our
continuum of care through the acquisitions of high quality O&P providers. Despite our national size, we are underrepresented in certain regional and local markets,
and as such, one of the primary drivers in executing our acquisition strategy is expanding our ability to serve new patients in new geographic markets. Acquisitions
in our markets can be competitive because we often compete with multiple potential buyers, including two international O&P product manufacturers who have
each entered the U.S. patient care market.
Once an acquisition is consummated, we integrate and generally centralize certain key functions including IT, marketing, sales, finance, and administration to
ensure that we can optimize cross-selling opportunities and realize cost efficiencies.
Our evaluation of the acquired business is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position, and
service and product offerings, as well as our experience and judgment.
Acquisition Activity
During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through
the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash
flows.
•
In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P
business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form
of notes to shareholders at fair value, and $1.0 million in additional consideration.
•
In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $21.0
million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value,
and $0.1 million in additional consideration.
•
In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P
business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of
notes to shareholders at fair value, and $0.8 million in additional consideration.
•
In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1
million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair
value.
7
During 2020, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through
the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash
flows.
•
In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.2 million at fair value,
of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5
million in the form of a deferred payment obligation to the former shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes
issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8
million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Total payments of $4.0
million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years
thereafter. Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination
payable in October 2020 and is included in Accrued expenses and other liabilities in the consolidated balance sheet. The remaining $0.4 million in
additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date.
•
In the fourth quarter of 2020, we completed the acquisitions of all the outstanding equity interests of four O&P businesses for total consideration of $7.1
million, of which $4.9 million was cash consideration, net of cash acquired, $1.9 million was issued in the form of notes to shareholders at fair value, and
$0.3 million in additional consideration.
Acquisition-related costs are included in general and administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred
during the years ended December 31, 2021 and 2020 were $2.1 million and $0.9 million, respectively, which includes those costs for transactions that are in
progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the years ended December 31, 2021
and 2020 were $1.6 million and $0.6 million, respectively.
Government Regulation
The operations of our business are subject to a variety of federal, state, and local governmental regulations. We make compliance with applicable regulations a
corporate priority through, among other things, our compliance programs, policies and procedures, manuals, and personnel training. Despite these efforts, we
cannot provide assurance that we will be in absolute compliance with all regulations at all times. Failure to comply with applicable governmental regulations may
result in significant penalties, including exclusion from the Medicare and Medicaid programs, which would have a material adverse effect on our business and
financial results.
Fraud and Abuse. Violations of fraud and abuse laws are punishable by criminal and/or civil sanctions, including, in some instances, False Claims Act liability
(discussed below), imprisonment, and exclusion from participation in federal health care programs, including Medicare, Medicaid, VA health programs, and the
Department of Defense’s TRICARE program, formerly known as CHAMPUS. These laws, which include but are not limited to federal and state anti-kickback
laws, false claims laws, physician self-referral laws, and federal criminal health care fraud laws, are discussed in further detail below. We believe our billing
practices, operations, and compensation and financial arrangements with referral sources and others materially comply with applicable federal and state
requirements. However, we cannot assure that such requirements will always be interpreted by a governmental authority in a manner consistent with our
interpretation and application. The failure to comply with any of these requirements, even if inadvertent, could require us to alter our operations with and/or refund
payments to the governmental authority. Such refunds could be significant and could also lead to the imposition of significant penalties. Even if we successfully
defend against any action against us for violation of these laws or regulations, we would likely be forced to incur significant legal expenses and divert our
management’s attention from the operation of our business. Any of these actions, individually or in the aggregate, could have a material adverse effect on our
business and financial results.
Anti-Kickback Laws. Our operations are subject to federal and state anti-kickback laws. The federal Anti-Kickback Statute (Section 1128B(b) of the Social
Security Act) prohibits persons or entities from knowingly and willfully soliciting, offering, receiving, or paying any remuneration in any form (including any
kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind in return for, or to induce, the referral of persons eligible for benefits under a
federal health care program (including Medicare, Medicaid, the VA health programs, and TRICARE), or the ordering, purchasing, leasing, or arranging for, or the
recommendation of purchasing, leasing, or ordering of, items or services that may be paid for, in whole
8
or in part, by a federal health care program. Courts have held that the statute may be violated when even one purpose (as opposed to a primary or sole purpose) of
the remuneration is to induce referrals or other business.
Recognizing that the Anti-Kickback Statute is broad and may technically prohibit beneficial commercial arrangements, the Office of Inspector General of the
Department of Health and Human Services has developed regulations addressing certain business arrangements that will offer protection from scrutiny under the
Anti-Kickback Statute. These “Safe Harbors” describe activities which may be protected from prosecution under the Anti-Kickback Statute, provided that they
meet all of the requirements of the applicable Safe Harbor regulation. For example, the Safe Harbors cover activities such as offering discounts to health care
providers and contracting with physicians or other individuals or entities that have the potential to refer business to us that would ultimately be billed to a federal
health care program, so long as the discount is properly disclosed and appropriately reflected in any claims or charges.
Failure to qualify for Safe Harbor protection does not mean that an arrangement is illegal. Rather, the facts and circumstances of the arrangement must be analyzed
to determine whether there is improper intent to pay or receive remuneration in return for referrals. Conduct and business arrangements that do not fully satisfy one
of the Safe Harbors may result in increased scrutiny by government enforcement authorities. In addition, some states have anti-kickback laws that vary in scope,
and may apply regardless of whether a federal health care program is involved.
Our operations and business arrangements include, for example, discount programs or other financial arrangements with individuals and entities, such as lease
arrangements with hospitals and certain participation agreements. Therefore, our operations and business arrangements are required to comply with the anti-
kickback laws. Although our business arrangements and operations may not always satisfy all the criteria of a Safe Harbor, we make compliance with federal and
state anti-kickback statutes a corporate priority. Nonetheless, we cannot assure that the government’s interpretation of a Safe Harbor provision will always be
consistent with our own, and our arrangements may be subject to scrutiny under anti-kickback laws. Noncompliance with such laws can result in a number of
enforcement actions, including the imposition of civil monetary penalties and exclusion from federal health care programs.
In addition, some states have anti-kickback laws that vary in scope, and may apply regardless of whether a federal health care program is involved. State anti-
kickback laws may extend similar anti-kickback prohibitions to other payors, including commercial payors, and these state laws do not always contain the same
safe harbors as the federal regulatory scheme.
Medical Device Regulation. We provide, distribute, and lease products that are subject to regulation as medical devices by the U.S. Food and Drug Administration
(“FDA”) under the Federal Food, Drug and Cosmetic Act (“FDCA”) and accompanying regulations. In our Patient Care segment, with the exception of two
products which have been cleared for marketing as prescription medical devices under section 510(k) of the FDCA, we believe that the products we provide,
including O&P medical devices, accessories, and components, are not Class III devices and thus are exempt from the FDA’s regulations for pre-market clearance
or approval requirements and from most requirements relating to the quality system regulation (except for certain record keeping and complaint handling
requirements). In our Products & Services segment, ACP manufactures, leases, and sells a number of rehabilitation devices that have been cleared or approved for
marketing under section 510(k) of the FDCA, and are subject to the requirements of the quality system regulation. All of our device businesses are required to
adhere to regulations for medical devices regarding adverse event reporting, establishment registration, and product listing, and we are subject to inspection by the
FDA for compliance with all applicable requirements. Labeling and promotional materials also are subject to scrutiny by the FDA and, in certain circumstances, by
the Federal Trade Commission. Our medical device operations are subject to inspection by the FDA for compliance with applicable FDA requirements, and the
FDA has in the past raised compliance concerns in connection with these investigations. We make compliance with applicable FDA requirements a corporate
priority, but we cannot assure that we will be found to be in compliance at all times. Noncompliance could result in a variety of civil and/or criminal enforcement
actions, including issuance of a Warning Letter, seizure, examination, and inspection of our products and a civil injunction or criminal prosecution, which could
have a material adverse effect on our business and results of operations.
Physician Self-Referral Laws. We are also subject to federal and state physician self-referral laws. With certain exceptions, the federal Medicare physician self-
referral law (the “Stark Law”) (Section 1877 of the Social Security Act) prohibits a physician from referring Medicare beneficiaries to an entity for “designated
health services” including durable medical equipment and supplies, and prosthetic and orthotic devices and supplies, if the physician or the physician’s immediate
family member has a financial relationship with the entity. A financial relationship includes both ownership or investment interests and compensation
arrangements. An entity that furnishes designated health services pursuant to a prohibited referral may not present or cause to be presented a claim or bill for such
designated health services. Penalties for violating the Stark
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Law include denial of payment for the service, an obligation to refund any payments received, civil monetary penalties, potential False Claims Act litigation, and
the possibility of being excluded from the Medicare or Medicaid programs.
Despite the general prohibition on such physician financial relationships, the Stark Law and regulations promulgated by the Centers for Medicare & Medicaid
services provide a number of exceptions from the prohibitions.
With respect to compensation arrangements, there are exceptions under the Stark Law that permit physicians to maintain certain business arrangements, such as
personal service contracts and equipment or space leases, with health care entities to which they refer patients for designated health services. All of the elements of
a Stark Law exception must be met in order for the exception to apply. Further, unlike the Anti-Kickback Statute, under the Stark Law, billing prohibitions can
result without specific intent to induce referrals. We strive to assure that our compensation arrangements with physicians comply with the Stark Law, either
because the physician’s relationship fits fully within a Stark Law exception or because the physician does not generate prohibited referrals. If, however, we receive
a prohibited referral, our submission of a bill for services rendered pursuant to such a referral could subject us to the prohibitions under the Stark Law and
applicable state self-referral laws, including false claims liability, potential exclusion, and imposition of civil monetary penalties. State self-referral laws may
extend the prohibitions of the Stark Law to Medicaid beneficiaries, and there are some indications that the federal government may similarly expand the reach of
the law, including certain adverse court decisions, to which we were not a party.
False Claims Laws. We are also subject to federal and state laws prohibiting individuals or entities from knowingly presenting, or causing to be presented, claims
for payment to third party payors (including Medicare and Medicaid) that are false or fraudulent, are for items or services not provided as claimed, or otherwise
contain misleading information. Our revenue cycle management function is responsible for the preparation of documents for the submission of reimbursement
claims to third party payors for items and services furnished to patients. In addition, our personnel may, in some instances, provide advice on billing and
reimbursement to purchasers of our products. Also, prosecutors and so-called “qui tam” relators (whistleblowers) may claim that a regulatory violation or
wrongfully-retained overpayment may be the basis of False Claims Act litigation. Successful relators can receive a share of the recovery in a False Claims Act case
ranging from 15% to 30%, depending on whether the government “intervenes” in the case. Penalties in a False Claims Act case may include double or triple
damages plus penalties ranging from $11,665 to $23,331 per claim. While we endeavor to assure that our billing practices comply with applicable laws, if claims
submitted to payors are deemed to be false, fraudulent, or for items or services not provided as claimed, we may face liability for presenting or causing to be
presented such claims.
Certification and Licensure. Our clinicians and/or certain operating units may be subject to certification or licensure requirements under the laws of some states.
Most states do not require separate licensure for clinicians. However, several states currently require clinicians to be certified by an organization such as the ABC.
The ABC conducts a certification program for clinicians and an accreditation program for patient care clinics. The minimum requirements for new certified
clinicians are a college degree, completion of an accredited master’s degree program, residency at a patient care clinic under the supervision of a certified clinician,
and successful completion of certain examinations. Certified clinicians are required to participate in a prescribed number of hours of specialized continuing
education courses to maintain their certifications. Minimum requirements for an accredited patient care clinic include the presence of a certified clinician and
specific site and equipment requirements.
While we make compliance with state licensure requirements a corporate priority, we cannot assure that we will be in compliance at all times with these
requirements, or how they may be interpreted or re-interpreted by the various state and local agencies. Failure to comply with state licensure requirements could
result in suspension or termination of licensure, civil penalties, termination of our Medicare and Medicaid agreements, and repayment of amounts received from
Medicare and Medicaid for services and supplies furnished by an unlicensed individual or entity.
Confidentiality and Privacy Laws. The Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act (“HIPAA”), and their
implementing regulations, set forth privacy standards and implementation specifications concerning the use and disclosure of individually identifiable health
information (referred to as “protected health information”) by health plans, health care clearinghouses, and health care providers that transmit health information
electronically in connection with certain standard transactions (“Covered Entities”). HIPAA further requires Covered Entities to protect the confidentiality of
protected health information by meeting certain security standards and implementation specifications. In addition, under HIPAA, Covered Entities that
electronically transmit certain administrative and financial transactions must utilize standardized formats and data elements. HIPAA imposes civil monetary
penalties for noncompliance, and criminal penalties for knowing violations of the privacy standards; violations of such standards committed under false pretenses;
or with the intent to sell, transfer, or use protected health information for commercial
10
advantage. Certain agents of Covered Entities (“business associates”) also have HIPAA responsibilities and liabilities. We have business associates and are
business associates to other Covered Entities. We believe that we are subject to the Administrative Simplification Provisions of HIPAA and have made it a
corporate priority to meet applicable standards and implementation specifications. The new requirements have had a significant effect on the manner in which we
handle health data and communicate with payors.
In addition, state confidentiality and privacy laws may impose civil and/or criminal penalties for certain unauthorized or other uses or disclosures of protected
health information. We are also subject to these laws. While we endeavor to assure that our operations comply with applicable laws governing the confidentiality
and privacy of protected health information, we could face liability in the event of a use or disclosure of protected health information in violation of one or more of
these laws.
Human Capital Management
Hanger is a company of people serving people, with the collective purpose of empowering human potential together. We believe the exceptional talent and clinical
focus of our clinicians, as well as the strength of our overall workforce, have significantly contributed to our success as a leading provider of O&P products and
services. Our values include Integrity, Patient-Focused, Outcomes, Collaboration, and Innovation. Our Hanger vision, culture, and values, taken together, provide a
roadmap for the employee profile we seek.
As an essential business that enables human mobility through our patient care services, we have continued to operate our business throughout the period impacted
by the COVID-19 pandemic. We have taken measures to promote employee safety and minimize virus transmission in order to help our employees and clinicians
continue to lead safe and productive lives during the outbreak, including expanded procedures in our O&P clinics and operational locations related to personal
safety, cleaning and medical screening measures and remote working arrangements. For additional discussion surrounding the impact of the COVID-19 pandemic,
please refer to the “Effects of the COVID-19 Pandemic” section of this document.
Our Board of Directors and its committees receive regular updates about our performance from our senior management team, including: talent acquisition,
development, and performance management, including hiring, promotion and leadership data; diversity and inclusion (“D&I”) metrics with respect to
representation, hiring and leadership; and total rewards data based on compensation studies and market data.
Talent Acquisition, Development & Performance Management
Attracting and developing talented employees devoted to patient care is core to the success we have enjoyed for nearly 160 years. Many of our employees are
patient-facing clinical talent, who are driven by a desire to serve their patients. Our position as a leading provider in the O&P industry, combined with the depth of
expertise across our organization, offers a unique value proposition for our network of clinicians. We have assembled a dedicated workforce of clinical talent and
expertise, which serves as a vast network within which our O&P professionals are able to collaborate across the nation. Our industry luminaries share experiences
and advice freely across the country, through hands-on training at our annual Hanger LIVE education and business meeting, through virtual and live workshops,
and personal consults across the country.
We invest in talent development programs for our employees with annual training events held for clinical talent, as well as virtual training programs for clinical
and support staff. Hanger LIVE is an annual event offering over 100 training sessions on topics ranging from clinical outcomes, best practices and resources,
leadership skills, and the latest in O&P technology. Historically, this event has been offered onsite for approximately 1,500 attendees, including employees and
exhibitors. In 2021, we held our first virtual Hanger LIVE event, enabling all our employees to participate in the various business and clinical education sessions.
Due to the surge in COVID-19 infections caused by the Omicron variant, the in-person event was cancelled in Q1 2022. Refer to the “Effects of the COVID-19
pandemic” section below for further discussion.
With approximately two million patient encounters per year, we have a built-in feedback loop to indicate how our development efforts improve patient outcomes.
Internally, and through external partnerships, we strive for innovation in patient care through technology, research, and training. We focus on delivering value-
based outcomes for our patients and provide our clinicians with the tools and information to make evidence-based decisions in today’s healthcare environment. To
that end, we have published multiple research studies to share our clinical findings with our approximately 1,660 clinicians and the broader O&P community at
large to educate, inform, and better prepare them to serve patients utilizing the best available scientific evidence, clinical techniques, and recommendations.
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We focus on the attraction and retention of all employees. We grow our talent base through organic hiring, acquisition of patient care clinics, and our clinical
residency program. We hired approximately 90 residents in 2021 and offer a formal training program supported by our extensive clinical expertise with
approximately 1,660 clinical providers in 47 states and the District of Columbia. Residents have the opportunity to relocate to any of our 875 patient care clinics
across the nation. Given the nationwide reach and diversity of patients served, clinicians have the ability to specialize in different areas of O&P based on their
interests, as well as have the opportunity to work with some of the best clinicians in their areas of expertise at Hanger.
Diversity and Inclusion
Diversity and Inclusion are core tenets of our corporate culture, one that embraces a diverse workforce and the realization of the critical role it plays in our success.
Hanger strives to build a culture of diversity and inclusion through its human resource practices and policies and actively works to eliminate discrimination and
harassment. Our commitment to diversity and inclusion begins with our Board of Directors and executive officers, with over 50% of our Directors and 40% of our
executive officers identifying as female or as racially or ethnically diverse. Through our ongoing investments in expanding diversity, we have increased the amount
of female representation in incoming resident classes to approximately 70%, which we believe is an important first step in advancing underrepresented
demographics in the O&P industry. We are also investing in developing our female, racial and ethnic minority team members as part of our succession planning
efforts to increase diversity in leadership positions.
We foster a culture of diversity and inclusion through our sponsorship of programs such as affinity groups that include Women in Leadership, Hanger Disability
Awareness Network, Hanger Veterans Network, Hanger LGBTQ+ Network, and PAUSE (People Aligned United to Serve Everyone). We have instituted a
Diversity and Inclusion Council, consisting of twelve employees, and chaired by our Chief Executive Officer, which identifies specific actions we can take to
increase diversity and foster inclusion at Hanger and, more broadly, in the O&P profession. We have instituted a Diversity and Inclusion Pledge with specific
actions to accelerate and elevate our own efforts and invited O&P industry peers and partners to join us in this charge. We have a D&I Ambassadors program open
to all employees who are interested in sharing ideas and getting involved in this movement. Our Chief Human Resources Officer is responsible for developing and
integrating our D&I Plans throughout the Company.
Total Rewards
Our pay strategy includes an emphasis on performance, factors of role, individual skills and abilities, alignment with external shareholders, and competitive
offerings in markets in which we compete for talent. We continue to invest in our workforce through competitive salaries and incentive programs aimed at short-
term and long-term performance. Our health and welfare benefits include medical, dental, vision, life and disability insurance, and prescription drug benefits. We
offer health savings accounts, flexible spending accounts, access to financial planners, a retirement savings plan with company match, telemedicine, and various
paid time off programs, including pay for time spent volunteering or on military duty. We have launched a wellness program designed to promote holistic well-
being across eight dimensions: physical, financial, occupational, spiritual, emotional, social, intellectual, and environmental, and are in the process of
implementing a wellness portal that will be personalized to reflect each employee’s specific health and welfare interests.
Employees
As of December 31, 2021, we employed approximately 5,200 people.
Insurance
We currently maintain insurance coverage for professional liability, product liability, general liability, directors’ and officers’ liability, workers’ compensation,
executive protection, property damage, and other lines of insurance. Our general liability insurance coverage is $1.0 million per occurrence, with a $15.0 million
umbrella insurance policy. The coverage for professional liability, product liability, and workers’ compensation is self-insured with both individual specific claim
and aggregate stop-loss policies to protect us from either significant individual claims or dramatic changes in our loss experience. Based on our experience and
prevailing industry practices, we believe our coverage is adequate as to risks and amount.
Impacts of Climate Change
As a healthcare services company, our business is not significantly or uniquely exposed to the impacts of climate-related risks. We also do not believe we
contribute significantly to greenhouse gas emissions given the nature of our business.
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However, unforeseen events, including catastrophic public health events and natural disasters, such as earthquakes, hurricanes, snow storms, floods, and heavy
rains, could disrupt our operations. As these events occur in the future, if they should impact areas in which we have our distribution facilities or a concentration of
patient care clinics, such events could have a material adverse effect on our business, financial condition, and results of operations.
Our Website
Our website is http://www.hanger.com. We make available free of charge, on or through our website, our Annual Report on Form 10-K, Current Reports on Form
8-K, Section 16 filings (i.e., Forms 3, 4, and 5), proxy statements, and other documents as required by applicable law and regulations as soon as reasonably
practicable after electronically filing such reports with the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our
website also contains the charters of the Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, and Quality, and
Compliance Committee of our Board of Directors; our Code of Business Conduct and Ethics for Directors and Employees, which includes our principal executive,
financial, and accounting officers; as well as our Corporate Governance Guidelines. Information contained on our website is not part of this report.
Information About Our Executive Officers
The following tables set forth information regarding our current executive officers. The ages listed for all executive officers are as of December 31, 2021.
Name
Age
Office with the Company
Vinit K. Asar
55
President and Chief Executive Officer
Peter A. Stoy
47
Executive Vice President, Chief Operating Officer and President, Patient Care Segment
Thomas E. Kiraly
61
Executive Vice President and Chief Financial Officer
C. Scott Ranson
57
Executive Vice President, Corporate Services and Chief Information Officer
Regina Weger
49
Senior Vice President and President, Products & Services Segment
James H. Campbell
63
Senior Vice President and Chief Clinical Officer
Thomas E. Hartman
59
Senior Vice President, General Counsel and Secretary
Mitchell D. Dobson
50
Senior Vice President and Chief Compliance Officer
Keri L. Jolly
54
Senior Vice President and Chief Human Resources Officer
Gabrielle B. Adams
53
Vice President and Chief Accounting Officer
Vinit K. Asar has been our Chief Executive Officer and President since May 2012, and served as our President and Chief Operating Officer from
September 2011 to May 2012. Mr. Asar also served as our Executive Vice President and Chief Growth Officer from December 2008 to September 2011. Mr. Asar
came to Hanger from the Medical Device & Diagnostic sector at Johnson & Johnson, having worked at the Ethicon, Ethicon-Endo-Surgery, Cordis and Biosense
Webster franchises. During his eighteen year career at Johnson & Johnson, Mr. Asar held various roles of increasing responsibility in Finance, Product
Development, Manufacturing, and Marketing and Sales in the United States and in Europe. Prior to joining Hanger, Mr. Asar was the Worldwide Vice-President at
Biosense Webster, the Electrophysiology division of Johnson & Johnson, responsible for the Worldwide Sales, Marketing and Services organizations. Mr. Asar has
a B.S.B.A from Aquinas College and a M.B.A. from Lehigh University.
Peter A. Stoy has been our Executive Vice President, Chief Operating Officer and President of our Patient Care Segment since November 2020. Prior to
joining Hanger, Mr. Stoy was East Region President of Sodexo, a food services and facilities management company where he was responsible for all operations,
including thousands of provider and hospital-based support service employees. Prior to that, Mr. Stoy served in leadership positions at McKesson Corporation from
2014 to 2018, where he oversaw the multibillion dollar McKesson U.S. Pharmaceutical Health System segment. Mr. Stoy also held senior positions in hospital
sales and pharmaceutical distribution during his 13-year employment at Cardinal Health. Mr. Stoy serves on the Board of Directors of TransSouth Logistics. Mr.
Stoy holds a Master of Business Administration from Franklin University and a BA from Ohio University. Mr. Stoy has been designated as a Fellow of the
American College of Healthcare Executives (FACHE).
Thomas E. Kiraly has been our Executive Vice President and Chief Financial Officer since January 2015. Mr. Kiraly joined Hanger in October 2014 as
Executive Vice President. Prior to joining Hanger, Mr. Kiraly served as the
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Executive Vice President, Chief Financial Officer and Treasurer of Sheridan Healthcare, Inc., a provider of anesthesia, radiology, emergency department, and
neonatology services from 2013 to 2014. From 1999 to 2011, Mr. Kiraly served as Executive Vice President, Chief Financial Officer and Treasurer and led the
financial accounting, procurement and real estate functions of Concentra, Inc., a provider of urgent care, occupational health care, and other health care services. In
2010, when Concentra, Inc. was acquired by Humana, Inc., a Fortune 100 provider of insurance, health and well-being and related health care services, Mr. Kiraly
transitioned to the position of Vice President of Finance for Humana, responsible for corporate financial forecasting, analysis, internal reporting, and accounting
operations until 2013. From 1988 to 1999, Mr. Kiraly served as Executive Vice President and Chief Financial Officer of BRC Holdings, Inc., where he led the
financial accounting, human resources and legal functions of this publicly-traded provider of information technology services to health care firms and local
governments. Mr. Kiraly earned his Master of Business Administration from the University of Texas in Austin, Texas and his Bachelor of Arts in Speech
Communication from California State University in Northridge, California.
C. Scott Ranson has been our Executive Vice President, Corporate Services and Chief Information Officer since May 2018. He joined Hanger as Senior
Vice President and Chief Information Officer in July 2015. Mr. Ranson joined Hanger after 14 years of service as the Chief Information Officer for Brookdale
Senior Living Inc., a publicly traded senior housing solution provider, from 2001 to June 2015. Previously, Mr. Ranson served as the Director of Software for
Marketing Specialists Company, where he led the successful implementation of an ERP system and e-commerce strategies, and as Vice President of Information
Technology for Atlas Marketing Company, Inc. Mr. Ranson earned his Bachelor of Science degree in Business Administration, Business Management, Computer
Information Systems from Ashland University in Ohio.
Regina A. Weger is our Senior Vice President and President of our Products & Services Segment since November 2020. Ms. Weger has been with Hanger
for over 20 years and most recently served as President of Southern Prosthetic Supply (“SPS”) within our products & services segment. Previously, she had roles
of Vice President and General Manager responsible for the daily operational business activities, and Vice President, Sales and Marketing and Director of Sales,
leading the functions of sales, marketing, and customer service. Ms. Weger was also appointed to the board of directors for the National Association for the
Advancement of Orthotics and Prosthetics for 2020. She attended Brenau University in Gainesville, Georgia.
James H. Campbell, PhD. has been our Senior Vice President and Chief Clinical Officer since October 2018. Previously, he held the position of Chief
Clinical Officer since joining Hanger in 2015. Prior to joining Hanger, Dr. Campbell spent seventeen years with Becker Orthopedic, a leading world-wide supplier
of orthotic components and central fabrication, and has forty years of experience in the Orthotics and Prosthetics profession with distinction in leadership and
research. Dr. Campbell is a named inventor on five issued U.S. Patents, and has served on the Board of Directors of the American Orthotic and Prosthetic
Association as well as the American Academy of Orthotists & Prosthetists (“AAOP”), from which he received the Distinguished Practitioner Award in February
2013. Dr. Campbell is a Certified Orthotist, a Fellow of the AAOP, and a member of the International Society for Prosthetics & Orthotics. Dr. Campbell holds a
Higher Diploma in Prosthetics and Orthotics and a PhD in Bio-Engineering from the University of Strathclyde in Glasgow, Scotland.
Thomas E. Hartman is our Senior Vice President, General Counsel and Secretary. He was appointed Senior Vice President in 2015 and Secretary in 2014,
and has served as Vice President and General Counsel since 2009. Mr. Hartman joined Hanger from Foley & Lardner, LLP where he was a partner in Foley’s
Business Law Department. Mr. Hartman’s practice at Foley was focused on securities transactions, securities law compliance, mergers and acquisitions, and
corporate governance. Prior to joining Foley in 1995, Mr. Hartman was a business law associate at Jones Day. Mr. Hartman received his J.D. from the University
of Wisconsin in Madison, and a Bachelor of Science in Engineering (Industrial & Operations Engineering) from the University of Michigan in Ann Arbor. Mr.
Hartman attended the University of Michigan on a Naval Reserve Officers Training Corp. (“NROTC”) scholarship, and served from 1984 to 1988 as an officer on
a destroyer in the United States Navy’s Pacific Fleet.
Mitchell D. Dobson has been our Senior Vice President and Chief Compliance Officer since October 2018. Mr. Dobson has been with Hanger for more
than twenty-five years, and most recently served as the Vice President and Compliance Officer for Hanger’s patient care segment. He previously held various
compliance and regulatory-related roles within Hanger. Mr. Dobson is also a certified prosthetist/orthotist, and practiced as a clinician for more than a decade. He
is currently a Fellow of the American Academy of Orthotists and Prosthetists. Mr. Dobson holds a Bachelor of Science in Prosthetics and Orthotics from the
University of Texas Southwestern Medical Center at Dallas and a Certificate in Healthcare Compliance from The George Washington University.
Keri L. Jolly joined Hanger, Inc. as Senior Vice President and Chief Human Resources Officer in July 2018. Ms. Jolly previously served as senior vice
president, human resources at Baylor Scott & White Health, a private healthcare
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provider, from May 2016 to November 2017. Prior to that, Ms. Jolly served as the chief human resources officer for Global Power Equipment Group, a public
global manufacturing and services company, from October 2014 to May 2016. From September 2012 to October 2014, Ms. Jolly served as the chief human
resources officer at Vertex Group, a private IT services and business process outsource provider for the utilities industry. Ms. Jolly’s previous professional
experience includes progressive leadership roles in human resources positions for companies in a variety of industries. Ms. Jolly obtained her Master of Business
Administration from the University of Minnesota and her Bachelor of Arts degree in Business from the University of St. Thomas.
Gabrielle B. Adams has been our Vice President and Chief Accounting Officer since April 2017. Ms. Adams joined Hanger as its Vice President -
Accounting in February 2015. Prior to joining Hanger, Ms. Adams served as Chief Financial Officer at the Texas Bankers Association, a trade association
supporting the banking industry in Texas, from 2012 to 2015. Previously, Ms. Adams served in various roles of increasing responsibility at EZCorp, Inc., a
publicly traded provider of pawn loans and operator of pawn stores, from 1999 to 2012, including serving as Vice President of Financial Planning and Analysis,
Director of Internal Audit, and Assistant Controller. Ms. Adams holds a degree in accounting from the University of Texas at Austin and is a licensed CPA in the
State of Texas.
There are no family relationships between any of the executive officers.
ITEM 1A. RISK FACTORS.
Set forth below are certain risk factors that could adversely affect our business, results of operations, and financial condition. You should carefully read the
following risk factors, together with the consolidated financial statements, related notes, and other information contained in this Annual Report on Form 10-K. This
Annual Report on Form 10-K contains forward-looking statements that contain risks and uncertainties. Please read the cautionary notice regarding forward-looking
statements in Item 7. under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in connection with your
consideration of the risk factors and other important factors that may affect future results described below.
I.
Risks Related to the Healthcare Industry
Health care reform has initiated significant changes to the United States health care system and we expect to see further changes in the health care system in
the future.
Various health care reform provisions became law upon enactment of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, on March 23, 2010 (the
“Affordable Care Act”). The reforms contained in the Affordable Care Act have impacted our business. Continued political, economic, and regulatory influences
are subjecting the health care industry in the United States to fundamental change. Further changes relating to the health care industry and in health care spending
may adversely affect our revenue. We anticipate that Congress will continue to review and assess alternative health care delivery and payment systems and may in
the future propose and adopt legislation effecting additional fundamental changes in the health care system. Although efforts at replacing the Affordable Care Act
and overhauling the health care system have stalled in Congress, the change of administration and control of the Senate following the 2020 election cycle suggests
that the risk of repeal of the Affordable Care Act is reduced. We cannot assure you as to the ultimate content, timing or effect of changes, nor is it possible at this
time to estimate the impact of potential legislation on our business. However, although the specific reforms to the current health care system cannot be accurately
predicted at this time, such changes could have a considerable impact on how health care is reimbursed, particularly on the coverage for certain types of services
and on the reimbursement levels provided by government sources.
Changes in government reimbursement levels could adversely affect our Patient Care segment’s net revenue, cash flows, and profitability.
We derived approximately 58.5%, 57.7%, and 57.5% of our net revenue for the years ended December 31, 2021, 2020, and 2019, respectively, from
reimbursements for O&P services and products from programs administered by Medicare, Medicaid, and the VA. Each of these programs set reimbursement levels
for the O&P services and products provided under their program. If these agencies reduce reimbursement levels for O&P services and products in the future, our
net revenues could substantially decline. In addition, the percentage of our net revenues 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 reimbursement 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 reimbursement
levels. Furthermore, the health care industry is experiencing a trend towards cost containment as government and other third party payors seek to impose
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lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net revenues. For example, the
Medicare contractor for Pricing, Data Analysis and Coding (referred to as “PDAC”) recently announced verification requirements and code changes that have
reduced the reimbursement level for certain prosthetic feet, and the VA is in the process of reassessing the method it uses to determine reimbursement levels for
O&P services and products provided under certain miscellaneous codes. Additionally, a number of states have reduced their Medicaid reimbursement rates for
O&P services and products, or have reduced Medicaid eligibility, and at any time some number of other states are reviewing Medicaid reimbursement policies
generally, including for prosthetic and orthotic devices. Similarly, the federal government is continually evaluating potentially significant changes to the Medicaid
program, including, but not limited to changing the nature and scope of Medicaid reimbursement. Any significant reduction in reimbursement levels under
programs administered by Medicare, Medicaid, or the VA could have a material adverse effect on our net revenues.
Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for eight regional service areas. Medicare prices are
adjusted each year based on the CPI-U unless Congress acts to change or eliminate the adjustment. The Medicare price changes for 2022, 2021, 2020, and 2019
were 5.1%, 0.2%, 0.9%, and 2.3%, respectively. The Affordable Care Act (“ACA”) changed the Medicare inflation factors applicable to O&P (and other)
suppliers. The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-months ended in June of the previous year.
Section 3401(m) of the ACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the 12-months ended in June
of the previous year is to be adjusted by the 10-year moving average of changes in annual economy-wide private nonfarm business multifactor productivity (as
projected by the Secretary of the Department of Health and Human Services for the 10-year period ending with the applicable fiscal year, year, cost reporting
period, or other annual period) (the “MFP Adjustment”). The MFP Adjustment may result in the 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. If the U.S. Congress were to legislate additional modifications to the
Medicare fee schedules, our net revenues from Medicare and other payors could be adversely and materially affected.
Regular challenges to the ACA occur in the federal courts. The ACA survived the third round of court challenges in California v. Texas, 141 S.Ct. 2104 (2021)
when the Supreme Court on June 17, 2021 held that plaintiffs, including certain individuals and twenty (20) states, lacked standing to sue to overturn the ACA.
Despite the Supreme Court’s decision, future legal challenges to the ACA are possible as rejection of the principles behind the ACA remains a focus of various
political candidates’ campaign platforms, and leadership of the states that challenged the law remain opposed to the law. If any challenges to the ACA are
successful, it may have a material adverse effect on our net revenues.
Alternative models of reimbursement for durable medical equipment, prosthetics, orthotics and supplies (“DMEPOS”) may also affect our business. The Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 requires that Medicare replace the current fee schedule payment methodology for certain
DMEPOS items and services with “single payment amounts” determined through a competitive bidding process, and CMS has issued regulations finalizing the
methodology for adjusting fee schedule amounts for such items. See 79 Fed. Reg. 66,120, 66,124 (Nov. 6, 2014). The types of DMEPOS most applicable to us
include certain off-the-shelf (“OTS”) orthotics. Under the DMEPOS Competitive Bidding Program, suppliers compete to submit bids for selected products, and the
Medicare suppliers offering the best price, in addition to meeting applicable quality and financial standards, are awarded contracts to supply the designated
products and services to Medicare beneficiaries in specified competitive bidding areas. Although our product offerings currently subject to competitive bidding do
not comprise a significant portion of our business, it is possible that the DMEPOS Competitive Bidding Program may expand to include other types of products we
offer, or that other payors will adopt similar models for reimbursement, which could negatively affect our net revenue.
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 as well as claims under the DMEPOS Competitive Bidding Program, are reduced by 2%.
Section 3709 of the CARES Act temporarily suspended the 2% payment adjustment applied to Medicare Fee-For-Service (FFS) claims due to sequestration for
claims with dates of service from May 1 through December 31, 2020. The Consolidated Appropriation Act of 2021, signed into law on December 27, 2020,
extended the suspension period to March 31, 2021. An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes, signed into law on April
14, 2021, extended the suspension period to December 31, 2021. The Protecting Medicare and American Farmers From Sequester Cuts Act, signed into law
December 10, 2021, extended the extension period to March 31, 2022, with a 1% reduction from April 1 to June 30, 2022, and the full 2% payment reduction on
and after July 1, 2022. On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 into law, which provided for two years of increases to
discretionary spending to be offset by an
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additional year of Medicare sequestration, through 2025. This is a claims payment adjustment with limited impact on us; no permanent reductions in the Medicare
DMEPOS fee schedule have been made as a result of sequestration, therefore additional reimbursements from Medicaid, the VA, and commercial payors who use
the Medicare fee schedule as a basis for reimbursement have not been impacted.
CMS may also develop policies to limit Medicare coverage of specific products and services. Medicare administrative contractors may issue local coverage
determinations (“LCD”) that limit coverage for a particular item or service, and these determinations are generally coordinated across all applicable Medicare
administrative contractors and therefore generally apply nationally. Any LCD that negatively impacts orthotic or prosthetic reimbursement would negatively affect
our revenue.
Finally, patients may continue to move to Medicare Advantage plans from traditional Medicare plans, which will change the nature of the reimbursement received
by us from the traditional Medicare program and may negatively affect our net revenue.
If the average rates that commercial payors pay us decline significantly, then it would have a material adverse effect on our Patient Care segment’s net
revenues, earnings, and cash flows.
We derived approximately 34.8%, 35.7%, and 35.8% of our net revenues for the years ended December 31, 2021, 2020, and 2019, respectively, from
reimbursements for O&P services and products for patients who have commercial payors as their primary payor. We continue to experience downward pressure on
some of our commercial payment rates as a result of general conditions in the market, recent, and future consolidations among commercial payors, increased focus
on O&P services and products and other factors. There is no guarantee that commercial payment rates will not be materially lower in the future, particularly given
the fluctuations in government reimbursement rates.
We are continuously in the process of negotiating new agreements and renegotiating agreements that are up for renewal with commercial payors, who often begin
negotiations with proposed reductions in our reimbursement rates. Sometimes many significant agreements are up for renewal or being renegotiated at the same
time. In the event that our ongoing negotiations result in overall commercial rate reductions in excess of overall commercial rate increases, the cumulative effect
could have a material adverse effect on our financial results. Consolidations in the commercial payor market have significantly increased the negotiating leverage
of commercial payors. Our negotiations with payors are also influenced by competitive pressures, and we may experience decreased contracted rates with
commercial payors or experience decreases in patient volume as our negotiations with commercial payors continue. If the average rates that commercial payors pay
us decline significantly, or if we see a decline in commercial patients, it would have a material adverse effect on our revenues, earnings, and cash flows.
We depend on reimbursements by third party payors, as well as payments by individuals, which could lead to delays and uncertainties in the Patient Care
segment’s reimbursement process.
We receive a substantial portion of our payments for health care services on a fee-for-service basis from third party payors, including Medicare and Medicaid,
private insurers, and managed care organizations. We estimate that we have received approximately 93.3%, 93.4%, and 93.3% of our net revenues from such third
party payors during 2021, 2020, and 2019, respectively. We estimate that such amounts included approximately 31.4%, 32.3%, and 31.9% from Medicare in 2021,
2020, and 2019, respectively, 17.6%, 16.2%, and 15.8% from Medicaid programs in 2021, 2020, and 2019, respectively. In addition, we estimate net revenues
from the VA were 9.5%, 9.2%, and 9.8% in 2021, 2020, and 2019, respectively.
The reimbursement process is complex and can involve lengthy delays. Third party payors continue their efforts to control expenditures for health care, including
proposals to revise reimbursement policies. While we recognize revenue when health care services are provided, there can be delays before we receive payment. In
addition, third party payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not reimbursable under
plan coverage, that services provided were not medically necessary, or that additional supporting documentation is necessary. Retroactive adjustments may change
amounts realized from third party payors. Third party payors may require pre-authorizations for certain services and/or devices, which may result in a delay in our
ability to provide services or to provide services at all. Additionally, we may see an increase in bundled payment models, which can result in delays before we
receive payment or no payment at all for certain services.
Changes in government reimbursement levels and policies such as those described above may also contribute to uncertainties surrounding the reimbursement
process. We are subject to governmental audits of our reimbursement claims under Medicare, Medicaid, the VA, and other governmental programs and may be
required to repay these agencies if found that we
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were incorrectly reimbursed. Delays and uncertainties in the reimbursement process may adversely affect accounts receivable, increase the overall costs of
collection and cause us to incur additional borrowing costs.
We also may not be paid with respect to co-payments and deductibles that are the patient’s financial responsibility. Many of the plans offered on the state health
insurance exchanges have high deductibles and require coinsurance that patients cannot afford to pay. Amounts not covered by third party payors are the
obligations of individual patients from whom we may not receive whole or partial payment. We also may not receive whole or partial payments from uninsured
and underinsured individuals. In such an event, our earnings and cash flow would be adversely affected, potentially affecting our ability to maintain our restrictive
debt covenant ratios and meet our financial obligations.
Additionally, employer based plans and other individual plans are increasingly relying on “high deductible” plan designs. As their participation in health plans with
these high deductible designs increases, our patients will face greater financial burdens and participatory costs that may affect their decisions regarding the timing
of their replacement of their devices. Due to cost considerations, they may seek to repair or refurbish their existing devices and delay the purchase of new
replacement devices, which will adversely affect our revenues and our profitability.
The risks associated with third party payors, co-payments, and deductibles and the inability to monitor and manage accounts receivable successfully could still
have a material adverse effect on our business, financial condition, and results of operations. Furthermore, our collection policies or our provisions for allowances
for Medicare, Medicaid, and contractual discounts and doubtful accounts receivable may not be adequate.
Another recent development that may impact both rates of payment and administrative expense relates to state and federal responses to so-called “surprise billing.”
The federal No Surprises Act was enacted on December 27, 2020 as part of the Consolidated Appropriations Act of 2021. It was generally designed to provide
protection from patients being surprised by bills for health care and patient cost-sharing payment obligations when receiving care from certain providers who are
“out-of-network” (“OON”) with a given health plan. The protection is generally aimed at situations where patients (i) receive care from OON providers who
furnish services at in-network facilities, (ii) receive emergency care from OON providers, or (iii) use OON air ambulances. While our facilities are not directly
regulated by the No Surprises Act, when our professionals provide services through or at a covered health care provider (such as a hospital) we may be impacted
by the new law, which became effective on January 1, 2022. Additionally, various of the states are experimenting with their own legislative solutions to “surprise
billing,” with laws and requirements that may extend beyond the scope of the No Surprises Act. An example of such a law is in the Commonwealth of
Massachusetts, which enacted a change to M.G.L. Chapter 111 Section 228, which was also effective on January 1, 2022, but with penalties for noncompliance
deferred to July 1, 2022. One side-effect of these laws, in addition to subjecting health care providers to additional administrative expense and risk of penalties, is
that health insurers are already using the laws to extract additional discounts and rate reductions from participating providers. If the health insurers extend this
approach to our services and contracts, that may have a material adverse effect on our revenues.
Due to constraints in the growth of our rates of reimbursement, we may face cost pressures that could adversely affect our profitability.
Due to increased pressures on governmental and commercial payors to seek ways of reducing the costs of care, those payors have and may continue to seek ways
to reduce growth in the rate of our reimbursement for the services we provide. This constraint in the rate of growth in reimbursement may adversely affect our
profitability as we experience increases in the wages, materials, and other costs necessary to the conduct of our business. These cost increases may adversely affect
our profitability and our profit margins.
Changes in government reimbursement levels could adversely affect our Products & Services segment’s net revenues, cash flows, and profitability.
Changes in government reimbursement levels could adversely affect the net revenues, cash flows, and profitability of the businesses in our Products & Services
segment. In particular, a significant majority of our therapeutic services sales involve devices and related services provided to SNFs and similar businesses.
Reductions in government reimbursement levels to SNFs have caused, and could continue to cause, such SNFs to reduce or cancel their use of our therapeutic
service equipment and related consultative services negatively impacting net revenues, cash flows, and profitability. For example, in July 2011 CMS announced an
across the board reduction of approximately 11% in SNF reimbursement levels, which negatively impacted the demand for our devices and treatment modalities.
Although CMS has announced increases in SNF reimbursement levels in the years since (the agency announced an increase of 1.2% for fiscal year (“FY”) 2022,
2.2% for FY
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2021, 2.4% for FY 2020, 2.4% for FY 2019, 1.0% for FY 2018), we cannot predict whether any other changes to reimbursement levels will be implemented, or if
implemented what form any changes might take. Effective October 1, 2019, the Patient-Driven Payment Model replaced the previous Resource Utilization Group
IV SNF payment system under Medicare Part A.
We face periodic reviews, audits, and investigations under our contracts with federal and state government agencies, and these audits could have adverse
findings that may negatively impact our business.
We contract with various federal and state governmental agencies to provide O&P services. Pursuant to these contracts, we are subject to various governmental
reviews, audits, and investigations to verify our compliance with the contracts and applicable laws and regulations. Any adverse review, audit, or investigation
could result in:
•
refunding of amounts we have been paid pursuant to our government contracts;
•
imposition of fines, penalties, and other sanctions on us;
•
loss of our right to participate in various federal programs;
•
damage to our reputation in various markets; or
•
material and/or adverse effects on our business, financial condition, and results of operations.
In the recent past, we saw a significant increase in Medicare audits with a temporary suspension of audit activity due to the public health emergency associated
with COVID-19. However, Medicare audit activity has resumed, which includes RAC audits, CERT audits, TPE prepayment audits, and UPIC audits. In addition,
SMRCs are responsible for the identification of improper payment rates through medical record review. We believe that Medicare audits, inquiries and
investigations will continue to occur from time to time in the ordinary course of our business. Medicare audits could have a material and adverse effect on our
business financial condition and results of operations, particularly if we are unsuccessful at final adjudication.
II. Risks Related to Our Operations and Strategy
Our results of operations can be adversely affected by labor shortages, turnover, and labor cost increases.
We have from time-to-time experienced labor shortages and other labor-related issues. These labor shortages have become more pronounced as a result of the
COVID-19 pandemic. A number of factors may adversely affect the labor force available to us in one or more of our markets, including high employment levels,
and federal and state government regulations, which include laws and regulations related to workers’ health and safety, wage and hour practices, and immigration.
These factors can also impact the cost of labor. Increased turnover rates within our employee base can lead to decreased efficiency and increased costs, such as
increased overtime to meet demand and increased wage rates to attract and retain employees. An overall labor shortage or lack of skilled labor, increased turnover
or labor inflation could have a material adverse effect on our results of operations.
Our results of operations can be adversely affected by inflation and other general cost increases.
We are subject to both contractual, inflationary, and other general cost increases, including with regard to our labor costs and purchases of raw materials and
transportation services. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflationary and
other general cost increases could have a material adverse effect on our results of operations.
In 2021, our total company costs including our materials costs, personnel costs, other operating costs, and general & administrative expenses totaled $1,015.3
million. A 1% inflationary increase in this amount would increase costs by approximately $10.2 million.
Cyber attacks, system security risks, data breaches, and other technology failures could adversely affect our ability to conduct business, our results of
operations, and our financial position.
A cyber attack, system security risk, data breach or technology failure could occur and potentially disrupt our business, damage our reputation, and adversely affect
our profitability. Our IT systems are subject to the risk of computer viruses or
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other malicious code, unauthorized access, or cyber attacks from a variety of sources, including directly, through a vendor with access to our IT systems, or
through code embedded in a program or application we run on our IT systems. The risk of system attacks or cyber incidents is not limited to threats to our IT
systems, but also includes compromises of the IT systems of vendors and third parties with which we do business.
The administrative and technical controls and other preventive measures that we take to reduce the risk of cyber incidents and protect our IT systems may be
insufficient to prevent physical and electronic break-ins, cyber attacks, or other security breaches to our computer systems. We are not currently in full compliance
with the standards prescribed under the Payment Card Industry Data Security Standard, and this could result in heightened cybersecurity risk. In addition,
disruptions or breaches could occur as a result of natural disasters, man-made disasters, epidemic/pandemic, industrial accident, blackout, criminal activity,
technological changes or events, terrorism, or other unanticipated events beyond our control. While we have insurance intended to provide coverage from certain
losses related to such incidents, and a variety of preventative security measures such as risk management, information protection, and disaster recovery systems,
insurance may not cover all losses and our preventive security measures may not be sufficient or adequate to protect our IT systems. Additionally, we cannot
predict the method or outcome of every possible cyber incident or ensure that we have protected ourselves against every possible cyber threat in light of the varied
and increasingly complex breaches faced by companies on a regular basis. Problems with, or shortcomings in, our systems or plans could have a material adverse
impact on our ability to conduct business, our results of operations, and our financial position.
We utilize information technology systems to support our business. Our multi-year implementation of an enterprise-wide resource planning system, reliance
upon multiple legacy business systems, security breaches, or other disruptions to our information technology systems or assets, could interfere with our
operations, compromise security of our customers’ or suppliers’ information and expose us to liability which could adversely impact our business and
reputation.
Our operations rely on certain key IT systems, many of which are legacy in nature or may be dependent upon third-party services, to provide critical connections of
data, information, and services for internal and external users. Over the next several years, we expect to implement a new enterprise resource planning system
(“ERP”), which will require significant financial and human resources to deploy. There can be no assurance that the actual costs for the ERP will not materially
exceed our current estimates or that the ERP will not take longer to successfully implement than we currently expect. The failure to successfully implement the
ERP in a timely manner may adversely affect our ability to establish and maintain an effective control environment. In addition, potential flaws in implementing
the ERP, not adequately training our work force or adapting our systems and processes to effectively operate under the ERP, or the failure of any portion/module of
the ERP to meet our needs, properly interface with legacy systems or provide appropriate controls, may pose risks to our ability to operate successfully and
efficiently. There may be other challenges and risks to both our aging and current IT systems over time due to any number of causes, such as catastrophic events,
availability of resources, power outages, security breaches, or cyber-based attacks, and as we upgrade and standardize our ERP system on a company-wide basis.
These challenges and risks could result in legal claims or proceedings, liability or penalties, disruption to our operations, a material weakness in or failure of our
control environment, loss of valuable data, and damage to our reputation, all of which could adversely affect our business.
Disruptions in our disaster recovery systems, management continuity planning, or information systems could limit our ability to operate our business
effectively, or adversely affect our financial condition and results of operations.
Our IT systems facilitate our ability to conduct our business. While we have disaster recovery systems in place, these systems may not be adequate, and any
disruptions in our disaster recovery systems could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to
effectively monitor and control our operations. Despite our implementation of a variety of security measures, our technology systems could be subject to physical
or electronic break-ins and similar disruptions from unauthorized tampering. In addition, in the event that a significant number of our management personnel were
unavailable in the event of a disaster, our ability to effectively conduct business could be adversely affected.
We have made and may continue to make acquisitions, which could divert the attention of management and which may not be integrated successfully into our
existing business. We may not find suitable acquisitions in the future, which could adversely affect our ability to penetrate new markets and achieve our
growth objectives.
We intend to continue to pursue acquisitions to enter new geographic markets and expand the scope of services we provide. We cannot assure you that we will
identify suitable acquisition candidates, acquisitions will be completed on acceptable terms or at all, our due diligence process will uncover all potential liabilities
or issues affecting our integration process, we
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will not incur breakup, termination or similar fees and expenses, or we will be able to successfully integrate the operations of any acquired business. Furthermore,
acquisitions in new geographic markets and services may require us to comply with new and unfamiliar legal and regulatory requirements, which could impose
substantial obligations on us and our management, cause us to expend additional time and resources, and increase our exposure to penalties or fines for
noncompliance with such requirements. The acquisitions could be of significant size and involve operations in multiple jurisdictions. The acquisition and
integration of another business could divert management attention from other business activities. This diversion, together with other difficulties we may incur in
integrating an acquired business, could have a material adverse effect on our business, financial condition, and results of operations. In addition, we may incur debt
to finance acquisitions. Such borrowings may not be available on terms as favorable to us as our current borrowing terms and may increase our leverage.
We face new competitors in the O&P patient care services market.
The barriers to entry into the O&P patient care services business in the United States are generally low. In particular, we are aware that two O&P product
manufacturers, each with international O&P patient care services operations, also now operate O&P patient care services business in the United States, and could
continue to expand their U.S. presence. These O&P product manufacturers are important suppliers to our O&P patient care services business as well as our Product
& Services segment distribution business. Other O&P product manufacturers with international O&P patient care services operations could also choose to enter the
U.S. O&P patient care services market, as could other healthcare companies. These competitors have significant financial resources, established brands, and other
competitive strengths. The continued expansion of these competitors, and the entry of new competitors into the O&P patient care services market in the United
States, could adversely affect our business, financial condition, or results of operations.
In addition, these competitors could negatively impact our acquisition strategy in the O&P patient care services market. In particular, competition for acquisition
candidates could increase the prices we pay to complete acquisitions, and could cause us to lose acquisitions to competitors, either of which could adversely affect
our business, financial condition or results of operations.
The O&P patient care services industry in the United States is consolidating, and this consolidation could adversely affect the distribution business in our
Products & Services segment.
In recent years the O&P patient care services industry in the United States has been consolidating, and that consolidation is accelerating. The primary customers of
the distribution business in our Products & Services Segment are these independent O&P patient care service providers. If the consolidation of these independent
O&P provider customers were to cause them to source their purchases of O&P products, components and supplies from another supplier, it could adversely affect
the net revenue, cash flow and profitability of our distribution business and the Products & Services segment.
The Company’s financial condition and results of operations for fiscal year 2022 and beyond may continue to be materially adversely affected by the ongoing
coronavirus (“COVID-19”) outbreak.
The outbreak of COVID-19 evolved into a global pandemic in the first quarter of 2020. The full extent to which the COVID-19 outbreak will continue to impact
our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new medical and
other information that may emerge concerning COVID-19 and the actions by governmental entities or others to contain it or mitigate its impact.
The COVID-19 pandemic had a significant negative impact on our business and results of operations in 2021 and 2020. We experienced a reduction in revenue due
to a decline in the number of patients that we treated in our patient care clinics, as well as a reduction in sales to independent O&P clinics by our distribution
business. A significant portion of this decline was due to O&P patients determining voluntarily to wait for various reasons, including concerns regarding their own
health and safety, for appointments and procedures, both with us and with their referring physicians, that the patient deems to be non-urgent or otherwise able to be
deferred or postponed. Although we have seen some recovery in patient volume since April of 2020, and sequentially since the second quarter of 2020, the
progress of the COVID-19 pandemic has been erratic, with infection rates fluctuating as new variants, including the Delta and Omicron variants that emerged
throughout the United States in 2021, and we are unable to predict when the COVID-19 pandemic will no longer significantly impact our patient volumes, both in
our own clinics and at independent O&P providers.
Nevertheless, we continue to believe that these patient volume declines attributed to COVID-19 in 2021 and 2020 primarily reflect a deferral of healthcare services
during those periods, rather than a permanent reduction in demand for our services. To date, we have not experienced significantly extended billing and collection
cycles as a result of displaced employees,
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delayed reimbursement by governmental or private payers, or delayed revenue cycle management procedures; however, we cannot predict the impact the ongoing
COVID-19 pandemic may have on these areas of our operations in future periods. We may also face a shortage in products within our supply chain in the future,
which could impact our ability to service our patients in our clinics on a timely basis or at all.
Our management of the impact of COVID-19 has and will continue to require significant investment of time from our management and employees, as well as
resources across our enterprise. The focus on managing and mitigating the impacts of COVID-19 on our business may cause us to divert or delay the application of
our resources toward existing or new initiatives or investments, which could have a material adverse impact on our results of operations.
Further, the impacts of COVID-19 have caused significant uncertainty and volatility in the credit markets. If our access to capital were to become significantly
constrained, or if costs of capital increased significantly due the impact of COVID-19 including, volatility in the capital markets, a reduction in our credit ratings or
other factors, then our financial condition, results of operations and cash flows could be materially adversely affected.
There have been several new sources of funding that flowed from Federal and state sources to health care providers and suppliers relating to the COVID-19
pandemic. We received approximately $1.1 million and $24.0 million, during 2021 and 2020, respectively, in grants under the Public Health and Social Services
Emergency Fund, also referred to as the CARES Act, which established to reimburse providers for lost revenue and health-care related expenses that are
attributable to the COVID-19 pandemic. We will be required to attest to and comply with the terms and conditions of any funding that we receive under the
Provider Relief Fund, and to track our use of the funds in order to demonstrate such compliance. Guidance issued by the Department of Health and Human
Services surrounding compliance requirements continues to emerge and evolve, resulting in increased complexity in our reporting obligations related to the
payments received under the Provider Relief Fund. If we fail to appropriately comply with all of the terms and conditions, we may be required to repay some or all
of these amounts and may be subject to other enforcement action, which could have a material adverse impact. There is still a significant degree of uncertainty
surrounding the implementation of the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act and other enacted legislation. Many of
the potential requirements under these sources of funding were not promulgated pursuant to notice-and-comment rulemaking but were, rather, issued as
subregulatory guidance, responses to frequently asked questions and other informal issuances, the content and substance of which changed materially and
regularly. There can be no assurance that the terms and conditions of provider relief funding or other relief programs will not change or be interpreted in ways that
affect our ability to comply with such terms and conditions in the future (which could affect our ability to retain any funding that we receive), the amount of total
stimulus funding we may ultimately receive or our eligibility to participate in any future stimulus funding. We continue to assess the potential impact of the
COVID-19 pandemic and government responses to the pandemic on our business, results of operations, financial position and cash flows.
The foregoing and other continued disruptions to our business as a result of COVID-19 has had, and is currently expected to continue to have, a material adverse
effect on our business, results of operations, and financial condition.
Disruption of our supply chain could adversely affect our net revenue, cash flow, and profitability.
We depend on domestic and international outside suppliers and O&P product manufacturers to provide the materials, components, and products we use in the
devices we provide to the patients of our Patient Care segment, and distribute to the customers of our distribution business in our Products & Services segment.
Disruption of our supply chain could result from a variety of factors that could impact our suppliers, manufacturers, or shipping carriers. These factors include,
among other things: a natural disaster, including a hurricane, earthquake, or flood; a public health crisis, including a global or regional pandemic outbreak of
disease; adverse weather; a cybersecurity breach or incident; terrorism or other acts of violence; acts of war or other armed conflict; operational or financial
instability of one or more key suppliers, manufacturers or shipping carriers; unavailability of raw materials; transportation interruptions or delays; or labor strikes
or other labor activities. To date, the effects of the COVID-19 pandemic have not had a material adverse impact on our supply chain; however, we cannot provide
assurance future developments will not result in a significant disruption to our supply chain. Any discontinuation or interruption in the availability of the materials,
components, and products we use and sell in our businesses from one or more suppliers or manufacturers could increase our cost of materials, or delay or preclude
deliveries to our patients and customers, which could have an adverse effect on our net revenue, cash flow, and profitability.
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Consolidation of manufacturers within the O&P industry may adversely affect our business by increasing prices we pay for certain devices and components.
We depend on a limited number of manufacturers who supply us with certain key devices and components used in the prostheses we provide to our patients,
particularly with respect to high technology components. These manufacturers are subject to a consolidation trend within the O&P industry. To the extent this trend
continues, consolidation amongst certain manufacturers could result in a sole or limited source for certain high technology devices and components used in the
devices we provide to patients. Any such consolidation could require us to pay increased prices for such devices and components, which could significantly reduce
our gross margin and profitability and have a material adverse effect on our business.
In order to remain competitive, we are required to make capital expenditures to maintain our systems, properties, and our equipment.
In order to remain competitive, we are required to make capital expenditures to invest in reengineering our supply chain and financial systems, in therapeutic
equipment for our Products & Services segment, and to refurbish and maintain our property and equipment generally. A substantial portion of our anticipated
capital expenditure requirements over the next several years relate to updating and refreshing the physical and technology infrastructure that supports logistics and
warehousing of products for both our business segments. We also continue to invest in refreshing the therapeutic equipment portfolio of Accelerated Care Plus in
our Products & Services segment, and in upgrading and maintaining the appearance and function of our patient care clinics and satellite locations in our Patient
Care segment. If we are unable to fund any such investment or otherwise fail to invest in such items, our business, financial condition, or results of operations
could be materially and adversely affected.
Our products and services face the risk of technological obsolescence, which, if realized, could have a material adverse effect on our business.
The medical device industry is characterized by rapid and significant technological change. There can be no assurance that third parties will not succeed in
developing and marketing technologies, products or services that are more effective than those that we provide our patients, or that would render the products and
services we provide our patients obsolete or noncompetitive. Additionally, new surgical procedures and medications could be developed for diabetes, trauma
associated with accidents or physical injury, tumors, infection, or musculoskeletal disorders of the back, extremities, or joints that would replace or reduce the
importance of our prosthetic and orthotic products and services. Accordingly, our success will depend upon our ability to respond to future medical and
technological changes that may impact the demand for our prosthetic and orthotic products and services.
We depend on our ability to recruit and retain experienced clinicians.
Our revenue generation is dependent upon referrals from physicians in the communities our patient care clinics serve, and our ability to maintain good relations
with these physicians. Our clinicians are the front line for generating these referrals and we are dependent on their talents and skills to successfully cultivate and
maintain strong relationships with these physicians. If we cannot recruit and retain our base of experienced and skilled clinicians, our business may decrease and
our net operating revenues may decline. We may also experience increases in our labor costs, if higher wages and greater benefits are required to attract and retain
qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most
efficient way, our efforts to manage them may have limited effectiveness and may lead to increased turnover and other challenges.
Given the complexities and demands related to reimbursement, we may fail to adequately provide the staffing and systems necessary to ensure we effectively
manage our reimbursement processes.
The nature of our business requires that we are effective in the assessment of patient eligibility, the process of pre-authorization, the recordation and collection of
provider documentation, the timely and complete submission of claims for reimbursement, the application of cash receipts to patient accounts, the timely response
to payor denials, and the conduct of collection activities. If we fail to provide adequate or qualified staffing, we could incur reductions in the amount of
reimbursement we receive for the O&P services that we provide.
23
If we are unable to retain our senior management and key employees, then our business and results of operations and financial position could be harmed.
Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key employees. Although we have
employment agreements with our senior management, these agreements do not prevent those individuals from ceasing their employment with us at any time. If we
are unable to retain existing senior management and other key employees, or to attract other such qualified employees on terms satisfactory to us, then our business
could be adversely affected.
Our failure to economically procure necessary components and to conduct timely and effective inventories of the materials and components we use in our
business could result in an adverse effect on our business, financial condition, and results of operations.
Our business involves the use of materials and componentry we acquire from third party manufacturers. If manufacturers critical to our business substantially
increase the cost of the components they sell to us, then our inability to acquire the necessary materials and components on a cost effective basis may adversely
affect revenues and earnings. Additionally, to successfully perform our business, it is necessary that we conduct timely and thorough inventories of our raw
materials and Work in Process. The conduct of these inventories is costly and time consuming. If we encounter issues in their conduct, given that our clinicians
oversee the inventory processes which occur in our clinics, remedial procedures can disrupt our ability to see and treat patients, and thereby adversely affect our
revenues and profitability.
Insurance coverage for some of our losses may be inadequate and may be subject to the credit risk of commercial insurance companies.
Some of our insurance coverage is through various third-party insurers. To the extent we hold policies to cover certain groups of claims or rely on insurance
coverage obtained by third parties to cover such claims, but either we or such third parties did not obtain sufficient insurance limits, did not buy an extended
reporting period policy, where applicable, or the issuing insurance company is unable or unwilling to pay such claims, we may be responsible for those losses.
Furthermore, for our losses that are insured or reinsured through commercial insurance companies, we are subject to the “credit risk” of those insurance companies.
While we believe our commercial insurance company providers currently are creditworthy, there can be no assurance that such insurance companies will remain so
in the future.
COVID-19 vaccination mandates adopted by federal, state, and local governments, as well as by certain healthcare systems, could have a material adverse
impact on our business and results of operations.
On September 9, 2021, President Biden issued an executive order requiring all employers with U.S. government contracts to ensure that their U.S.-based
employees, contractors, and subcontractors that work on or in support of U.S. government contracts are fully vaccinated against COVID-19; the initial deadline for
covered contractor employees to be fully vaccinated was December 8, 2021, but on November 4, 2021, the Biden administration extended this deadline to January
18, 2022. The executive order includes on-site and remote U.S.-based employees, contractors, and subcontractors and it only permits limited exceptions for
medical and religious reasons. This executive order is currently tied up in litigation and is not currently being enforced.
Additionally, many state and local governments in which our business operates, as well as certain healthcare systems that serve as referral sources for Hanger
Clinic patients, have implemented or announced COVID-19 vaccination requirements applicable to certain of our employees, and additional vaccination mandates
may be announced in the future.
It is currently not possible to predict with certainty the impact any vaccination mandate will have on our business, especially on our workforce. These mandates
could impact employers like us as well as health care providers with which we do business and who may require vendors and other health care professionals, such
as our staff, to be vaccinated before coming on-site.
Our implementation of these requirements may result in costs to us in the form of vaccinations or testing of employees. These requirements may also result in
attrition in our workforce, including attrition of critically skilled employees, and difficulty securing future employment needs, which could have a material adverse
effect on our business, financial condition, and results of operations.
24
III. Risks Related to Our Legal and Regulatory Environment
A cybersecurity incident could cause a violation of HIPAA and other privacy laws and regulations or result in a loss of confidential data.
We are not currently in full compliance with all the requirements of the regulations issued under HIPAA, and this could result in heightened cybersecurity risk. A
cyber attack that penetrates our IT security defenses causing an IT security breach, loss of protected health information or other data subject to privacy laws, loss of
proprietary business information, or a material disruption of our IT business systems, could have a material adverse impact on our business, financial condition, or
results of operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or
misappropriation of protected health information, other confidential data, or proprietary business information.
Our acquisitions require transitions and integration of various information technology systems, and we regularly upgrade and expand our information technology
systems’ capabilities. If we experience difficulties with the transition and integration of these systems or are unable to implement, maintain, or expand our systems
properly, we could suffer from, among other things, operational disruptions, regulatory problems, working capital disruptions, and increases in administrative
expenses. While we make significant efforts to address any information security issues and vulnerabilities with respect to the companies we acquire, we may still
inherit risks of security breaches or other compromises when we integrate these companies within our business.
We are subject to numerous federal, state, and local governmental regulations, noncompliance with which could result in significant penalties that could have
a material adverse effect on our business.
A failure by us to comply with the numerous federal, state, and/or local health care and other governmental regulations to which we are subject, including the
regulations discussed under “Government Regulation” in “ITEM 1. BUSINESS.” above, could result in significant penalties and adverse consequences, including
exclusion from the Medicare and Medicaid programs, which could have a material adverse effect on our business.
Our non-compete agreements and other restrictive covenants involving clinicians may not be enforceable.
We have contracts with clinicians in many states. Some of these contracts include provisions preventing these clinicians from competing with us both during and
after the term of our relationship with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some
states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to health care providers. There can be no assurance that our
non-compete agreements related to affiliated clinicians will not be successfully challenged as unenforceable in certain states. In such event, we would be unable to
prevent former affiliated clinicians from competing with us, potentially resulting in the loss of some of our patients, reducing our revenues and earnings.
We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business or to defend successfully
against intellectual property infringement claims by third parties.
Our ability to compete effectively depends in part upon our intellectual property rights, including but not limited to our trademarks and copyrights, and our
proprietary technology. Our use of contractual provisions, confidentiality procedures and agreements, and trademark, copyright, unfair competition, trade secret,
and other laws to protect our intellectual property rights and proprietary technology may not be adequate. Litigation may be necessary to enforce our intellectual
property rights and protect our proprietary technology, or to defend against claims by third parties that the conduct of our businesses or our use of intellectual
property infringes upon such third-party’s intellectual property rights. Any intellectual property litigation or claims brought against us, whether or not meritorious,
could result in substantial costs and diversion of our resources, and there can be no assurances that favorable final outcomes will be obtained in all cases. The terms
of any settlement or judgment may require us to pay substantial amounts to the other party or cease exercising our rights in such intellectual property, including
ceasing the use of certain trademarks used by us to distinguish our services from those of others or ceasing the exercise of our rights in copyrightable works. In
addition, we may have to seek a license to continue practices found to be in violation of a third-party’s rights, which may not be available on reasonable terms, or
at all. Our business, financial condition, or results of operations could be adversely affected as a result.
25
IV. Risks Related to Our Common Stock and Capital Structure
We have substantial indebtedness, and our failure to comply with the covenants and payment requirements of that indebtedness may subject us to increased
interest expenses, lender consent and amendment costs, or adverse financial consequences.
As of December 31, 2021, we had approximately $517.2 million in indebtedness. This current level of indebtedness is comprised of approximately $486.1 million
of borrowings under the term loan facility under our Credit Agreement, no borrowings under the revolving credit facility of our Credit Agreement, and
approximately $31.2 million of indebtedness related to other financing obligations and Seller Notes, net of unamortized discount and debt issuance costs. Under
our Credit Agreement, we are required to comply with certain financial covenants and other provisions. In addition to other requirements, these provisions include
requirements that we timely prepare our financial statements and timely receive audits on our annual financial statements, meet certain financial ratio requirements,
and timely pay interest and principal when due. To the extent that we fail to meet our financial statement requirements in future periods, our operating trends do
not enable us to meet our financial covenant requirements, we are unable to pay interest or principal when due or we are unable to meet other covenants and
requirements contained within our currently existing Credit Agreement, we may default under the Credit Agreement. A default could result in increases in consent
or amendment fees to lenders, increases in interest costs, the imposition of additional constraints on borrowing by our lenders, or potentially more serious liquidity
constraints and adverse financial consequences, including reductions in the value of our common stock or the necessity of seeking protection from creditors under
bankruptcy laws. See the “Financial Condition, Liquidity, and Capital Resources” section in this Management’s Discussion and Analysis for further discussion.
Additionally, our current Credit Agreement includes variable interest rates. In the event that interest rates rise, we will be required to pay greater interest expenses,
which will have an adverse effect on our income from operations and financial condition.
To remedy issues we may encounter with meeting our debt obligations, or for other purposes, we may find it necessary to seek further refinancing of our
indebtedness, and may do so with debt instruments that are more costly than our existing instruments (and which will rank senior to our equity securities), or we
may issue additional equity securities which may dilute the ownership interests or value of our existing shareholders. These actions may decrease the value of our
equity securities.
The market price of our common stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:
•
industry or general market conditions;
•
domestic and international economic factors unrelated to our performance;
•
changes in our referral sources’ or customers’ preferences;
•
new regulatory pronouncements and changes in regulatory guidelines;
•
lawsuits, enforcement actions, and other claims by third parties or governmental authorities;
•
actual or anticipated fluctuations in our quarterly operating results;
•
changes in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;
•
action by activist shareholders, institutional shareholders or other large shareholders, including future sales or purchases of our common stock;
•
the entry of a new competitor into one of the markets we serve;
•
speculation in the press or investment community;
•
investor perception of us and our industry;
26
•
changes in market valuations or earnings of similar companies;
•
announcements by us or our competitors of significant contracts, acquisitions, or strategic partnerships;
•
any future sales of our common stock or other securities;
•
additions or departures of key personnel; and
•
ability to file future SEC filings timely.
The stock markets have experienced extreme volatility in recent years from a variety of reasons that have been unrelated to the operating performance of particular
companies, including geopolitical, social, healthcare, and other events impacting the global stock markets generally. These broad market fluctuations may
adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action
litigation has often been instituted against such company. Any litigation of this type brought against us could result in substantial costs and a diversion of
management’s attention and resources, which would harm our business, results of operations, and financial condition.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume
could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one
or more analysts downgrade our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of
these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading
volume to decline.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in
the price of our common stock.
We do not intend to declare and pay dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund
our growth, to develop our business, and to potentially fund future share repurchases. Therefore, you are not likely to receive any dividends on your common stock
for the foreseeable future, and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no
guarantee that shares of our common stock will appreciate in value or even maintain the price at which shareholders have purchased their shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
As of December 31, 2021, we operated or leased 875 patient care locations, comprised of 760 patient care clinics and 115 satellite locations, in 47 states and the
District of Columbia. We own eight buildings, including seven buildings that house a patient care clinic and one building that is currently unoccupied. Our patient
care clinics occupied under leases have terms expiring between 2022 and 2031. Our patient care clinics average approximately 3,200 square feet in size. In total,
including locations relating to our non-patient care businesses, administrative, and fabrication locations, as well as storage and other non-occupied space, we
currently have 999 locations, of which 991 are under lease.
We believe our leased and owned facilities are adequate for carrying out our current and anticipated future O&P operations. We believe we will be able to renew
such leases as they expire or find comparable or alternative space on commercially suitable terms. See Note L - “Leases” to our consolidated financial statements
in this Annual Report on Form 10-K for additional information regarding our facilities leases.
27
The following table sets forth the number of our patient care clinics and satellite locations in each state as of December 31, 2021:
State
Patient Care
Locations
State
Patient Care
Locations
State
Patient Care
Locations
Alabama
13
Kentucky
11
North Carolina
30
Alaska
2
Louisiana
15
North Dakota
4
Arizona
36
Maine
8
Ohio
36
Arkansas
6
Maryland
13
Oklahoma
9
California
76
Massachusetts
8
Oregon
10
Colorado
28
Michigan
35
Pennsylvania
48
Connecticut
13
Minnesota
18
South Carolina
16
District of Columbia
3
Mississippi
12
South Dakota
3
Delaware
1
Missouri
23
Tennessee
24
Florida
47
Montana
5
Texas
49
Georgia
41
Nebraska
10
Utah
6
Idaho
1
Nevada
5
Virginia
22
Illinois
35
New Hampshire
4
Washington
21
Indiana
17
New Jersey
10
West Virginia
9
Iowa
20
New Mexico
13
Wisconsin
10
Kansas
14
New York
30
Wyoming
5
Other leased real estate holdings include our distribution facilities in Texas, Nevada, Georgia, and Illinois, our corporate headquarters in Austin, Texas; the
headquarters for our therapeutic solutions business in Reno, Nevada, which is located within our Nevada distribution facility, and the headquarters for our
distribution business, located within our distribution facility in Alpharetta, Georgia. We have announced plans to close the warehouse and distribution facilities in
Texas and Illinois in the second quarter of 2022, consolidating their operations into the distribution facilities in Georgia and Nevada. We additionally operate
fifteen separate leased fabrication facilities that assist our patient care locations in the fabrication of devices. The fabrication facilities are located in the states of
Alabama, Arizona, California, Colorado, Connecticut, Florida, Kansas, Kentucky, North Carolina, Tennessee, and Texas. Substantially all of our owned properties
are pledged to collateralize bank indebtedness. See Note M - “Debt and Other Obligations” to our consolidated financial statements in this Annual Report on Form
10-K for additional information regarding our outstanding debt and related collateral.
ITEM 3. LEGAL PROCEEDINGS.
From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, and are also subject to additional payments
under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially
adverse effect on our consolidated financial position, liquidity, or results of our operations.
We operate in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries
relating to our billing activities. No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on
our consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the U.S. Securities and
Exchange Commission (“SEC”) or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not
be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it
by reference into such a filing.
Market Information
Our common stock trades on the New York Stock Exchange under the symbol “HNGR.”
Holders
At February 16, 2022, there were approximately 142 holders of record of our 38,716,040 shares of outstanding common stock.
Dividend Policy
We have never paid cash dividends on our common stock and our Board of Directors intends to continue this policy for the foreseeable future. We plan to retain
earnings for use in our business. The terms of our credit agreements and certain other agreements limit the payment of dividends on our common stock and such
agreements are expected to continue to limit the payment of dividends in the future.
Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent on our results of operations, financial
condition, contractual and legal restrictions, and any other factors deemed to be relevant.
Sales of Unregistered Securities
During the year ended December 31, 2021, we did not sell any securities that were unregistered under the Securities Act of 1933.
Issuer Purchases of Equity Securities
During the year ended December 31, 2021, we did not make any purchases of our common stock.
29
STOCK PERFORMANCE CHART
The annual changes in the cumulative total shareholder return on our common stock for the five-year period shown in the graph below are based on the assumption
that $100 had been invested in our common stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Small Cap 600 Stock Index, the Russell 2000
Stock Index, the Standard & Poor’s 500 Health Care Services Index, and the Standard & Poor’s 500 Health Care Facilities Index on December 31, 2016, and that
all quarterly dividends were reinvested at the average of the closing stock prices at the beginning and end of the quarter. The total cumulative dollar returns shown
on the graph represent returns that such investments would have had on December 31, 2021.
As of December 31,
2016
2017
2018
2019
2020
2021
Hanger, Inc.
$
100.00
$
136.96
$
164.79
$
240.09
$
191.22
$
157.66
S&P 500 Index - Total Returns
$
100.00
$
121.83
$
116.49
$
153.17
$
181.35
$
233.41
S&P Small Cap 600 Index
$
100.00
$
113.23
$
103.63
$
127.24
$
141.60
$
179.58
Russell 2000 Index
$
100.00
$
114.65
$
102.02
$
128.06
$
153.62
$
176.39
S&P 500 Health Care Services Index
$
100.00
$
106.45
$
107.77
$
125.48
$
128.63
$
176.26
S&P 500 Health Care Facilities Index
$
100.00
$
115.09
$
151.73
$
183.75
$
198.76
$
288.30
Our stock price in 2016 was negatively impacted by our common stock’s suspension from trading on February 26, 2016 and subsequent delisting from trading on
the NYSE and the commencement of trading on February 29, 2016 on the OTC. Our stock was relisted on the NYSE on September 11, 2018.
ITEM 6. Reserved.
30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
This Annual Report on Form 10-K including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (or “Management’s
Discussion and Analysis”) contains statements that are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements
include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These
statements often include words such as “believe,” “expect,” “project,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may,”
“would,” “should,” “could,” “forecasts,” or similar words. These statements are based on certain assumptions that we have made in light of our experience in
the industry as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in these
circumstances. We believe these assumptions are reasonable, but you should understand that these statements are not guarantees of performance or results, and
our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative,
that may be revised or supplemented in subsequent reports.
These statements involve risks, estimates, assumptions, and uncertainties that could cause actual results to differ materially from those expressed in these
statements and elsewhere in this report. These uncertainties include, but are not limited to, contractual, inflationary, and other general cost increases, including
with regard to costs of labor, raw materials, and freight; labor shortages and increased turnover in our employee base; the financial and business impacts of the
COVID-19 pandemic on our operations and the operations of our customers, suppliers, governmental and private payers, and others in the healthcare industry
and beyond; federal laws governing the health care industry; governmental policies affecting O&P operations, including with respect to reimbursement; failure to
successfully implement a new enterprise resource planning system or other disruptions to information technology systems; the inability to successfully execute our
acquisition strategy, including integration of recently acquired O&P clinics into our existing business; changes in the demand for our O&P products and services,
including additional competition in the O&P services market; disruptions to our supply chain; our ability to enter into and derive benefits from managed-care
contracts; our ability to successfully attract and retain qualified O&P clinicians; and other risks and uncertainties generally affecting the health care industry.
Readers are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in
Item 1A. “Risk Factors” contained in this Annual Report on Form 10-K, some of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by
any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to
publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect
unanticipated events. Forward-looking statements and our liquidity, financial condition, and results of operations may be affected by the risks set forth in Item 1A.
“Risk Factors” or by other unknown risks and uncertainties.
Non-GAAP Measures
We refer to certain financial measures and statistics that are not in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). We utilize these non-GAAP measures in order to evaluate the underlying factors that affect our business performance and trends. These non-GAAP
measures should not be considered in isolation and should not be considered superior to, or as a substitute for, financial measures calculated in accordance with
GAAP. We have defined and provided a reconciliation of these non-GAAP measures to their most comparable GAAP measures. The non-GAAP measure used in
this Management’s Discussion and Analysis is as follows:
Same Clinic Revenues Per Day - measures the year-over-year change in revenue from clinics that have been open a full calendar year or more. Examples of clinics
not included in the same center population are closures and acquisitions. Day-adjusted growth normalizes sales for the number of days a clinic was open in each
comparable period.
31
Overview
Business Overview
General
We are a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries, and
we and our predecessor companies have provided O&P services for nearly 160 years. We provide O&P services, distribute O&P devices and components, manage
O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments - Patient
Care and Products & Services.
Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in comprehensive, outcomes-based design, fabrication, and delivery of
custom O&P devices through 760 patient care clinics and 115 satellite locations in 47 states and the District of Columbia, as of December 31, 2021. We also
provide payor network contracting services to other O&P providers through this segment.
Our Products & Services segment is comprised of our distribution services and therapeutic solutions businesses. As a leading provider of O&P products in the
United States, we engage in the distribution of a broad catalog of branded and private label O&P devices, products, and components to independent O&P providers
nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies
and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately 4,000 skilled nursing and post-acute providers nationwide.
For the years ended December 31, 2021, 2020, and 2019, our net revenues were $1,120.5 million, $1,001.2 million, and $1,098.0 million, respectively. We
recorded net income of $42.0 million, $38.2 million, and $27.5 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Industry Overview
As of 2019, we estimate that approximately $4.3 billion is spent in the United States each year for prescription-based O&P products and services through O&P
clinics. We believe our Patient Care segment currently accounts for approximately 24% of the market, providing a comprehensive portfolio of orthotic, prosthetic,
and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.
The O&P patient care services market in the United States is highly fragmented and is characterized by regional and local independent O&P businesses operated
predominantly by independent operators, but also including two O&P product manufacturers with substantial international patient care services operations. We do
not believe that any single competitor accounts for 2.5% or more of the nation’s total estimated O&P clinic revenues.
The industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of
O&P devices. We anticipate that the demand for O&P services will continue to grow as the nation’s population increases, and as a result of several trends,
including the aging of the U.S. population, there will be an increase in the prevalence of disease-related disability and the demand for new and advanced devices.
We believe the typical replacement time for prosthetic devices is three to five years, while the typical replacement time for orthotic devices varies, depending on
the device.
We estimate that approximately $1.8 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components,
devices, and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P services. We estimate that our
distribution sales account for approximately 7% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).
We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be
approximately $150 million annually. We currently provide these products and services to approximately 25% of the estimated 15,000 SNFs located in the U.S.
We estimate the market for rehabilitation technologies, clinical programs, and training within the broader post-acute rehabilitation markets to be approximately
$400 million annually. We do not currently provide a meaningful amount of products and services to this broader market.
32
Business Description
Patient Care
Our Patient Care segment employs approximately 1,660 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which
are certified by either the American Board for Certification (“ABC”) or the Board of Certification of Orthotists and Prosthetists, which are the two boards that
certify O&P clinicians. To facilitate timely service to our patients, we also employ technicians, fitters, and other ancillary providers to assist our clinicians in the
performance of their duties. Through this segment, we additionally provide network contracting services to independent providers of O&P.
Patients are typically referred to Hanger Clinic by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then
consult with both the referring physician and the patient with a view toward assisting in the selection of an orthotic or prosthetic device to meet the patient’s needs.
O&P devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process,
and lower the cost of rehabilitation.
Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of
certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs. When
fabricating a device, our clinicians ascertain the specific requirements, componentry, and measurements necessary for the construction of the device. Custom
devices are constructed using componentry provided by a variety of third party manufacturers that specialize in O&P, coupled with sockets and other elements that
are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs. Our clinicians and technicians typically utilize
castings, electronic scans, and other techniques to fabricate items that are specialized for the patient. After fabricating the device, a fitting process is undertaken
and adjustments are made to ensure the achievement of proper alignment, fit, and patient comfort. The fitting process often involves several stages to successfully
achieve desired functional and cosmetic results.
Given the differing physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic, and other
needs of each individual patient, each fabricated prosthesis and orthosis is customized for each particular patient. These custom devices are commonly fabricated at
one of our regional or national fabrication facilities.
We have earned a reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort
and capability and can significantly enhance the rehabilitation process. We utilize multiple scanning and imaging technologies in the fabrication process,
depending on the patient’s individual needs, including our proprietary Insignia scanning system. The Insignia system scans the patient and produces an accurate
computer-generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.
In recent years, we have established a centralized revenue cycle management organization that assists our clinics in pre-authorization, patient eligibility, denial
management, collections, payor audit coordination, and other accounts receivable processes.
The principal reimbursement sources for our services are:
•
Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance
companies, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers,
workers’ compensation programs, third party administrators, and similar sources;
•
Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with
disabilities;
•
Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons
requiring financial assistance, regardless of age, which may supplement Medicare benefits for persons aged 65 or older requiring financial assistance;
and
•
the VA.
33
We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be reimbursed for our services. These
contracts usually have a stated term of one to three years and generally may be terminated without cause by either party on 60 to 90 days’ notice, or on 30 days’
notice if we have not complied with certain licensing, certification, program standards, Medicare or Medicaid requirements, or other regulatory requirements.
Reimbursement for services is typically based on a fee schedule negotiated with the third party payor that reflects various factors, including market conditions,
geographic area, and number of persons covered. Many of our commercial contracts are indexed to the commensurate Medicare fee schedule that relates to the
products or services being provided.
Government reimbursement is comprised of Medicare, Medicaid, and the VA. These payors set maximum reimbursement levels for O&P services and products.
Medicare prices are adjusted each year based on the Consumer Price Index for All Urban Consumers (“CPI-U”) unless Congress acts to change or eliminate the
adjustment. The CPI-U is adjusted further by an efficiency factor known as the “Productivity Adjustment” or the “Multi-Factor Productivity Adjustment” in order
to determine the final rate adjustment each year. There can be no assurance that future adjustments will not reduce reimbursements for O&P services and products
from these sources.
We, and the O&P industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive
Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits, Supplemental Medical Review Contractor (“SMRC”) audits, and Unified
Program Integrity Contractor (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, and SMRC audits are generally post-payment
audits. UPIC audits can be both pre- or post-payment audits, with a majority currently pre-payment. TPE audits replaced the previous Medicare Administrative
Contractor audits. Adverse post-payment audit determinations generally require Hanger to reimburse Medicare for payments previously made, while adverse pre-
payment audit determinations generally result in the denial of payment. In either case, we can request a redetermination or appeal, if we believe the adverse
determination is unwarranted, which can take an extensive period of time to resolve, currently up to six years or more.
Products & Services
Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we distribute branded and private label devices, products, and components to
independent O&P clinics and other customers. Through our wholly-owned subsidiary, Accelerated Care Plus Corp. (“ACP”), our therapeutic solutions business is a
leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute rehabilitation providers. Our value proposition is
to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence-based clinical programs, and ongoing
consultative education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex
conditions. We currently serve approximately 4,000 skilled nursing and post-acute providers nationwide. Through our SureFit subsidiary, we also manufacture and
sell therapeutic footwear for diabetic patients in the podiatric market. We also operate the Hanger Fabrication Network, which fabricates custom O&P devices for
our patient care clinics, as well as for independent O&P clinics.
Through our internal “supply chain” organization, we purchase, warehouse, and distribute over 350,000 active SKUs from approximately 750 different suppliers
through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and distribution facilities in Nevada, Georgia, Illinois, and Texas
provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days. In January 2022, we announced
plans to close the warehouse and distribution facilities in Illinois and Texas in the second quarter of 2022, consolidating their operations into our Georgia and
Nevada facilities.
Our supply chain organization enables us to:
•
centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;
•
better manage our patient care clinic inventory levels and improve inventory turns;
•
improve inventory quality control;
•
encourage our patient care clinics to use the most clinically appropriate products; and
•
coordinate new product development efforts with key vendors.
34
Effects of the COVID-19 Pandemic
We began to see a reduction in business volumes as a result of the COVID-19 pandemic starting in the last weeks of March 2020. As federal, state, and local
authorities implemented social distancing and suppression measures to respond to an increasing number of nationwide COVID-19 infections, we experienced a
decrease in our patient appointments and general business volumes. In response, during the last week of March 2020, we made certain changes to our operations,
implemented a broad number of cost reduction measures, and delayed certain capital investment projects. Although our business volumes have shown gradual
improvement from their initial significant decline in mid-2020, the adverse impact of the COVID-19 pandemic on our business continued through the fourth
quarter of 2021, and into 2022. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19
pandemic, including temporary labor and cost reduction measures largely in place during the second and third quarters of 2020, may not be indicative of future
financial and operational performance. The volume effects, our operating responses, and the effects of COVID-19 on our financial condition are discussed in Item
1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the “Financial Condition, Liquidity
and Capital Resources” sections below. Our results of operations for any quarter during the COVID-19 pandemic may not be indicative of results of operations that
may be achieved for a subsequent quarter or the full year, and may not be similar to results of operations experienced in prior years. In addition, results in any
given period in 2021 may be different than 2020 as a result of the depressed conditions in 2020 stemming from the COVID-19 pandemic.
Effect on Business Volumes
Patient appointments showed some recovery in our clinics during the full year of 2021 increasing 11% over the prior year period, but remaining down by 7% from
the level reported in 2019.
Same clinic revenue per day grew by 9.1% for the full year of 2021. For the three-month period ending March 31, 2021, June 30, 2021, September 30, 2021, and
December 31, 2021 same clinic revenue per day increased by approximately 1.4%, 18.2%, 10.7%, and 5.8%, respectively, as compared to their corresponding
periods in 2020. However, the progress of the COVID-19 Pandemic has been erratic, with infection rates fluctuating as new variants, including the Delta and
Omicron variants, have emerged. When compared to each of the quarters in 2019, same clinic revenue in our clinics was approximately 99%, 96%, 99%, and 95%,
of each respective period in that pre-COVID-19 year. For the full year, same clinic revenue was 97% of the level reported during 2019.
Throughout the COVID-19 affected periods of 2020 through the fourth quarter of 2021, revenues from orthotics have generally dropped more significantly than
revenues from prosthetics. During the year, our prosthetics and orthotics day-adjusted sales, excluding acquisitions, increased by approximately 6.1% and 13.0%,
respectively. While prosthetic revenues seem to have recovered, the recovery in orthotics has been more gradual when comparing 2021 over the 2019 periods.
In the early months of 2021, vaccines for combating COVID-19 were approved by the US Food and Drug Administration, and the US government began a phased
roll out. However, the initial quantities of the vaccines were limited, and the US government has prioritized distribution to front-line health care workers and other
essential workers, followed by individual populations that were most susceptible to the severe effects of COVID-19. As vaccines became more readily available,
social adversity to vaccination and other factors affected the achievement of nationwide vaccination goals. The lack of achievement of broad immunity coupled
with an increase in infections caused by the “Delta” variant in the third quarter of 2021 and the “Omicron” variant in the fourth quarter of 2021 contributed to an
increase in the duration and effect of COVID-19 on our business volumes and staffing shortages. Currently, we believe our business volumes are primarily being
inhibited by reduced medical procedures due to surgical constraints, reduced referral volumes from in-patient and out-patient providers due to decreases in their
volumes and the effect of COVID related protocols on their businesses, patient hesitancy to seek care during the pandemic, and increased patient mortality.
Additionally, we believe that our patient volumes are being affected by our own labor constraints in technical and administrative positions, employee absences
related to COVID-19, as well as decreases in our sales of off-the-shelf orthotic devices.
Nevertheless, the overall adverse impact of the COVID-19 pandemic on our business volumes has diminished and stabilized over time, and while our patient
appointment and other business volumes have improved, they have not reached the levels experienced prior to the pandemic. We currently anticipate volumes to
increase by approximately 2% over 2021 in the coming year.
35
Operating and Cost Reduction Responses
Throughout the periods affected by the COVID-19 pandemic, given that our services are considered essential, we have continued to operate our businesses.
However, due to the risks posed to our clinicians, other employees, and patients, we made certain changes to our operating practices in order to promote safety and
to minimize the risk of virus transmission. These included the implementation of certain patient screening protocols and the relocation of certain administrative and
support personnel to a “work at home” environment.
As a result of the COVID-19 pandemic in 2020, we found it necessary to reduce our personnel costs in response to significant decreases in business volumes.
Commencing at the start of April 2020, personnel cost reductions were implemented through (i) an average 32% decrease in the salaries of all of our exempt
employees, the percentage of which varied from lower amounts for lower salaried employees up to reduction amounts ranging from 47% to 100% for our senior
leadership team; (ii) the furloughing of certain employees on a voluntary and involuntary basis; (iii) the reduction of work hours for non-exempt employees; (iv)
modification of bonus, commission, and other variable incentive plans; (v) the reduction of overtime expenses; (vi) the elimination of certain open positions; (vii) a
reduction in the use of contract employees, and (viii) the temporary suspension of certain auto allowances. During the period April 2020 through September 2020,
salaries were gradually reinstated, with full reinstatement of all exempt employee’s salaries being effective on September 19, 2020. We believe this approach
allowed us to retain as many employees as possible to preserve the experience, culture, and patient service capabilities of our workforce for periods subsequent to
the COVID-19 pandemic.
In addition to these reductions in operating expenses, in 2020, we temporarily delayed the implementation of our supply chain and financial systems, further
discussed in the “New Systems Implementations” section. We also suspended construction of our new fabrication facility in Tempe, Arizona, and other projects
related to the reconfiguration of our distribution facilities. We resumed construction of the Tempe, Arizona fabrication facility in the first quarter of 2021, and
recommenced the remaining activities in the second quarter of 2021.
While it is not yet a requirement that all Hanger employees be vaccinated, we are strongly encouraging it. As a policy, we adhere to federal, state, and local
regulations which increasingly require certain employees, particularly those who provide healthcare services, to be vaccinated. We are closely monitoring the
evolving and growing requirements to ensure we are continuing to take the appropriate actions to ensure our impacted employees are compliant.
Despite the effects of the COVID-19 pandemic on our business volumes, for the foreseeable future, we currently believe that our cash flows from operations and
retained cash and cash equivalent balances are sufficient to enable us to fund our operations, capital expenditures and other financial obligations as they become
due. Please refer to the “Financial Condition, Liquidity and Capital Resources” section below for a discussion of our liquidity position.
CARES Act
The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $203.5
billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid-enrolled suppliers
and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the COVID-19 pandemic, such as lost revenues
attributable to canceled procedures, as well as to provide support for health-care related expenses. In April 2020, HHS began making payments to healthcare
providers from the $203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.
During 2021 and 2020, we recognized a total benefit of $1.1 million and $24.0 million, respectively, in our consolidated statement of operations within Other
operating costs for the grant proceeds we received under the CARES Act (“Grants”) from HHS.
Other Products & Services Performance Considerations
As discussed in our 2020 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, several of the
larger independent O&P providers we served through the distribution of componentry encountered financial difficulties during the year ended December 31, 2020,
which resulted in our discontinuing distribution services to these customers. Generally, we believe our distribution customers encounter reimbursement pressures
similar to those we experience in our own Patient Care segment and, depending on their ability to adapt to the increased claims documentation standards that have
emerged in our industry, this may either limit the rate of growth of some of our customers,
36
or otherwise affect the rate of growth we experience in our distribution of O&P componentry to independent providers. In certain circumstances, we may pursue
acquisition of inventory in advance to preserve pricing to offset inflation and potential supply chain constraints. During future periods, in addition to the adverse
effects of the COVID-19 pandemic discussed above, we currently believe our rate of revenue growth in this segment may decrease as we choose to limit the extent
to which we distribute certain low margin orthotic products. Additionally, to the extent that we acquire independent O&P providers who are pre-existing customers
of our distribution services, our revenue growth in this segment would be adversely affected as we would no longer recognize external revenue from the
components we provide them.
Within our Products & Services segment, in addition to our distribution of products, we provide therapeutic equipment and services to patients at SNFs and other
healthcare provider locations. Since 2016, a number of our clients, including several of our larger SNF clients, have been discontinuing their use of our therapeutic
services. We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities.
As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations. Within
this portion of our business, we have and continue to respond to these historical trends through the expansion of our products and services offerings.
Reimbursement Trends
In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid, and the
VA. The following is a summary of our payor mix, expressed as an approximate percentage of net revenues for the periods indicated:
For the Years Ended December 31,
2021
2020
2019
Medicare
31.4 %
32.3 %
31.9 %
Medicaid
17.6 %
16.2 %
15.8 %
Commercial Insurance / Managed Care (excluding Medicare and Medicaid
Managed Care)
34.8 %
35.7 %
35.8 %
Veterans Administration
9.5 %
9.2 %
9.8 %
Private Pay
6.7 %
6.6 %
6.7 %
Patient Care
100.0 %
100.0 %
100.0 %
Patient Care constituted 84.2%, 83.1%, and 82.5% of our net revenues for the years ended December 31, 2021, 2020, and 2019, respectively. Our remaining net
revenues were provided by our Products & Services segment which derives its net revenues from commercial transactions with independent O&P providers,
healthcare facilities, workers’ compensation, and other customers. In contrast to net revenues from our Patient Care segment, payment for these products and
services are not directly subject to third party reimbursement from health care payors. Our reimbursement from Medicare is normally updated by the Centers for
Medicare and Medicaid Studies (“CMS”) annually, and that update is currently based on changes in the consumer price index, adjusted for increases in
productivity. Within the Medicare caption of the table above, approximately 13.6%, 12.4%, and 10.9% of the segment’s net revenues for the years ended
December 31, 2021, 2020, and 2019, respectively is Managed Medicare which is administered through Commercial Insurance Plans and therefore is not
necessarily directly tied to the Medicare reimbursement rate. Similarly within the Medicaid caption of the table above, approximately 12.9%, 11.5%, and 11.2% of
the segment’s net revenues for the years ended December 31, 2021, 2020, and 2019, respectively is Managed Medicaid which is administered through Commercial
Insurance Plans.
Our contracts with Commercial and other payors are based on negotiated rates, or fixed fee schedules, and do not generally provide for automatic increases based
on changes in inflation. Overall, approximately half of our reimbursement arrangements have an inherent reference to inflation, or can be adjusted by us to reflect
increases in inflation, while the other half do not have such accommodations. While we endeavor to work with Commercial and other payors to advocate rate
adjustments that provide for inflationary increases, such payors have been generally reluctant to provide increases commensurate with inflation, which exposes us
to potential margin pressures if we are unable to manage our material, personnel and other costs, or otherwise increase the productivity of our personnel in a
commensurate fashion.
The amount of our reimbursement varies based on the nature of the O&P device we fabricate for our patients. Given the particular physical weight and size
characteristics, location of injury or amputation, capability for physical activity, and mobility, cosmetic, and other needs of each individual patient, each fabricated
prostheses and orthoses is customized for each
37
particular patient. The nature of this customization and the manner by which our claims submissions are reviewed by payors makes our reimbursement process
administratively difficult.
To receive reimbursement for our work, we must ensure that our clinical, administrative, and billing personnel receive and verify certain medical and health plan
information, record detailed documentation regarding the services we provide, and accurately and timely perform a number of claims submission and related
administrative tasks. It is our belief the increased nationwide efforts to reduce health care costs has driven changes in industry trends with increases in payor pre-
authorization processes, documentation requirements, pre-payment reviews, and pre- and post-payment audits, and our ability to successfully undertake these tasks
using our traditional approach has become increasingly challenging. For example, the Medicare contractor for Pricing, Data Analysis and Coding (referred to as
“PDAC”) recently announced verification requirements and code changes that has reduced the reimbursement level for certain prosthetic feet, and the VA is in the
process of reassessing the method it uses to determine reimbursement levels for O&P services and products provided under certain miscellaneous codes.
A measure of our effectiveness in securing reimbursement for our services can be found in the degree to which payors ultimately disallow payment of our claims.
Payors can deny claims due to their determination that a physician who referred a patient to us did not sufficiently document that a device was medically necessary
or clearly establish the ambulatory (or “activity”) level of a patient. Claims can also be denied based on our failure to ensure that a patient was currently eligible
under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, or that we filed or appealed the payor’s determination
timely, as well as on the basis of our coding, failure by certain classes of patients to pay their portion of a claim, or for various other reasons. If any portion of, or
administrative factor within, our claim is found by the payor to be lacking, then the entirety of the claim amount may be denied reimbursement.
In recent years, we have taken a number of actions to manage payor disallowance trends. These initiatives included: (i) the creation of a central revenue cycle
management function; (ii) the implementation of a patient management and electronic health record system; and (iii) the establishment of new clinic-level
procedures and training regarding the collection of supporting documentation and the importance of diligence in our claims submission processes.
Payor disallowances is considered an adjustment to the transaction price. Estimated uncollectible amounts due to us by patients are generally considered implicit
price concessions and are presented as a reduction of net revenues. These amounts recorded in net revenues within the Patient Care segment for the years ended
December 31, 2021, 2020, and 2019 are as follows:
For the Years Ended December 31,
(dollars in thousands)
2021
2020
2019
Gross charges
$
982,523
$
870,575
$
956,852
Less estimated implicit price concessions arising from:
Payor disallowances
31,209
30,875
40,581
Patient non-payments
7,986
8,097
10,580
Payor disallowances and patient non-payments
$
39,195
$
38,972
$
51,161
Net revenues
$
943,328
$
831,603
$
905,691
Payor disallowances
$
31,209
$
30,875
$
40,581
Patient non-payments
7,986
8,097
10,580
Payor disallowances, patient non-payments, and bad debt expense
$
39,195
$
38,972
$
51,161
Payor disallowances %
3.2 %
3.5 %
4.2 %
Patient non-payments %
0.8 %
1.0 %
1.1 %
Percent of gross charges
4.0 %
4.5 %
5.3 %
During 2020 and 2021, we benefited from reductions in claims denials and increases in our rates of collection compared to prior periods. This has been due to a
variety of factors, including increases in our revenue cycle management staffing and an increased focus on collections and liquidity during a period of reduced
business volumes, a possible temporary relaxing of payor review procedures during the COVID-19 pandemic, the benefit of CARES Act funds on the ability of
patients to pay
38
their portion of claims and other factors relating to our pre-authorization and documentation procedures for devices. We do not believe this favorable trend will
necessarily be sustainable in future periods as the COVID-19 pandemic subsides and patient volumes and resulting revenues increase.
Our accounts receivable balances for 2019 through 2021 were as follows:
As of December 31,
(dollars in thousands)
2021
2020
2019
Gross charges before estimates for implicit price concessions
$
194,574
$
177,804
$
229,683
Less estimates for implicit price concessions:
Payor disallowances
(33,007)
(39,343)
(58,094)
Patient non-payments
(7,500)
(7,042)
(9,589)
Accounts receivable, gross
154,067
131,419
162,000
Allowance for doubtful accounts
(2,009)
(2,823)
(2,641)
Accounts receivable, net
$
152,058
$
128,596
$
159,359
Payor disallowances %
17.0
%
22.1
%
25.3
%
Patient non-payments %
3.9
%
4.0
%
4.2
%
Allowance for doubtful accounts %
1.0
%
1.6
%
1.1
%
Total allowance %
21.9
%
27.7
%
30.6
%
Acquisitions
During the first quarter of 2022 to date, we completed the acquisition of one O&P business for a total purchase price of $5.0 million. Total consideration
transferred for this acquisition is comprised of $4.0 million in cash consideration, $1.0 million in the form of notes to the former shareholders.
During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through
the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash
flows.
•
In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P
business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form
of notes to shareholders at fair value, and $1.0 million in additional consideration.
•
In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $21.0
million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value,
and $0.1 million in additional consideration.
•
In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P
business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of
notes to shareholders at fair value, and $0.8 million in additional consideration.
•
In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1
million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair
value.
During 2020, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through
the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash
flows.
•
In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.2 million at fair value,
of which $16.8 million was cash consideration, net of cash acquired,
39
$21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former
shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of
the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period
of three years on the anniversary date of the acquisition. Total payments of $4.0 million under the deferred payment obligation are due in annual
installments beginning in the fourth year following the acquisition and for three years thereafter. Additional consideration includes approximately $3.6
million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and
other liabilities in the consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts
due to us from the acquired O&P business as of the acquisition date.
•
In the fourth quarter of 2020, we completed the acquisitions of all the outstanding equity interests of four O&P businesses for total consideration of $7.1
million, of which $4.9 million was cash consideration, net of cash acquired, $1.9 million was issued in the form of notes to shareholders at fair value, and
$0.3 million in additional consideration.
Acquisition-related costs are included in general and administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred
during the years ended December 31, 2021 and 2020 were $2.1 million and $0.9 million, respectively, which includes those costs for transactions that are in
progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the years ended December 31, 2021
and 2020 were $1.6 million and $0.6 million, respectively.
In response to the expected economic impact of the COVID-19 pandemic, we implemented certain cost mitigation and liquidity management strategies, including
the temporary delay of our acquisitions of O&P providers, subject to certain conditions and thresholds in the first amendment to our Credit Agreement entered into
in May 2020, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. During the
fourth quarter of 2020, we recommenced our acquisition of O&P providers. Refer to the “Financial Condition, Liquidity, and Capital Resources” section for
additional discussion.
New Systems Implementations
During 2019, we commenced the design, planning, and initial implementation of new financial and supply chain systems (“New Systems Implementations”), and
planned to invest in new servers and software that operate as a part of our technology infrastructure. As discussed in the “Effects of the COVID-19 Pandemic”
section, we elected in 2020 to temporarily delay our New Systems Implementations as part of our efforts to preserve liquidity. We recommenced these activities in
the second quarter of 2021, and transitioned our corporate financial systems to the Oracle Cloud Financials platform in the third quarter of 2021.
In connection with our New Systems Implementations, for the years ended December 31, 2021 and 2020, we expensed $5.2 million and $2.6 million, respectively.
We are additionally incurring increased capital expenditures in connection with improvements to our systems’ infrastructure. In 2022, we currently expect to incur
technology-related implementation expenses for the financial and supply chain projects of approximately $4 to $5 million and approximately $1 million in lease
termination and related facility transition expenses. In addition, we expect to incur further significant cash outlays and capital expenditures in connection with our
supply chain, financial systems, and technology infrastructure initiatives. For a further discussion of our current outlook for capital expenditures and systems
implementation expenditures, refer to the “Financial Condition, Liquidity, and Capital Resources” section below.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350)
- Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Effective July 1, 2019, we elected to
early adopt the requirements of the standard on a prospective basis. The new guidance aligns the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and
hosting arrangements that include an internal-use software license). Under the new standard, certain of the implementation costs of our new financial and supply
chain system will be capitalized. As of December 31, 2021, we capitalized $7.0 million of implementation costs for cloud computing arrangements, net of
accumulated amortization, and recorded in other current assets and other assets in the consolidated balance sheet.
40
Business Environment and Outlook
Patient Care
In our Patient Care segment, we have a positive view of the long-term need for prosthetic and orthotic devices and services within the markets that we serve. To
address the debilitating effects of injuries and medical conditions such as diabetes, vascular disease, cancer, and congenital disorders, we believe patients will have
a continuing need for the O&P services that we provide. As the population grows and ages, we also believe there will be a gradual underlying increase in market
demand.
To ensure we maintain and grow our share of this market, we believe that it will be necessary for us to find effective means to automate and better organize our
business processes, further improve our reimbursement capabilities, and lower our cost structure in the longer term. Our size may afford us the ability to achieve
economies of scale through purchasing and process automation initiatives that could be difficult for our smaller competitors. However, our size can work against
us if we do not succeed in effectively serving our referring physicians and in competing with our individual competitors in each of the markets that we serve.
Products & Services
Generally, we believe our distribution customers encounter reimbursement pressures similar to those that we do in our own Patient Care services and, depending
on their ability to adapt to the increased claims documentation standards that have emerged in our industry, that this may either limit the rate of growth of some of
our customers, or otherwise affect the rate of growth we experience in our distribution of O&P componentry to independent providers. Additionally, during 2020,
we discontinued our distribution of certain low-margin orthotics products to podiatrists.
Within our Products & Services segment, in addition to our distribution of products, we provide therapeutic equipment and services to patients at SNFs and other
healthcare provider locations. Since 2016, a number of our clients, including several of our larger SNF clients, began to discontinue their use of our therapeutic
services. We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities.
As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations, which
resulted in our recognition of $2.5 million in equipment sales in 2021, as compared with $1.9 million in 2020 and $2.4 million in 2019. For the year ended
December 31, 2021, due to customer discontinuances, we experienced a decrease of $2.6 million in therapeutic services and supplies revenue and an increase of
$0.6 million in therapeutic equipment sales, for a total reduction of $2.0 million in revenues we received from therapeutic equipment and services. We recognized
a total of $43.5 million in revenues from therapeutic equipment and services in 2021. Within this portion of our business, we have and continue to respond to these
trends through the expansion of our products and services offerings.
Personnel
While we have traditionally been able to recruit and retain adequate staffing to operate and support our business, our ability to support growth is dependent on our
ability to add new personnel. Nevertheless, as are other employers, we are currently finding it difficult to recruit and retain personnel in certain positions, including
clinic front office administrative, distribution center, and fabrication center technician positions. In certain cases, we have also found it necessary to make
individual market adjustments for clinical and professional staff to attract or retain them. Our inability to successfully recruit and maintain staffing levels for these
positions has and could continue to introduce some constraints on our ability to achieve our revenue growth objectives. In cases where we have open clinic
administrative or technician positions, or these positions are filled with inexperienced or new personnel, our clinicians find it necessary to augment the activities
performed by these roles, which can slow the speed of our patient service.
In order to attract and retain personnel, we may find it necessary to further increase wages in these areas. Additionally, when coupled with the generally fixed
nature of our reimbursement arrangements, increases in our personnel costs caused by current inflation conditions may put increasing pressure on our ability to
maintain or increase our margins. Please refer to Part I, Item 1A. “Risk Factors” in this report for further discussion.
Seasonality
We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during
the course of the year. The first quarter is normally our lowest relative net revenue
41
quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another. Due to the general fulfillment by patients of their
health plan co-payments and deductible requirements towards the year’s end, our fourth quarter is normally our highest revenue producing quarter. However,
historical seasonality patterns have been impacted by the COVID-19 pandemic and may not be reflective of our prospective financial results and operations. Please
refer to the “Effects of the COVID-19 Pandemic” section for further discussion.
Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This event is conducted to assist our clinicians
in maintaining their training and certification requirements and to facilitate a national meeting with our clinical leaders. We also invite manufacturers of the
componentry for the devices we fabricate to these annual events so they can demonstrate their products and otherwise assist in our training process. Due to the
COVID-19 pandemic, we conducted our first virtual education fair in 2021. During the first quarter of 2021, 2020, and 2019, we spent approximately $0.3 million,
$2.3 million, and $2.3 million on travel and other costs associated with this event, respectively. In addition to the costs we incur associated with this annual event,
we also lose the productivity of a significant portion of our clinicians during the period in which this event occurs, which contributes to the lower seasonal revenue
level we experience during the first quarter of each year. Due to the Omicron variant, the in-person event was cancelled in Q1 2022, resulting in much lower
expenses for the event in 2022. We anticipate resuming an in-person event in 2023.
Critical Accounting Policies and Estimates
Our analysis and discussion of our financial condition and results of operations is based upon the consolidated financial statements that have been prepared in
accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions, and
disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to fairly present, in all material respects, our operating
results, and financial position. Our significant accounting policies are stated in Note A - “Organization and Summary of Significant Accounting Policies” to the
consolidated financial statements included in this Annual Report on Form 10-K. We believe the following accounting policies are critical to understanding our
results of operations and the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Patient Care Segment
Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the
transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to
the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the VA, and private or patient pay (“Private Pay”)
individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of
estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional
disallowances. These are recorded as a reduction of revenues because they are not caused by an inability of the payor or patient to pay, but rather internal
administrative issues such as adjustments to contractual allowances, adjustments to coding, failure to ensure that a patient was currently eligible under a payor’s
health plan, that their plan provides full O&P benefits, failure to receive prior authorization, failure to file or appeal the payor’s determination timely, failure by
certain classes of patients to pay their portion of a claim, or other such administrative issues.
Our products and services are sold with a 90-day labor and 180-day warranty for fabricated components. Warranties are not considered a separate performance
obligation. We estimate warranties based on historical trends and include them in accrued expenses and other current liabilities in the consolidated balance sheet.
The warranty liability was $2.9 million at December 31, 2021 and $2.2 million at December 31, 2020.
A portion of our O&P revenue comes from the provision of cranial devices. In addition to delivering the cranial device, there are patient follow-up visits where we
assist in treating the patient’s condition by adjusting or modifying the cranial device. We conclude that, for these devices, there are two performance obligations
and use the expected cost plus margin approach to estimate for the standalone selling price of each performance obligation. The allocated portion associated with
the patient’s receipt of the cranial device is recognized when the patient receives the device while the portion of revenue associated with
42
the follow-up visits is initially recorded as deferred revenue. On average, the cranial device follow-up visits occur less than 90 days after the patient receives the
device and the deferred revenue is recognized on a straight-line basis over the period.
Medicare and Medicaid regulations and the various agreements we have with other third party payors, including commercial healthcare payors under which these
contractual adjustments and payor disallowances are calculated, are complex and are subject to interpretation and adjustment and may include multiple
reimbursement mechanisms for different types of services. Therefore, the particular O&P devices and related services authorized and provided, and the related
reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and
reimbursement schedules, and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. As a
result, there is a reasonable possibility that recorded estimates could change and any related adjustments will be recorded as adjustments to net revenue when they
become known.
Products & Services Segment
Revenue in our Products & Services segment is derived from the distribution of O&P components and the leasing and sale of rehabilitation equipment and
ancillary consumable supplies combined with equipment maintenance, education, and training.
Distribution services revenues are recognized when obligations under the terms of a contract with our customers are satisfied, which occurs with the transfer of
control of our products. This occurs either upon shipment or delivery of goods, depending on whether the terms are FOB Origin or FOB Destination. Payment
terms are typically between 30 to 90 days. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products to a
customer (“transaction price”).
To the extent that the transaction price includes variable consideration, such as prompt payment discounts, list price discounts, rebates, and volume discounts, we
estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is
included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our
anticipated performance and all information (historical, current, and forecasted) that is reasonably available.
We reduce revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a
reduction to revenue in the period sales are recognized. We make estimates of the amount of sales returns and allowances that will eventually be incurred.
Management analyzes sales programs that are in effect, contractual arrangements, market acceptance, and historical trends when evaluating the adequacy of sales
returns and allowance accounts.
Therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the
services are provided. Equipment sales revenue is recognized upon shipment, with any related services revenue deferred and recognized as the services are
performed. Sales of consumables are recognized upon shipment.
In addition, we estimate amounts recorded to bad debt expense using historical trends and these are presented as a bad debt expense under the operating costs
section of our consolidated financial statements.
Accounts Receivable, Net
Patient Care Segment
We establish allowances for accounts receivable to reduce the carrying value of such receivables to their estimated net realizable value. The Patient Care segment’s
accounts receivables are recorded net of unapplied cash and estimated implicit price concessions, such as payor disallowances and patient non-payments, as
described in the revenue recognition accounting policy above.
Our estimates of payor disallowances utilize the expected value method by considering historical collection experience by each of the Medicare and non-Medicare
primary payor class groupings. For each payor class grouping, liquidation analyses of historical period end receivable balances are performed to ascertain
collections experience by aging category. In the absence of an evident adverse trend, we use historical experience rates calculated using an average of four quarters
of data
43
with at least twelve months of adjudication. We will modify the time periods analyzed when significant trends indicate that adjustments should be made.
Products & Services Segment
Our Products & Services segment’s allowance for doubtful accounts is estimated based on the analysis of the segment’s historical write-offs experience, accounts
receivable aging and economic status of its customers. Accounts receivable that are deemed uncollectible are written off to the allowance for doubtful accounts.
Accounts receivable are also recorded net of an allowance for estimated sales returns.
Inventories
Inventories are valued at the lower of estimated cost or net realizable value with cost determined on a first-in, first-out (“FIFO”) basis. Provisions have also been
made to reduce the carrying value of inventories for excess, obsolete, or otherwise impaired inventory on hand at period end. The reserves for excess and obsolete
inventory and WIP cancellations total $7.5 million and $6.1 million at December 31, 2021 and 2020, respectively.
Patient Care Segment
Substantially all of our Patient Care segment inventories are recorded through a periodic approach whereby inventory quantities are adjusted on the basis of a
quarterly physical count. Segment inventories relate primarily to raw materials and work-in-process at Hanger Clinics. Inventories at Hanger Clinics totaled $36.7
million and $30.5 million at December 31, 2021 and 2020, respectively, with WIP inventory representing $15.8 million and $12.0 million of the total inventory,
respectively. The increase in inventories, including the increase in WIP, is due in part to acquisitions as well as a build in undelivered devices resulting in part from
our inability to deliver devices at the end of 2021 due to the Omicron variant. Refer to the “Effects of the COVID-19 Pandemic” section above for further
discussion.
Raw materials consist of purchased parts, components, and supplies which are used in the assembly of O&P devices for delivery to patients. In some cases,
purchased parts and components are also sold directly to patients. Raw materials are valued based on recent vendor invoices, reduced by estimated vendor rebates.
Such rebates are recognized as a reduction of cost of materials in the consolidated statements of operations when the related devices or components are delivered to
the patient. Approximately 77% of raw materials at December 31, 2021 and 2020, respectively, were purchased from our Products & Services segment. Raw
material inventory was $20.9 million and $18.4 million at December 31, 2021 and 2020, respectively.
WIP consists of devices which are in the process of assembly at our clinics or fabrication centers. WIP quantities were determined by the physical count of patient
orders at the end of every quarter of 2021 and 2020 while the related stage of completion of each order was established by clinic personnel. We do not have an
inventory costing system and as a result, the identified WIP quantities were valued on the basis of estimated raw materials, labor, and overhead costs. To estimate
such costs, we develop bills of materials for certain categories of devices that we assemble and deliver to patients. Within each bill of material, we estimate (i) the
typical types of component parts necessary to assemble each device; (ii) the points in the assembly process when such component parts are added; (iii) the
estimated cost of such parts based on historical purchasing data; (iv) the estimated labor costs incurred at each stage of assembly; and (v) the estimated overhead
costs applicable to the device.
Products & Services Segment
Our Product & Service segment inventories consist primarily of finished goods at its distribution centers as well as raw materials at fabrication facilities, and
totaled $50.8 million and $45.9 million as of December 31, 2021 and 2020, respectively. Finished goods include products that are available for sale to third party
customers as well as to our Patient Care segment as described above. Such inventories were determined on the basis of perpetual records and a physical count at
year end. Inventories in connection with therapeutic services are valued at a weighted average cost.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Acquisition
consideration typically includes cash payments, the issuance of Seller Notes and in certain instances contingent consideration with payment terms based on the
achievement of certain targets of the acquired business. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their
44
estimated fair values at the date of acquisition inclusive of identifiable intangible assets. The estimated fair value of identifiable assets and liabilities, including
intangibles, are based on valuations that use information and assumptions available to management. We allocate any excess purchase price over the fair value of
the tangible and identifiable intangible assets acquired and liabilities assumed to goodwill. We allocate goodwill to our reporting units based on the reporting unit
that is expected to benefit from the acquired goodwill. Significant management judgments and assumptions are required in determining the fair value of assets
acquired and liabilities assumed, particularly acquired intangible assets, including estimated useful lives. The valuation of purchased intangible assets is based
upon estimates of the future performance and discounted cash flows of the acquired business. Each asset acquired or liability assumed is measured at estimated fair
value from the perspective of a market participant. Subsequent changes in the estimated fair value of contingent consideration are recognized as general and
administrative expenses within the consolidated statements of operations.
Goodwill and Other Intangible Assets, Net
Goodwill represents the excess of the purchase price over the estimated fair value of net identifiable assets acquired and liabilities assumed from purchased
businesses. We assess goodwill for impairment annually during the fourth quarter, and between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying amount. We have the option to first assess qualitative factors for a reporting unit 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 quantitative goodwill impairment test. If we choose to bypass this qualitative assessment or alternatively determine that a quantitative goodwill
impairment test is required, our annual goodwill impairment test is performed by comparing the estimated fair value of a reporting unit with its carrying amount
(including attributed goodwill). We measure the fair value of the reporting units using a combination of income and market approaches. Any impairment would be
recognized by a charge to income from operations and a reduction in the carrying value of the goodwill. As of October 1, 2021, we performed a qualitative
assessment of the Patient Care reporting unit. The qualitative assessment did not result in the carrying value of the reporting unit exceeding its fair value.
We apply judgment in determining the fair value of our reporting units and the implied fair value of goodwill which is dependent on significant assumptions and
estimates regarding expected future cash flows, terminal value, changes in working capital requirements, and discount rates.
We did not have any goodwill impairment during 2021, 2020, and 2019. We also did not have any indefinite-lived trade name impairment during 2021, 2020, and
2019. See Note H - “Goodwill and Other Intangible Assets” to our consolidated financial statements in this Annual Report on Form 10-K for additional
information.
As described, we apply judgment in the selection of key assumptions used in the goodwill impairment test and as part of our evaluation of intangible assets tested
annually and at interim testing dates as necessary. If these assumptions differ from actual, we could incur additional impairment charges and those charges could be
material.
We consider the assessment of the occurrence of triggering events or substantive changes in circumstances that may indicate the fair value of goodwill may be
impaired to be a critical estimate. Additionally, we consider the assumptions discussed above pertaining to the income and market approaches we use in the testing
of impairment to be critical estimates. Changes in these estimates and assumptions could materially affect the determination of fair value and the goodwill
impairment test result.
Income Taxes
We recognize deferred tax assets and liabilities for net operating loss and other credit carry forwards and the expected tax consequences of temporary differences
between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in
our financial statements or tax returns, and future profitability by tax jurisdiction.
We provide a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We evaluate our deferred tax assets
quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected
future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax
earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which
45
involve the exercise of significant judgment. We have experienced losses from 2014 to 2017 due to impairments of our intangible assets, increased professional
fees in relation to our restatement and related remediation procedures for identified material weaknesses, and increased interest and bank fees. These losses have
necessitated that we evaluate the sufficiency of our valuation allowance.
We are in a taxable income position in 2021 and are able to utilize net operating losses. We have $1.6 million and $4.6 million of U.S. federal and $139.1 million
and $153.0 million of state net operating loss carryforwards available at December 31, 2021 and 2020, respectively. These carryforwards will be used to offset
future income but may be limited by the change in ownership rules in Section 382 of the Internal Revenue Code. These net operating loss carryforwards will expire
in varying amounts through 2041. We expect to generate income before taxes in future periods at a level that would allow for the full realization of the majority of
our net deferred tax assets. As of December 31, 2021 and 2020, we have recorded a valuation allowance of approximately $2.1 million related to various state
jurisdictions.
We believe that our 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, we are subject to periodic audits and examinations by the
Internal Revenue Service and other state and local taxing authorities. In these cases, we record the financial statement effects of a tax position when it is more
likely than not, based on the technical merits, that the position will be sustained upon examination. We record the largest amount of tax benefit that is greater than
fifty percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If not paid, the liability for
uncertain tax positions is reversed as a reduction of income tax expense at the earlier of the period when the position is effectively settled or when the statute of
limitations has expired. Although we believe that our estimates are reasonable, actual results could differ from these estimates. Interest and penalties, when
applicable, are recorded within the income tax provision. During the year ended December 31, 2021, we released $4.0 million of unrecognized tax benefits and
$1.3 million of interest expense due to lapse of statute of limitations for the applicable tax years. We do not anticipate further significant release of unrecognized
tax benefits within the next twelve months.
Reclassifications
We have reclassified certain amounts in the prior year consolidated financial statements to be consistent with the current year presentation. These relate to
classifications with the consolidated statements of operations.
Recent Accounting Pronouncements
Refer to the “Recent Accounting Pronouncements” section in Note A - “Organization and Summary of Significant Accounting Policies” in this Annual Report on
Form 10-K for disclosure of recent accounting pronouncements that are either expected to have more than a minimal impact on our consolidated financial position
and results of operation, or that we are still assessing to determine their impact.
46
Results of Operations - Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
For the years ended December 31, 2021 and 2020, our consolidated results of operations were as follows:
For the Years Ended
December 31,
Percent
Change
(dollars in thousands)
2021
2020
2021 vs 2020
Net revenues
$
1,120,488
$
1,001,150
11.9 %
Material costs
354,342
315,410
12.3 %
Personnel costs
397,574
351,191
13.2 %
Other operating costs
135,630
100,010
35.6 %
General and administrative expenses
127,752
127,785
— %
Depreciation and amortization
32,519
34,847
(6.7)%
Operating expenses
1,047,817
929,243
12.8 %
Income from operations
72,671
71,907
1.1 %
Interest expense, net
28,864
32,445
(11.0)%
Non-service defined benefit plan expense
667
632
5.5 %
Income before income taxes
43,140
38,830
11.1 %
Provision for income taxes
1,158
638
81.5 %
Net income
$
41,982
$
38,192
9.9 %
Material costs, personnel costs, and other operating costs reflect expenses we incur in connection with our delivery of care through our clinics and other patient
care operations, or through the distribution of products and services, and exclude general and administrative activities. General and administrative activities reflect
expenses we incur that are not directly related to the operation of our clinics or provision of products and services.
During 2021 and 2020, our operating expenses as a percentage of net revenues were as follows:
For the Years Ended
December 31,
2021
2020
Material costs
31.6 %
31.5 %
Personnel costs
35.5 %
35.1 %
Other operating costs
12.1 %
9.9 %
General and administrative expenses
11.4 %
12.8 %
Depreciation and amortization
2.9 %
3.5 %
Operating expenses
93.5 %
92.8 %
During the previous two years, the number of patient care clinics and satellite locations we operated or leased have been as follows:
As of December 31,
2021
2020
Patient care clinics
760
704
Satellite locations
115
112
Total
875
816
Patient care clinics reflect locations that are licensed as a primary location to provide O&P services and which are fully staffed and open throughout a typical
operating week. To facilitate patient convenience, we also operate satellite clinics. These are remote locations associated with a primary care clinic, utilized to see
patients, and are open for operation on less than a full-time basis during a typical operating week.
47
Relevance of Year Ended Results to Comparative and Future Periods. As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first
quarter of 2020, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend that continued throughout 2020 and into
2021. The effects of this public health emergency on our revenues and earnings, particularly in 2020, impacted the comparison to our historical financial results. As
a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic, including temporary
labor and other cost reduction measures largely in place during the second and third quarters of 2020, may not be indicative of future financial and operational
performance. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity, and Capital Resources” section
below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results
and financial condition.
Net revenues. Net revenues for the year ended December 31, 2021 were $1,120.5 million, an increase of $119.3 million, or 11.9%, from $1,001.2 million for the
year ended December 31, 2020. Net revenues by operating segment, after elimination of intersegment activity, were as follows:
For the Years Ended
December 31,
Change
Percent
Change
(dollars in thousands)
2021
2020
2021 vs 2020
2021 vs 2020
Patient Care
$
943,328
$
831,603
$
111,725
13.4 %
Products & Services
177,160
169,547
7,613
4.5 %
Net revenues
$
1,120,488
$
1,001,150
$
119,338
11.9 %
Patient Care net revenues for the year ended December 31, 2021 were $943.3 million, an increase of $111.7 million, or 13.4%, from $831.6 million for the same
period in the prior year. Same clinic revenues increased $69.9 million for the year ended December 31, 2021 compared to the same period in the prior year,
reflecting an increase in same clinic revenues of 9.1% on a per-day basis. We estimate that approximately 8.3% of this increase related to growth in volume,
primarily associated with the recovery from the COVID-19 related impact on 2020 volumes, and the remaining 0.8% related to price growth and improvements in
disallowed and patient non-payment rates. Net revenues from acquired clinics and consolidations increased $42.3 million, and revenues from other services
decreased $0.5 million. For the year ended December 31, 2021, we estimate that our same clinic net revenues were approximately 97% of the level we reported for
the same period of 2019, prior to the pandemic, while our patient appointment volumes were 93% of those we reported in the 2019 period. This increase in revenue
relative to patient volumes related primarily to reductions in patient encounters for lower “off-the-shelf” orthotic devices, as well as increases in volume of
technology-related prosthetic devices during the year.
Prosthetics constituted approximately 55% of our total Patient Care revenues for the year ended December 31, 2021 and 56% for the same period in the prior year,
excluding the impact of acquisitions. Prosthetic revenues were 6.1% higher on a per-day basis than the same period in the prior year, excluding the impact of
acquisitions. Orthotics, shoes, inserts, and other products increased by 13.0% on a per-day basis for the same comparative period, excluding the impact of
acquisitions. Revenues throughout 2020, particularly orthotic revenues, were adversely affected due to a decline in patient appointment volumes as a result of the
COVID-19 pandemic, governmental suppression measures implemented in response to the COVID-19 pandemic, and other factors impacting our business volumes
as discussed in the “Effects of the COVID-19 Pandemic” section.
Products & Services net revenues for the year ended December 31, 2021 were $177.2 million, an increase of $7.6 million, or 4.5%, from $169.5 million for the
same period in the prior year. This was primarily attributable to an increase of $9.6 million, or 7.7%, in the distribution of O&P componentry to independent
providers stemming largely from lower volumes in the comparative period due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19
Pandemic” section above, and a $2.0 million, or 4.3%, decrease in net revenues from therapeutic solutions as a result of the impact of customer lease cancellations,
partially offset by lease installations.
48
Material costs. Material costs for the year ended December 31, 2021 were $354.3 million, an increase of $38.9 million or 12.3%, from $315.4 million for the same
period in the prior year. Total material costs as a percentage of net revenues increased to 31.6% in 2021 from 31.5% in 2020 due primarily to changes in our
Patient Care segment business mix. Material costs by operating segment, after elimination of intersegment activity, were as follows:
For the Years Ended
December 31,
Change
Percent
Change
(dollars in thousands)
2021
2020
2021 vs 2020
2021 vs 2020
Patient Care
$
287,204
$
247,384
$
39,820
16.1 %
Products & Services
67,138
68,026
(888)
(1.3) %
Material costs
$
354,342
$
315,410
$
38,932
12.3 %
Patient Care material costs increased $39.8 million, or 16.1%, for the year ended December 31, 2021 compared to the same period in the prior year as a result of
the increase in segment net sales and changes in the segment product mix. Patient Care material costs as a percent of segment net revenues was 30.4% in 2021 and
29.7% in 2020. Our operations and clinic throughput were not adversely affected due to the lack of availability of componentry in 2021.
Products & Services material costs decreased $0.9 million, or 1.3%, for the year ended December 31, 2021 compared to the same period in the prior year. As a
percent of net revenues in the Products & Services segment, material costs were 37.9% in the year ended December 31, 2021 as compared to 40.1% in the same
period 2020. The decrease in material costs as a percentage of segment net revenues was due to a change in business and product mix within the segment, in part
due to the discontinuation of our distribution of certain low-margin orthotics products to podiatrists during 2020.
Personnel costs. Personnel costs for the year ended December 31, 2021 were $397.6 million, an increase of $46.4 million, or 13.2%, from $351.2 million for the
same period in the prior year. Personnel costs by operating segment were as follows:
For the Years Ended
December 31,
Change
Percent
Change
(dollars in thousands)
2021
2020
2021 vs 2020
2021 vs 2020
Patient Care
$
339,578
$
302,206
$
37,372
12.4 %
Products & Services
57,996
48,985
9,011
18.4 %
Personnel costs
$
397,574
$
351,191
$
46,383
13.2 %
Personnel costs for the Patient Care segment were $339.6 million for the year ended December 31, 2021, an increase of $37.4 million, or 12.4%, from $302.2
million for the same period in the prior year. The increase in Patient Care personnel costs during the year was primarily due to an increase in salary expense of
$40.3 million due to cost mitigation efforts in the prior year period as a result of the COVID-19 pandemic as well as from acquisitions, and related increases in
benefits costs of $2.3 million, payroll taxes of $2.1 million, and commissions by $1.0 million, offset by a decrease in incentive compensation and other personnel
costs of $8.3 million compared to the same period in the prior year.
Personnel costs in the Products & Services segment were $58.0 million for the year ended December 31, 2021, an increase of $9.0 million, or 18.4% compared to
the same period in the prior year. Salary expense increased $7.7 million primarily due to cost mitigation efforts implemented in 2020 as a result of the COVID-19
pandemic, and benefits, payroll taxes, and other personnel costs increased $1.7 million, offset by a decrease in incentive compensation of $0.4 million for the year
ended December 31, 2021 compared to the same period in the prior year.
Other operating costs. Other operating costs for the year ended December 31, 2021 were $135.6 million, an increase of $35.6 million, or 35.6%, from $100.0
million for the same period in the prior year. Other expenses increased by $26.4 million primarily due to the benefit in the prior year period associated with the
recognition of $24.0 million in proceeds from Grants under the CARES Act included in Other operating costs, as discussed in the “Effects of the COVID-19
Pandemic” section, and an approximate $1.9 million gain on the sale of property. Professional fees increased $2.7 million, travel expenses increased $1.9 million,
and other expenses increased $3.7 million primarily due to cost mitigation efforts in the prior year as a result of the COVID-19 pandemic, and an increase of $1.3
million in rent expense from new, renewed, and acquired leases. The increases are partially offset by a decrease in bad debt expense of $0.4 million as compared to
the same period in the prior year.
49
General and administrative expenses. General and administrative expenses for the year ended December 31, 2021 were $127.8 million, which is unchanged from
the same period in the prior year. This was primarily the result of an increase in salary expense of $7.6 million and an increase in travel and other expenses of $5.9
million, offset by decreases in share-based compensation of $5.7 million due to the modification recognized in the prior year period of certain equity awards
granted in 2017, a decrease of $5.4 million in incentive compensation and benefits, and a decrease of $2.4 million of qualified disaster relief payments to
employees in the prior year.
Depreciation and amortization. Depreciation and amortization for the year ended December 31, 2021 was $32.5 million, a decrease of $2.3 million, or 6.7%, from
the same period in the prior year. Depreciation expense decreased $1.2 million and amortization expense decreased $1.1 million when compared to the same period
in the prior year.
Interest expense, net. Interest expense for the year ended December 31, 2021 was $28.9 million, a decrease of $3.6 million, or 11.0%, from $32.4 million for the
same period in the prior year.
Provision for income taxes. The provision for income taxes for the year ended December 31, 2021 was $1.2 million, or 2.7% of income before taxes, compared to a
provision of $0.6 million, or 1.6% of income before taxes for the year ended December 31, 2020. The effective tax rate in 2021 consisted principally of the 21%
federal statutory tax rate and non-deductible expenses, offset by research and development tax credits and the release of reserves for uncertain tax positions. The
increase in the effective tax rate for the year ended December 31, 2021 compared with the year ended December 31, 2020 is primarily attributable to the net tax
benefit resulting from the loss carryback provisions granted under the CARES Act for the year ended December 31, 2020, partially offset by the release of reserves
for uncertain tax positions for the year ended December 31, 2021.
For the year ended December 31, 2020, we completed a formal study to identify qualifying research and development expenses resulting in the recognition of
federal tax benefits of $3.3 million, net of tax reserves, related to 2020 and $6.1 million, net of tax reserves, related to prior years. For the year ended December 31,
2021, we recorded a federal tax benefit of $4.3 million, net of tax reserves, as a deferred tax asset.
During the year ended December 31, 2021, we released $4.0 million of unrecognized tax benefits and $1.3 million of interest expense due to lapse of statute of
limitations for the applicable tax years. We do not anticipate further significant release of unrecognized tax benefits within the next twelve months.
Net income. Our net income for year ended December 31, 2021 was $42.0 million as compared to net income of $38.2 million for year ended December 31, 2020.
Results of Operations - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
For the years ended December 31, 2020 and 2019, our consolidated results of operations were as follows:
For the Years Ended
December 31,
Percent
Change
(dollars in thousands)
2020
2019
2020 v 2019
Net revenues
$
1,001,150
$
1,098,046
(8.8)%
Material costs
315,410
357,771
(11.8)%
Personnel costs
351,191
372,225
(5.7)%
Other operating costs
100,010
135,224
(26.0)%
General and administrative expenses
127,785
131,473
(2.8)%
Depreciation and amortization
34,847
35,925
(3.0)%
Operating expenses
929,243
1,032,618
(10.0)%
Income from operations
71,907
65,428
9.9 %
Interest expense, net
32,445
34,258
(5.3)%
Non-service defined benefit plan expense
632
691
(8.5)%
Income before income taxes
38,830
30,479
27.4 %
Provision for income taxes
638
2,954
(78.4)%
Net income
$
38,192
$
27,525
38.8 %
50
Material costs, personnel costs, and other operating costs reflect expenses we incur in connection with our delivery of care through our clinics and other patient
care operations, or through the distribution of products and services, and exclude general and administrative activities. General and administrative activities reflect
expenses we incur that are not directly related to the operation of our clinics or provision of products and services.
During 2020 and 2019, our operating expenses as a percentage of net revenues were as follows:
For the Years Ended
December 31,
2020
2019
Material costs
31.5 %
32.6 %
Personnel costs
35.1 %
33.9 %
Other operating costs
9.9 %
12.2 %
General and administrative expenses
12.8 %
12.0 %
Depreciation and amortization
3.5 %
3.3 %
Operating expenses
92.8 %
94.0 %
During the previous two years, the number of patient care clinics and satellite locations we operated or leased have been as follows:
As of December 31,
2020
2019
Patient care clinics
704
701
Satellite locations
112
111
Total
816
812
Patient care clinics reflect locations that are licensed as a primary location to provide O&P services and which are fully staffed and open throughout a typical
operating week. To facilitate patient convenience, we also operate satellite clinics. These are remote locations associated with a primary care clinic, utilized to see
patients, and are open for operation on less than a full-time basis during a typical operating week.
Relevance of Year Ended Results to Comparative and Future Periods. As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first
quarter of 2020, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend that continued throughout 2020 and into
2021. The effects of this public health emergency on our revenues and earnings in the year ended December 31, 2020 impacted the comparison to our historical
financial results. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic,
including temporary labor and other cost reduction measures largely in place during the second and third quarters of 2020, may not be indicative of future financial
and operational performance. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity, and Capital
Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our
prospective results and financial condition.
Net revenues. Net revenues for the year ended December 31, 2020 were $1,001.2 million, a decrease of $96.9 million, or 8.8%, from $1,098.0 million for the year
ended December 31, 2019. Net revenues by operating segment, after elimination of intersegment activity, were as follows:
For the Years Ended
December 31,
Change
Percent
Change
(dollars in thousands)
2020
2019
2020 vs 2019
2020 vs 2019
Patient Care
$
831,603
$
905,691
$
(74,088)
(8.2)%
Products & Services
169,547
192,355
(22,808)
(11.9)%
Net revenues
$
1,001,150
$
1,098,046
$
(96,896)
(8.8)%
Patient Care net revenue for the year ended December 31, 2020 was $831.6 million, a decrease of $74.1 million, or 8.2%, from $905.7 million for the same period
in the prior year. Same clinic revenues decreased $91.9 million for the year ended
51
December 31, 2020 compared to the same period in the prior year, reflecting a decrease in same clinic revenues of 11.0% on a per-day basis. We estimate that
volumes decreased 12.8% and this decline was partially mitigated by a 0.7% increase in pricing and a 1.1% increase from the improvement in disallowed claims
and patient non-payment. Net revenues from acquired clinics and consolidations increased $18.6 million, and revenues from other services decreased $0.8 million.
Prosthetics constituted approximately 56% of our total Patient Care revenues for the year ended December 31, 2020 and 55% for the same period in the prior year,
excluding the impact of acquisitions. Prosthetic revenues were 8.3% lower on a per-day basis than the same period in the prior year, excluding the impact of
acquisitions. Orthotics, shoes, inserts, and other products decreased by 14.2% on a per-day basis for the same comparative period, excluding the impact of
acquisitions. Revenues were adversely affected during the period due to a decline in patient appointment volumes beginning in the last two weeks of March and
continuing throughout 2020 as a result of the continuing spread of COVID-19 viral infections, governmental suppression measures implemented in response to the
COVID-19 pandemic, and other factors impacting our business volumes discussed in the “Effects of the COVID-19 Pandemic” section.
Products & Services net revenues for the year ended December 31, 2020 were $169.5 million, a decrease of $22.8 million, or 11.9%, from $192.4 million for the
same period in the prior year. This was primarily attributable to a decrease of $19.4 million, or 13.5% in the distribution of O&P componentry to independent
providers stemming primarily from lower volumes due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19 Pandemic” section above, and a
$3.4 million, or 7.1%, decrease in net revenues from therapeutic solutions as a result of the impact of historical customer lease cancellations, partially offset by
lease installations.
Beginning in the latter half of March 2020, our business volumes began to be adversely affected by the COVID-19 pandemic, and business volumes were
adversely impacted throughout 2020. We believe that the decline in net revenues in the year ended December 31, 2020 was primarily due to the continuing spread
of COVID-19 viral infections, state and local government restrictions, social distancing and suppression measures adopted by our patients and customers, and
deferral of elective surgical procedures, all of which resulted in a decline in physician referrals and patient appointments. For additional discussion, refer to the
“Effects of the COVID-19 Pandemic” section.
Material costs. Material costs for the year ended December 31, 2020 were $315.4 million, a decrease of $42.4 million, or 11.8%, from $357.8 million for the same
period in the prior year. Total material costs as a percentage of net revenue decreased to 31.5% in 2020 from 32.6% in 2019 due primarily to changes in our Patient
Care segment business mix. Material costs by operating segment, after elimination of intersegment activity, were as follows:
For the Years Ended
December 31,
Change
Percent
Change
(dollars in thousands)
2020
2019
2020 vs 2019
2020 vs 2019
Patient Care
$
247,384
$
274,801
$
(27,417)
(10.0)%
Products & Services
68,026
82,970
(14,944)
(18.0)%
Material costs
$
315,410
$
357,771
$
(42,361)
(11.8)%
Patient Care material costs decreased $27.4 million, or 10.0%, for the year ended December 31, 2020 compared to the same period in the prior year as a result of
the reduction in segment net sales, offset by our acquisitions and changes in the segment product mix. Patient Care material costs as a percent of segment net
revenues was 29.7% in 2020 from 30.3% in 2019.
Products & Services material costs decreased $14.9 million, or 18.0%, for the year ended December 31, 2020 compared to the same period in the prior year. As a
percent of net revenues in the Products & Services segment, material costs were 40.1% in the year ended December 31, 2020 as compared to 43.1% in the same
period 2019. The decrease in material costs as a percentage of segment net revenues was due to a change in business and product mix within the segment.
52
Personnel costs. Personnel costs for the year ended December 31, 2020 were $351.2 million, a decrease of $21.0 million, or 5.7%, from $372.2 million for the
same period in the prior year. Personnel costs by operating segment were as follows:
For the Years Ended
December 31,
Change
Percent
Change
(dollars in thousands)
2020
2019
2020 vs 2019
2020 vs 2019
Patient Care
$
302,206
$
319,633
$
(17,427)
(5.5) %
Products & Services
48,985
52,592
(3,607)
(6.9) %
Personnel costs
$
351,191
$
372,225
$
(21,034)
(5.7) %
Personnel costs for the Patient Care segment were $302.2 million for the year ended December 31, 2020, a decrease of $17.4 million, or 5.5%, from $319.6 million
for the same period in the prior year. The decrease in Patient Care personnel costs during the year was primarily due to a decrease in salary expense of $21.5
million due to cost mitigation efforts implemented as result of the COVID-19 pandemic, and decreases in benefits costs of $1.5 million due to reduced claims
experience, payroll taxes of $0.9 million, and commissions by $0.7 million, offset by increases in incentive compensation and other personnel costs of $6.1 million
and severance costs of $1.1 million compared to the same period in the prior year.
Personnel costs in the Products & Services segment were $49.0 million for the year ended December 31, 2020, a decrease of $3.6 million, or 6.9% compared to the
same period in the prior year. Salary expense decreased $3.2 million due to cost mitigation efforts as a result of the COVID-19 pandemic, and bonus, commissions,
and other personnel costs decreased $0.4 million for the year ended December 31, 2020 compared to the same period in the prior year.
Other operating costs. Other operating costs for the year ended December 31, 2020 were $100.0 million, a decrease of $35.2 million, or 26.0%, from $135.2
million for the same period in the prior year. Other expenses decreased by $26.3 million due to the benefit associated with the recognition of $24.0 million in
proceeds from Grants under the CARES Act included in Other operating costs, as discussed in the “Effects of the COVID-19 Pandemic” section, and an
approximate $1.9 million gain on the sale of property. Travel and other expenses decreased $11.9 million due to cost mitigation efforts as a result of the COVID-19
pandemic, and bad debt expense decreased $0.8 million. The decreases are offset by a $3.8 million increase in rent expense from new, renewed, and acquired
leases as compared to the same period in the prior year.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2020 were $127.8 million, a decrease of $3.7 million,
or 2.8%, from $131.5 million for the same period in the prior year. This was primarily the result of a decrease in salary expense of $6.2 million, as well as a
decrease in professional fees of $5.7 million and travel and other expenses of $1.9 million, offset by increases in share-based compensation of $4.4 million due to
the modification recognized in the second quarter of certain equity awards granted in 2017, and from an increase of $1.4 million in incentive compensation and
benefits costs, $2.4 million of qualified disaster relief payments to employees, and additional severance costs of $1.9 million.
Depreciation and amortization. Depreciation and amortization for the year ended December 31, 2020 was $34.8 million, a decrease of $1.1 million, or 3.0%, from
the same period in the prior year. Depreciation expense decreased $2.5 million and amortization expense increased $1.4 million when compared to the same period
in the prior year.
Interest expense, net. Interest expense for the year ended December 31, 2020 was $32.4 million, a decrease of $1.8 million, or 5.3%, from $34.3 million for the
same period in the prior year.
Provision for income taxes. The provision for income taxes for the year ended December 31, 2020 was $0.6 million, or 1.6% of income before taxes, compared to a
provision of $3.0 million, or 9.7% of income before taxes for the year ended December 31, 2019. The effective tax rate in 2020 consisted principally of the 21%
federal statutory tax rate and non-deductible expenses, offset by research and development tax credits and the net tax benefit of the loss carryback claim granted
under the CARES Act. The decrease in the effective tax rate for the year ended December 31, 2020 compared with the year ended December 31, 2019 is primarily
attributable to the recognition of research and development tax credits for the current and prior years and the tax benefit resulting from the loss carryback
provisions granted under the CARES Act.
For the year ended December 31, 2020, we completed a formal study to identify qualifying research and development expenses resulting in the recognition of tax
benefits of $2.2 million, net of tax reserves, related to the current year and $6.1 million, net of tax reserves, related to prior years. We recorded the tax benefit,
before tax reserves, as a deferred tax asset.
53
The CARES Act, which was enacted on March 27, 2020, included changes to certain tax laws related to the deductibility of interest expense and depreciation, as
well as the provision to carryback net operating losses to five preceding years. Accounting Standards Codification (“ASC”) 740, Income Taxes, requires the effects
of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. As a result of the CARES Act
provisions, for the year ended December 31, 2020 we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a
higher statutory rate, which also decreased our current income taxes payable by $17.2 million as of December 31, 2020.
During the year ended December 31, 2019, we determined that it was more likely than not that we would be able to realize the benefit of certain state deferred tax
assets after we achieved twelve quarters of cumulative pretax income adjusted for permanent differences, as well as forecasted future taxable income and other
positive evidence, and released $7.1 million of the valuation allowance related to certain state deferred tax assets in the fourth quarter of 2019.
Net income. Our net income for year ended December 31, 2020 was $38.2 million as compared to a net income of $27.5 million for year ended December 31,
2019.
Financial Condition, Liquidity, and Capital Resources
Liquidity
To provide cash for our operations and capital expenditures, our immediate source of liquidity is our cash and investment balances and any amounts we have
available for borrowing under our revolving credit facility. We refer to the sum of these two amounts as our “liquidity.”
As of December 31, 2021, we had total liquidity of $191.0 million, which reflected a decrease of $48.4 million, from the $239.4 million in liquidity we had as of
December 31, 2020. Our liquidity as of December 31, 2021 was comprised of cash and cash equivalents of $61.7 million and $129.3 million in available borrowing
capacity under our $135.0 million revolving credit facility. This decrease in liquidity primarily relates to a decrease in cash of $82.9 million, comprised of cash
paid for acquisitions, net of cash acquired, of $80.1 million, capital expenditures of $24.9 million, and net cash used in financing activities of $16.6 million,
partially offset by cash provided by operating activities of $36.2 million.
Our Credit Agreement contains customary representations and warranties, as well as financial covenants, including that we maintain compliance with certain
leverage and interest coverage ratios. If we are not compliant with our debt covenants in any period, absent a waiver or amendment of our Credit Agreement, we
may be unable to access funds under our revolving credit facility. Due to the additional borrowings under our revolving credit facility in March 2020, which were
repaid in full during the third quarter of 2020, and in anticipation of the potential economic impact of the COVID-19 pandemic, we entered into an amendment to
the Credit Agreement that provided for, among other things, increases in the allowable level of indebtedness we may carry relative to our earnings, changes in the
definition of EBITDA used to compute certain financial ratios, certain restrictions regarding investments and payments we made until the completion of the first
quarter of 2021 and increases in the interest costs associated with borrowings under our revolving credit facility. We were in compliance with our debt covenants
as of December 31, 2021.
For additional discussion, please refer to the Liquidity Outlook section below.
Working Capital and Days Sales Outstanding
As of December 31, 2021, we had working capital of $91.5 million compared to working capital of $129.3 million as of December 31, 2020. Our working capital
decreased $37.8 million in 2021 when compared to 2020 due to a decrease in current assets of $56.5 million and a decrease in current liabilities of $18.8 million.
The decrease in current assets was primarily attributable to a decrease in Cash and cash equivalents of $82.9 million discussed in the “Liquidity” section above and
a decrease in Income taxes receivable of $12.3 million, which relates to income tax relief under the CARES Act. The decreases were offset by increases in
Accounts receivable, net of $23.5 million, discussed further below, Inventories of $11.0 million, and Other current assets of $4.2 million.
The decrease in current liabilities was primarily attributable to a decreases of $18.1 million in Accrued compensation related costs attributable to current year
decreases in incentive compensation, $2.5 million in Accrued expenses and other current
54
liabilities, $1.5 million in Accounts payable, and $1.6 million in the Current portion of operating lease liabilities, partially offset by an increase in the Current
portion of long-term debt of $4.9 million.
Days sales outstanding (“DSO”) is a calculation that approximates the average number of days between the billing for our services and the date of our receipt of
payment, which we estimate using a 90-day rolling period of net revenue. This computation can provide a relative measure of the effectiveness of our billing and
collections activities. Clinics acquired during the past 90-day period are excluded from the calculation. As of December 31, 2021, our DSO was 43 days, as
compared to 42 days and 48 days as of December 31, 2020 and 2019, respectively. The increase compared to the December 31, 2020 DSO is primarily attributable
to an increase in sales at the end of 2021 as compared to 2020.
Sources and Uses of Cash in the Year Ended December 31, 2021 Compared to December 31, 2020
Cash flows provided by operating activities decreased $119.4 million to $36.2 million for the year ended December 31, 2021 from $155.6 million for year ended
December 31, 2020. The most significant decrease in cash provided by operating activities was due to a $51.7 million decrease in cash provided by Accounts
receivable, net which is largely attributable to an increase in revenue in 2021 as compared to 2020, as discussed in the “Effects of the COVID-19 Pandemic”
section above. In addition, operating cash flows have also decreased on a comparative basis due to a decrease in Accrued compensation related costs of $29.8
million, a decrease in Accounts payable and Accrued expenses and other current liabilities of $23.2 million, and other decreases in working capital of $25.6
million; offset by an increase in operating cash flows resulting from income taxes of $14.2 million.
Cash flows used in investing activities increased $56.6 million to $102.5 million for the year ended December 31, 2021 from $45.9 million for the year ended
December 31, 2020. The increase in cash used in investing activities was primarily due to higher cash outflows of $58.3 million for acquisitions, net of cash
acquired, partially offset by lower capital expenditures of $3.2 million during the year ended December 31, 2021.
Cash flows used in financing activities decreased $22.9 million to $16.6 million for the year ended December 31, 2021 from $39.5 million for the year ended
December 31, 2020. This decrease in cash used in financing activities was primarily due to lower cash outflows of $21.0 million related to payments on sellers
notes and additional consideration, of which $22.0 million relates to acquisitions that closed in 2020, and a $2.7 million decrease from employee taxes on stock-
based compensation.
Capital Expenditures and Deferred Cloud Implementation Expenditures
During 2021, we expended a combined total of $24.9 million for the purchase of property, plant, and equipment, and the purchase of therapeutic program
equipment. Our capital expenditures relate primarily to our investment in leasehold and other machinery and equipment for our patient care clinics, for equipment
we use in providing therapeutic solutions, as well as for the purchase or development of information technology assets that support our businesses and corporate
activities. In addition to this capital expenditure amount, we incurred approximately $2 million in incremental expenditures related to the implementation of cloud-
based supply chain and financial systems that will be deferred in accordance with ASU 2018-15 and will be included in future expense over the periods of
operation of these systems. These expenditures are anticipated to be separate from and additional to the operating expenses discussed in “New Systems
Implementations” section above.
Effect of Indebtedness
On March 6, 2018, we entered into a new Credit Agreement in order to refinance our indebtedness, as disclosed in Note M - “Debt and Other Obligations,” in the
notes to the consolidated financial statements contained elsewhere in this report. Our indebtedness bears reduced rates of interest compared with those under our
prior agreement, and as such, for the year ended December 31, 2021, we incurred interest expense of $28.9 million compared with the $32.4 million incurred in
2020 and the $34.3 million incurred in 2019. Cash paid for interest totaled $25.7 million, $28.4 million, and $29.2 million for the years ended December 31, 2021,
2020, and 2019 respectively.
In May 2020, we entered into an amendment to the Credit Agreement (the “Amendment”) that provided for, amongst other things, an increase in the maximum Net
Leverage Ratio to 5.25 to 1.00 for the fiscal quarter ended March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021;
and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter. In addition, the Amendment changed the definition of
EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the COVID-19 pandemic.
Borrowings under the revolving credit facility will bear interest at a variable rate
55
equal to the greater of LIBOR or 1.00%, plus 3.75%. In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and
certain of our subsidiaries’ ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed
with the proceeds of an equity offering, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and
liquidity thresholds. During the fourth quarter of 2020, we recommenced our acquisition of O&P providers as we met certain Amendment parameters around
leverage and liquidity thresholds.
On November 23, 2021, we entered into a Second Amendment to Credit Agreement (the “Second Amendment”) that revised certain provisions of the Existing
Credit Agreement to, among other things, (i) increase the aggregate amount of the revolving loan commitments by $35 million to an aggregate total amount of
$135 million, (ii) extend the scheduled maturity date of the revolving loan facility to November 23, 2026 (subject to a springing maturity if the term loans
outstanding under the Existing Credit Agreement are not repaid prior to the date that is 91 days prior to the stated maturity thereof), (iii) decrease the applicable
margin on LIBOR and base rate revolving loan borrowings by 0.75% per annum, (iv) decrease the LIBOR interest rate floor in respect of revolving loan
borrowings to 0.00% per annum, (v) decrease the revolving loan facility commitment fee to 0.30% per annum, (vi) increase the maximum allowable leverage ratio
for covenant purposes such that the maximum consolidated first lien net leverage ratio shall be up to (a) 5.00 to 1.00 for the fiscal quarters ending December 31,
2021, March 31, 2022, June 30, 2022 and September 30, 2022 and (b) 4.75 to 1.00 for the fiscal quarter ending December 31, 2022 and the last day of each fiscal
quarter thereafter, and (vii) permit, at our election and up to three times during the term of the Credit Agreement, the maximum allowable leverage ratio for
covenant purposes to be temporarily increased by an additional 0.50 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions.
Scheduled maturities of debt as of December 31, 2021 were as follows (in thousands):
(in thousands)
2022
$
15,281
2023
15,243
2024
14,703
2025
474,246
2026
2,603
Thereafter
1,143
Total debt before unamortized discount and debt issuance costs, net
523,219
Unamortized discount and debt issuance costs, net
(5,974)
Total debt
$
517,245
Future Cash Requirements
Our primary future cash requirements will be for acquisitions of O&P providers, debt payments, capital expenditures, payment of deferred payroll taxes, and to
fund operations.
We expect our primary cash requirements for 2022 to be as follows:
•
Acquisitions of O&P providers - Our strategy is to achieve long-term growth through disciplined diversification of our revenue streams, including
geographic expansion or the broadening of our continuum of care through the acquisitions of high quality O&P providers. We anticipate that we will
continue to pursue acquisitions and other growth initiatives that provide value to our shareholders.
•
Debt - We are contractually obligated to make payments of $15.3 million on principal and of $26.6 million in interest in 2022 associated with our Credit
Agreement and Seller Notes. In the ordinary course of business, we may from time to time borrow and repay amounts under our revolving credit facility,
as well as make voluntary prepayments on Term Loan B.
•
Capital expenditures and deferred cloud implementation expenditures - During 2022, we expect to continue to invest in capital expenditures, and in
deferred cloud implementation expenditures, in connection with our planned reconfiguration of distribution facilities and our related implementation of
supply chain and financial systems. In 2022, due to these projects, we currently estimate that our capital expenditures will increase to approximately $33
million. Of this amount, we estimate that approximately $4 million to $5 million will relate to our distribution and
56
fabrication facility leasehold and equipment expenditures. In addition to this capital expenditure amount, we estimate that we will incur $4 million to $6
million in incremental expenditures related to the New Systems Implementations that will be deferred in accordance with ASU 2018-15 and will be
included in future expense over the periods of operation of these systems. We currently expect similar levels of expenditures related to our supply chain
and financial systems implementations through 2023.
•
Deferred payroll taxes - We expect to make a payment of $5.9 million of deferred payroll taxes in 2022. Refer to the CARES Act discussion below for
further discussion.
•
Working capital - As business volumes return to more normal levels, it is likely that we will experience a natural corresponding increase in our investment
in working capital.
Liquidity Outlook and Going Concern Evaluation
Our Credit Agreement has a term loan facility with $486.1 million in principal outstanding at December 31, 2021, due in quarterly principal installments equal to
0.25% of the original aggregate principal amount of $505 million, with all remaining outstanding principal due at maturity in March 2025, and, as of December 31,
2021, a revolving credit facility with no borrowings and a maximum aggregate amount of availability of $135 million that matures in November 2026.
Our primary sources of liquidity are cash and cash equivalents, and available borrowings under our revolving credit facility. Due to the economic and social
activity impacts outlined in the “Effects of the COVID-19 Pandemic” section above, we expect the continuing disruption to have an unfavorable impact on our
operations, financial condition, and results of operations. While the duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity
depends on future developments which cannot be predicted with certainty, we believe that our existing sources of liquidity, when combined with our operating
cash flows and other measures taken to enhance our liquidity position and cost structure, will continue to allow us to finance our operations throughout 2022 and
the foreseeable future. Please refer to the “Effects of the COVID-19 Pandemic” section above for additional discussion.
With these factors in mind, we continue to anticipate we will generate positive operating cash flows that, together with our retained cash and revolving credit
facility, will allow us to invest in acquisitions and other growth opportunities to provide value to our shareholders. From time to time, we may seek additional
funding through the issuance of debt or equity securities to provide additional liquidity to fund acquisitions aligned with our strategic priorities and for other
general corporate purposes.
CARES Act
The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $203.5
billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers
and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the
COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the
$203.5 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid.
During 2021 and 2020, we recognized a total benefit of $1.1 million and $24.0 million, respectively, in our consolidated statement of operations within Other
operating costs for the Grants from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have
complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We
recognized the benefit from the Grants within Other operating costs in our Patient Care segment.
The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The
provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We paid the current portion of $5.9
million in September 2021, and deferred $5.9 million of payroll taxes within Accrued compensation related costs in the consolidated balance sheet as of
December 31, 2021.
57
Going Concern Evaluation
ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires that we evaluate whether there is substantial doubt
about our ability to meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to
be issued. We have performed such an evaluation considering the financial and operational effects of the COVID-19 pandemic and, based on the results of that
assessment, we are not aware of any relevant conditions or events that raise substantial doubt regarding our ability to continue as a going concern within one year
of the date the financial statements are issued.
Dividends
It is our policy to not pay cash dividends on our common stock, and, given our capital needs, we currently do not foresee a change in this policy. Our Credit
Agreement limits our ability to pay dividends, and we currently anticipate that these restrictions will continue to exist in future debt agreements that we may enter.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our future financial results are subject to a variety of risks, including interest rate risk. As of December 31, 2021, the interest expense arising from the $486.1
million of outstanding borrowings under both our term loan facility under our Credit Agreement and our revolving credit facility under our Credit Agreement was
subject to variable interest rates, partially offset by interest income subject to variable interest rates generated from our $61.7 million of cash equivalents as of that
date. As of December 31, 2021, we had $37.2 million of fixed rate debt which included subordinated Seller Notes and the deferred payment obligation, and
financing leases. As of December 31, 2021, there were no borrowings under our revolving credit facility.
Set forth below is an analysis of our financial instruments as of December 31, 2021 that were 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 facilities and the interest rate swap, calculated for an
instantaneous shift in interest rates, plus or minus 50 BPS, 100 BPS, and 150 BPS. As of December 31, 2021, the interest rate on the term loan facilities was 3.60%
based on a LIBOR rate of 0.10%, with an interest rate floor of 0%, and an applicable margin of 3.50%.
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 and Revolver and Swap
24,976
24,976
24,976
25,183
26,176
27,169
28,161
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Hanger, Inc.
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)
60
Consolidated Balance Sheets as of December 31, 2021 and 2020
62
Consolidated Statements of Operations for the Three Years Ended December 31, 2021
63
Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2021
64
Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Three Years Ended December 31, 2021
65
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2021
66
Notes to Consolidated Financial Statements
68
59
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Hanger, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hanger, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the
related consolidated statements of operations, comprehensive income, changes in shareholders’ equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the
Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and
60
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Payor Disallowances
As described in Notes A and D to the consolidated financial statements, the Company’s estimate of implicit price concessions related to payor disallowances was
$33.0 million as of December 31, 2021. The estimate for payor disallowances utilizes the expected value method by considering historical collection experience by
each of the Medicare and non-Medicare primary payor class groupings. For each payor class grouping, liquidation analyses of historical period-end receivable
balances are performed by management to ascertain collections experience by aging category. In the absence of an evident adverse trend, management uses
historical experience rates calculated using an average of four quarters of data with at least twelve months of adjudication. Management will modify the time
periods analyzed when significant trends indicate that adjustments should be made.
The principal considerations for our determination that performing procedures relating to payor disallowances is a critical audit matter are the significant judgment
by management to determine the estimate of payor disallowances. This in turn led to a high degree of auditor effort in performing procedures and evaluating audit
evidence relating to management’s estimate.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to the estimated payor disallowances, including controls over the completeness
and accuracy of the underlying data. These procedures also included, among others, testing management’s process for determining the estimate of payor
disallowances. Testing management’s process included evaluating the appropriateness of the expected value method; evaluating the reasonableness of the time
periods analyzed by management to develop the estimate and evaluating the reasonableness of payor class groupings; and testing the completeness and accuracy of
the accounts receivable balance, aging of accounts receivable balance by payor class groupings and the historical collection experience.
/s/PricewaterhouseCoopers LLP
Austin, Texas
February 28, 2022
We have served as the Company’s auditor since 1987.
61
HANGER, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value and share amounts)
As of December 31,
2021
2020
ASSETS
Current assets:
Cash and cash equivalents
$
61,692
$
144,602
Accounts receivable, net
152,058
128,596
Inventories
87,462
76,429
Income taxes receivable
581
12,888
Other current assets
16,536
12,357
Total current assets
318,329
374,872
Non-current assets:
Property, plant, and equipment, net
82,434
84,873
Goodwill
363,554
277,223
Other intangible assets, net
25,892
18,431
Deferred income taxes
45,494
54,877
Operating lease right-of-use assets
144,491
124,741
Other assets
17,945
15,734
Total assets
$
998,139
$
950,751
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
14,938
$
10,085
Accounts payable
63,565
65,091
Accrued expenses and other current liabilities
60,399
62,861
Accrued compensation related costs
54,465
72,541
Current portion of operating lease liabilities
33,438
35,002
Total current liabilities
226,805
245,580
Long-term liabilities:
Long-term debt, less current portion
502,307
493,012
Operating lease liabilities
124,016
104,589
Other liabilities
34,840
56,593
Total liabilities
887,968
899,774
Commitments and contingent liabilities (Note R)
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 38,891,438 shares issued and 38,748,617
shares outstanding at 2021, and 38,321,796 shares issued and 38,178,975 shares outstanding at 2020,
respectively
389
383
Additional paid-in capital
373,644
365,503
Accumulated other comprehensive loss
(11,150)
(20,215)
Accumulated deficit
(252,016)
(293,998)
Treasury stock, at cost; 142,821 shares at 2021 and 2020, respectively
(696)
(696)
Total shareholders’ equity
110,171
50,977
Total liabilities and shareholders’ equity
$
998,139
$
950,751
The accompanying notes are an integral part of the consolidated financial statements.
62
HANGER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
For the Years Ended December 31,
2021
2020
2019
Net revenues
$
1,120,488
$
1,001,150
$
1,098,046
Material costs
354,342
315,410
357,771
Personnel costs
397,574
351,191
372,225
Other operating costs
135,630
100,010
135,224
General and administrative expenses
127,752
127,785
131,473
Depreciation and amortization
32,519
34,847
35,925
Income from operations
72,671
71,907
65,428
Interest expense, net
28,864
32,445
34,258
Non-service defined benefit plan expense
667
632
691
Income before income taxes
43,140
38,830
30,479
Provision for income taxes
1,158
638
2,954
Net income
$
41,982
$
38,192
$
27,525
Basic and Diluted Per Common Share Data:
Basic income per share
$
1.09
$
1.01
$
0.74
Weighted average shares used to compute basic earnings per common share
38,599,300
37,948,796
37,267,188
Diluted income per share
$
1.07
$
0.99
$
0.72
Weighted average shares used to compute diluted earnings per common share
39,225,616
38,598,330
38,064,617
The accompanying notes are an integral part of the consolidated financial statements.
63
HANGER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31,
2021
2020
2019
Net income
$
41,982
$
38,192
$
27,525
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges, net of tax provision (benefit) of $2,718,
($2,103), and ($2,278), respectively
$
8,267
$
(6,634)
$
(7,201)
Unrealized gain (loss) on defined benefit plan, net of tax provision (benefit) of $262,
($326), and ($259), respectively
798
(1,030)
(819)
Total other comprehensive income (loss)
9,065
(7,664)
(8,020)
Comprehensive income
$
51,047
$
30,528
$
19,505
The accompanying notes are an integral part of these consolidated financial statements.
64
HANGER, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
For the Three Years Ended December 31, 2021
(dollars and share amounts in thousands)
Common
Shares,
Balance
Common
Stock, Par
Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Treasury
Stock
Total
Balance, December 31, 2018
36,921
$
371
$
343,955
$
(4,531)
$
(361,023)
$
(696)
$
(21,924)
Cumulative effect of a change in accounting
for leases
—
—
—
—
1,547
—
1,547
Balance, January 1, 2019
36,921
$
371
$
343,955
$
(4,531)
$
(359,476)
$
(696)
$
(20,377)
Net income
—
—
—
—
27,525
—
27,525
Share-based compensation expense
—
—
13,414
—
—
—
13,414
Issuance in connection with the exercise of
stock options
104
1
1,098
—
—
—
1,099
Issuance of common stock upon vesting of
restricted stock units
435
4
(4)
—
—
—
—
Effect of shares withheld to cover taxes
—
—
(4,137)
—
—
—
(4,137)
Total other comprehensive loss
—
—
—
(8,020)
—
—
(8,020)
Balance, December 31, 2019
37,460
$
376
$
354,326
$
(12,551)
$
(331,951)
$
(696)
$
9,504
Cumulative effect of a change in accounting
for credit losses
—
—
—
—
(239)
—
(239)
Balance, January 1, 2020
37,460
$
376
$
354,326
$
(12,551)
$
(332,190)
$
(696)
$
9,265
Net income
—
—
—
—
38,192
—
38,192
Share-based compensation expense
—
—
18,448
—
—
—
18,448
Issuance in connection with the exercise of
stock options
7
—
92
—
—
—
92
Issuance of common stock upon vesting of
restricted stock units
712
7
(7)
—
—
—
—
Effect of shares withheld to cover taxes
—
—
(7,356)
—
—
—
(7,356)
Total other comprehensive loss
—
—
—
(7,664)
—
—
(7,664)
Balance, December 31, 2020
38,179
$
383
$
365,503
$
(20,215)
$
(293,998)
$
(696)
$
50,977
Net income
—
—
—
—
41,982
—
41,982
Share-based compensation expense
—
—
12,297
—
—
—
12,297
Issuance in connection with the exercise of
stock options
129
2
522
—
—
—
524
Issuance of common stock upon vesting of
restricted stock units
441
4
(4)
—
—
—
—
Effect of shares withheld to cover taxes
—
—
(4,674)
—
—
—
(4,674)
Total other comprehensive income
—
—
—
9,065
—
—
9,065
Balance, December 31, 2021
38,749
$
389
$
373,644
$
(11,150)
$
(252,016)
$
(696)
$
110,171
The accompanying notes are an integral part of the consolidated financial statements.
65
HANGER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Years Ended December 31,
2021
2020
2019
Cash flows provided by operating activities:
Net income
$
41,982
$
38,192
$
27,525
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
32,519
34,847
35,925
(Benefit) provision for doubtful accounts
(54)
295
1,131
Share-based compensation expense
12,297
18,448
13,414
Deferred income taxes
5,613
17,432
(3,226)
Amortization of debt discounts and issuance costs
1,932
2,085
1,623
Gain on sale and disposal of fixed assets
(1,340)
(3,134)
(1,614)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net
(17,315)
34,378
(12,329)
Inventories
(6,350)
(6,258)
1,568
Other current assets and other assets
(5,736)
(628)
(2,611)
Income taxes receivable
12,307
(13,757)
1,248
Accounts payable
(1,909)
14,674
(6,725)
Accrued expenses and other current liabilities
(6,351)
217
(1,242)
Accrued compensation related costs
(18,420)
11,349
5,780
Other liabilities
(11,079)
4,778
(1,883)
Operating lease liabilities, net of amortization of right-of-use assets
(1,886)
2,649
262
Changes in operating assets and liabilities:
(56,739)
47,402
(15,932)
Net cash provided by operating activities
36,210
155,567
58,846
Cash flows used in investing activities:
Acquisitions, net of cash acquired
(80,078)
(21,801)
(36,585)
Purchase of property, plant, and equipment
(22,579)
(24,500)
(26,433)
Purchase of therapeutic program equipment leased to third parties under operating leases
(2,280)
(3,592)
(6,672)
Proceeds from sale of property, plant and equipment
2,451
3,890
2,598
Other investing activities, net
—
135
(66)
Net cash used in investing activities
(102,486)
(45,868)
(67,158)
Cash flows used in financing activities:
Borrowings under revolving credit agreement
—
79,000
—
Repayments under revolving credit agreement
—
(79,000)
—
Repayment of term loan
(5,050)
(5,050)
(5,050)
Payment of employee taxes on stock-based compensation
(4,674)
(7,356)
(4,137)
Payment of Seller Notes and additional consideration
(4,434)
(25,415)
(3,821)
Payments under vendor financing arrangements
(1,375)
(825)
—
Payment of financing lease obligations
(1,052)
(748)
(474)
Payment of debt issuance costs
(573)
(214)
—
Proceeds from exercise of options
524
92
1,099
Net cash used in financing activities
(16,634)
(39,516)
(12,383)
(Decrease) increase in cash and cash equivalents
(82,910)
70,183
(20,695)
Cash and cash equivalents at beginning of period
144,602
74,419
95,114
Cash and cash equivalents at end of period
$
61,692
$
144,602
$
74,419
66
A reconciliation of the change in operating lease liabilities, net of amortization of right-of-use assets is as follows:
For the Years Ended December 31,
(in thousands)
2021
2020
2019
Operating lease liabilities
$
(43,346)
$
(37,343)
$
(36,911)
Amortization of right-of-use assets
41,460
39,992
$
37,173
Operating lease liabilities, net of amortization of right-of-use assets
$
(1,886)
$
2,649
$
262
The supplemental disclosure requirements for the statements of cash flows are as follows:
For the Years Ended December 31,
(in thousands)
2021
2020
2019
Cash paid during the period for:
Interest paid
$
25,727
$
28,411
$
29,192
Income tax (refunds received) paid
(11,296)
(2,979)
5,100
Non-cash financing and investing activities:
Seller Notes, deferred payment obligations and additional consideration related to acquisitions
24,395
31,579
7,885
Purchase of property, plant and equipment in accounts payable at period end
3,396
3,955
2,998
Purchase of property, plant and equipment through vendor financing
—
—
2,200
The accompanying notes are an integral part of the consolidated financial statements.
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HANGER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2021, 2020, and 2019
Note A — Organization and Summary of Significant Accounting Policies
Description of Business
Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients
with disabilities or injuries. We provide orthotic and prosthetic (“O&P”) services, distribute O&P devices and components, manage O&P networks, and provide
therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments, Patient Care and Products & Services.
Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication, and delivery of custom O&P devices through 760
patient care clinics and 115 satellite locations in 47 states and the District of Columbia as of December 31, 2021. On a regular basis, we have been opening,
closing, and merging patient care locations and satellite locations. During the year ended December 31, 2021, we have opened or acquired 91 and closed or
consolidated 32 patient care locations.
Our Products & Services segment is comprised of our distribution services and therapeutic solutions businesses. As a leading provider of O&P products in the
United States, we engage in the distribution of a broad catalog of O&P parts, componentry, and devices to independent O&P providers nationwide. The other
business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-
based clinical programs for post-acute rehabilitation to patients at approximately 4,000 skilled nursing and post-acute providers nationwide.
Principles of Consolidation
Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany transactions and balances have been
eliminated in the accompanying consolidated financial statements.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
requires the use of estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and contingencies. Although actual results
in subsequent periods may differ from these estimates, such estimates are developed based on the best information available to management and based on
management’s best judgments at the time. We base our estimates on historical experience, observable trends, and various other assumptions that we believe are
reasonable under the circumstances. All significant assumptions and estimates underlying the amounts reported in the consolidated financial statements and
accompanying notes are regularly reviewed and updated when necessary. Changes in estimates are reflected prospectively in the consolidated financial statements
based upon on-going actual trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies.
Interim changes in estimates related to annual operating costs are applied prospectively within annual periods. Although we believe that our estimates are
reasonable, actual results could differ from these estimates.
The most significant assumptions and estimates underlying these consolidated financial statements and accompanying notes involve revenue recognition and
accounts receivable valuation, inventories, accounts payable and accrued liabilities, impairments of long-lived assets including goodwill, income taxes, business
combinations, leases, and stock-based compensation.
Reclassifications
We have reclassified certain amounts in the prior year condensed consolidated financial statements to be consistent with the current year presentation. These relate
to classifications within the condensed consolidated statements of operations.
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Revenue Recognition
Patient Care Segment
Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the
transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to
the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the VA, and private or patient pay (“Private Pay”)
individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of
estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional
disallowances. These are recorded as a reduction of revenues because they are not caused by an inability of the payor or patient to pay, but rather internal
administrative issues such as adjustments to contractual allowances, adjustments to coding, failure to ensure that a patient was currently eligible under a payor’s
health plan or that their plan provides full O&P benefits, failure to receive prior authorization, failure to file or appeal the payor’s determination timely, failure by
certain classes of patients to pay their portion of a claim, or other such administrative issues.
Our products and services are sold with a 90-day labor and 180-day warranty for fabricated components. Warranties are not considered a separate performance
obligation. We estimate warranties based on historical trends and include them in accrued expenses and other current liabilities in the consolidated balance sheet.
The warranty liability was $2.9 million at December 31, 2021 and $2.2 million at December 31, 2020.
A portion of our O&P revenue comes from the provision of cranial devices. In addition to delivering the cranial device, there are patient follow-up visits where we
assist in treating the patient’s condition by adjusting or modifying the cranial device. We conclude that, for these devices, there are two performance obligations
and use the expected cost plus margin approach to estimate for the standalone selling price of each performance obligation. The allocated portion associated with
the patient’s receipt of the cranial device is recognized when the patient receives the device while the portion of revenue associated with the follow-up visits is
initially recorded as deferred revenue. On average, the cranial device follow-up visits occur less than 90 days after the patient receives the device and the deferred
revenue is recognized on a straight-line basis over the period.
Medicare and Medicaid regulations and the various agreements we have with other third party payors, including commercial healthcare payors under which these
contractual adjustments and payor disallowances are calculated, are complex and are subject to interpretation and adjustment and may include multiple
reimbursement mechanisms for different types of services. Therefore, the particular O&P devices and related services authorized and provided, and the related
reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and
reimbursement schedules, and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. As a
result, there is a reasonable possibility that recorded estimates could change and any related adjustments will be recorded as adjustments to net revenue when they
become known.
Products & Services Segment
Revenue in our Products & Services segment is derived from the distribution of O&P components and the leasing and sale of rehabilitation equipment and
ancillary consumable supplies combined with equipment maintenance, education, and training.
Distribution services revenues are recognized when obligations under the terms of a contract with our customers are satisfied, which occurs with the transfer of
control of our products. This occurs either upon shipment or delivery of goods, depending on whether the terms are FOB Origin or FOB Destination. Payment
terms are typically between 30 to 90 days. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products to a
customer (“transaction price”).
To the extent that the transaction price includes variable consideration, such as prompt payment discounts, list price discounts, rebates, and volume discounts, we
estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is
included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our
anticipated performance and all information (historical, current, and forecasted) that is reasonably available.
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We reduce revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a
reduction to revenue in the period sales are recognized. We make estimates of the amount of sales returns and allowances that will eventually be incurred.
Management analyzes sales programs that are in effect, contractual arrangements, market acceptance, and historical trends when evaluating the adequacy of sales
returns and allowance accounts.
Therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the
services are provided. Equipment sales revenue is recognized upon shipment, with any related services revenue deferred and recognized as the services are
performed. Sales of consumables are recognized upon shipment.
In addition, we estimate amounts recorded to bad debt expense using historical trends and these are presented as a bad debt expense under the operating costs
section of our consolidated financial statements.
Material Costs
Material costs in our Patient Care segment reflect purchases of orthotics and prosthetic componentry and other related costs in connection with the delivery of care
through our clinics and other patient care operations. Material costs in our Products & Services segment reflect purchases of orthotics and prosthetic materials and
other related costs in connection with the distribution of products and services to third party customers.
Personnel Costs
Personnel costs reflect salaries, benefits, incentive compensation, contract labor, and other personnel costs we incur in connection with our delivery of care through
our clinics and other patient care operations, or distribution of products and services, and exclude similar costs incurred in connection with general and
administrative activities.
Other Operating Costs
Other operating costs reflect costs we incur in connection with our delivery of care through our clinics and other patient care operations or distribution of products
and services. Marketing costs, including advertising, are expensed as incurred and are presented within this financial statement caption. We incurred approximately
$2.1 million, $1.9 million, and $3.8 million in advertising costs during the years ended December 31, 2021, 2020, and 2019, respectively. Other costs include rent,
utilities, and other occupancy costs, general office expenses, bad debt expense, and travel and clinical professional education costs, and exclude similar costs
incurred in connection with general and administrative activities.
During 2021 and 2020, we recognized a total benefit of $1.1 million and $24.0 million, respectively, in our consolidated statement of operations within Other
operating costs for the grant proceeds we received under the CARES Act (“Grants”) from HHS. We recognize income related to grants on a systematic and rational
basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income
related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment.
General and Administrative Expenses
General and administrative expenses reflect costs we incur in the management and administration of our businesses that are not directly related to the operation of
our clinics or provision of products and services. These include personnel costs and other operating costs supporting our general and administrative functions. We
incurred approximately $0.6 million, $0.3 million, and $0.9 million in advertising costs during the years ended December 31, 2021, 2020, and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization expenses reflect all depreciation and amortization expenses, whether incurred in connection with our delivery of care through our
clinics, our distribution of products and services, or in the general management and administration of our business.
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Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. We maintain cash balances
in excess of Federal Deposit Insurance Corporation (“FDIC”) limits at certain financial institutions. We manage this credit risk by concentrating our cash balances
in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. With short
maturities, the investments present insignificant risk of changes in value because of interest rate changes and are readily convertible to cash. Historically, no losses
have been incurred due to such cash concentrations.
Accounts Receivable, Net
Patient Care Segment
We establish allowances for accounts receivable to reduce the carrying value of such receivables to their estimated net realizable value. The Patient Care segment’s
accounts receivables are recorded net of unapplied cash and estimated implicit price concessions, such as payor disallowances and patient non-payments, as
described in the revenue recognition accounting policy above.
Our estimates of payor disallowances utilize the expected value method by considering historical collection experience by each of the Medicare and non-Medicare
primary payor class groupings. For each payor class grouping, liquidation analyses of historical period end receivable balances are performed to ascertain
collections experience by aging category. In the absence of an evident adverse trend, we use historical experience rates calculated using an average of four quarters
of data with at least twelve months of adjudication. We will modify the time periods analyzed when significant trends indicate that adjustments should be made.
Estimates for patient non- payments are calculated utilizing historical collection experience of patient receivables, as well as current and future economic
conditions. A liquidation analysis of historical period end receivable balances for patients is performed to ascertain collection experience by aging category over
the same time horizons as payor disallowances.
Products & Services Segment
Our Products & Services segment’s allowance for doubtful accounts is estimated based on the analysis of the segment’s historical write-offs experience, accounts
receivable aging and economic status of its customers. Accounts receivable that are deemed uncollectible are written off to the allowance for doubtful accounts.
Accounts receivable are also recorded net of an allowance for estimated sales returns.
Inventories
Inventories are valued at the lower of estimated cost or net realizable value with cost determined on a first-in, first-out (“FIFO”) basis. Provisions have also been
made to reduce the carrying value of inventories for excess, obsolete, or otherwise impaired inventory on hand at period end. The reserve for excess and obsolete
inventory is $7.5 million and $6.1 million at December 31, 2021 and 2020, respectively.
Patient Care Segment
Substantially all of our Patient Care segment inventories are recorded through a periodic approach whereby inventory quantities are adjusted on the basis of a
quarterly physical count. Segment inventories relate primarily to raw materials and work-in-process (“WIP”) at Hanger Clinics. Inventories at Hanger Clinics
totaled $36.7 million and $30.5 million at December 31, 2021 and 2020, respectively, with WIP inventory representing $15.8 million and $12.0 million of the total
inventory, respectively.
Raw materials consist of purchased parts, components, and supplies which are used in the assembly of O&P devices for delivery to patients. In some cases,
purchased parts and components are also sold directly to patients. Raw materials are valued based on recent vendor invoices, reduced by estimated vendor rebates.
Such rebates are recognized as a reduction of cost of materials in the consolidated statements of operations when the related devices or components are delivered to
the patient. Approximately 77% of raw materials at December 31, 2021 and 2020, respectively, were purchased from our Products & Services segment. Raw
material inventory was $20.9 million and $18.4 million at December 31, 2021 and 2020, respectively.
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WIP consists of devices which are in the process of assembly at our clinics or fabrication centers. WIP quantities were determined by the physical count of patient
orders at the end of every quarter of 2021 and 2020 while the related stage of completion of each order was established by clinic personnel. We do not have an
inventory costing system and as a result, the identified WIP quantities were valued on the basis of estimated raw materials, labor, and overhead costs. To estimate
such costs, we develop bills of materials for certain categories of devices that we assemble and deliver to patients. Within each bill of material, we estimate (i) the
typical types of component parts necessary to assemble each device; (ii) the points in the assembly process when such component parts are added; (iii) the
estimated cost of such parts based on historical purchasing data; (iv) the estimated labor costs incurred at each stage of assembly; and (v) the estimated overhead
costs applicable to the device.
Products & Services Segment
Our Product & Service segment inventories consist primarily of finished goods at its distribution centers as well as raw materials at fabrication facilities, and
totaled $50.8 million and $45.9 million as of December 31, 2021 and 2020, respectively. Finished goods include products that are available for sale to third party
customers as well as to our Patient Care segment as described above. Such inventories were determined on the basis of perpetual records and a physical count at
year end. Inventories in connection with therapeutic services are valued at a weighted average cost.
Fair Value Measurements
We follow 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. 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.
Level 1 consists of securities for which there are quoted prices in active markets for identical securities;
Level 2 consists of securities for which observable inputs other than Level 1 inputs are used, such as quoted prices for similar securities in active markets or quoted
prices for identical securities in less active markets and model-derived valuations for which the variables are derived from, or corroborated by, observable market
data; and
Level 3 consists of securities for which there are no observable inputs to the valuation methodology that are significant to the measurement of the fair value.
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.
Derivative Financial Instruments
We are exposed to certain risks arising from both our business operations and economic conditions. We manage economic risks, including interest rate, liquidity,
and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Our derivative
financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our
borrowings.
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these
objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the
receipt of variable amounts from a counter party in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying
notional amount. In accordance with ASC 815, “Derivatives and Hedging,” we record all derivatives in the consolidated balance sheets as either assets or liabilities
measured at fair value. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in
accumulated other comprehensive loss net of tax and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
During the years ended December 31, 2021 and 2020, such derivatives were used to hedge certain variable cash flows associated with existing variable-rate debt.
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Insurance Recoveries Receivable
We incur legal and other costs with respect to a variety of issues on an ongoing basis. We record a related receivable when costs are reimbursable under applicable
insurance policies, we believe it is probable such costs will be reimbursed and such reimbursements can be reasonably estimated. We record the benefit of related
receivables from the insurer as a reduction of costs in the same financial statement caption in which the related loss was recognized in our consolidated statements
of operations. Loss contingency reserves, which are recorded within accrued liabilities, are not reduced by estimated insurance recoveries.
Property, Plant, and Equipment, Net
Property, plant, and equipment are recorded at cost less accumulated depreciation and amortization. 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
operations. Depreciation is computed for financial reporting purposes using the straight-line method over the useful lives of the related assets estimated as follows:
furniture and fixtures, equipment, and information systems, principally five years, buildings ten to forty years, finance leases over the shorter of the useful life or
lease term, and leasehold improvements over the shorter of ten years or the lease term. We record maintenance and repairs, including the cost of minor
replacements, to maintenance expense which is included within “Other operating costs” in our consolidated statements of operations. Costs of major repairs that
extend the effective useful life of property are capitalized and depreciated accordingly.
We capitalize the costs of obtaining or developing internal use software, including external direct costs of materials and services and directly related payroll costs.
Amortization begins when the internal use software is ready for its intended use. Costs incurred during the preliminary project and post-implementation stages, as
well as maintenance and training costs, are expensed as incurred.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Acquisition
consideration typically includes cash payments, the issuance of Seller Notes and in certain instances contingent consideration with payment terms based on the
achievement of certain targets of the acquired business. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition inclusive of identifiable intangible assets. The estimated fair value of identifiable assets and liabilities, including
intangibles, are based on valuations that use information and assumptions available to management. We allocate any excess purchase price over the fair value of
the tangible and identifiable intangible assets acquired and liabilities assumed to goodwill. We allocate goodwill to our reporting units based on the reporting unit
that is expected to benefit from the acquired goodwill. Significant management judgments and assumptions are required in determining the fair value of assets
acquired and liabilities assumed, particularly acquired intangible assets, including estimated useful lives. The valuation of purchased intangible assets is based
upon estimates of the future performance and discounted cash flows of the acquired business. Each asset acquired or liability assumed is measured at estimated fair
value from the perspective of a market participant. Subsequent changes in the estimated fair value of contingent consideration are recognized as general and
administrative expenses within the consolidated statements of operations.
Goodwill and Other Intangible Assets, Net
Goodwill represents the excess of the purchase price over the estimated fair value of net identifiable assets acquired and liabilities assumed from purchased
businesses. We assess goodwill for impairment annually during the fourth quarter, and between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying amount. We have the option to first assess qualitative factors for a reporting unit 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 quantitative goodwill impairment test. If we choose to bypass this qualitative assessment or alternatively determine that a quantitative goodwill
impairment test is required, our annual goodwill impairment test is performed by comparing the estimated fair value of a reporting unit with its carrying amount
(including attributed goodwill). We measure the fair value of the reporting units using a combination of income and market approaches. Any impairment would be
recognized by a charge to income from operations and a reduction in the carrying value of the goodwill. As of October 1, 2021, we performed a qualitative
assessment of the Patient Care reporting unit, which resulted in no indicators of goodwill impairment.
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We apply judgment in determining the fair value of our reporting units and the implied fair value of goodwill which is dependent on significant assumptions and
estimates regarding expected future cash flows, terminal value, changes in working capital requirements, and discount rates.
We did not have any goodwill impairment during 2021, 2020, and 2019. We did not have any indefinite-lived trade name impairment during 2021, 2020, and 2019.
See Note H - “Goodwill and Other Intangible Assets” to our consolidated financial statements in this Annual Report on Form 10-K for additional information.
As described, we apply judgment in the selection of key assumptions used in the goodwill impairment test and as part of our evaluation of intangible assets tested
annually and at interim testing dates as necessary. If these assumptions differ from actual, we could incur additional impairment charges and those charges could be
material.
Long-Lived Asset Impairment
We evaluate the carrying value of long-lived assets to be held and used for impairment whenever events or changes in circumstance indicate that the carrying
amount may not be recoverable. The carrying value of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset group. We measure impairment as the amount by which the carrying value exceeds the estimated fair
value. Estimated fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. Long-lived
assets to be disposed of by sale are classified as held for sale when the applicable criteria are met, and recognized within the consolidated balance sheet at the lower
of carrying value or fair value less cost to sell. Depreciation on such assets is ceased.
Long-Term Debt
Long-term debt is recorded on our consolidated balance sheets at amortized cost, net of discounts and issuance expenses. Debt issuance costs incurred in
connection with long-term debt are amortized utilizing the effective interest method, through the maturity of the related debt instrument. Discounts and costs
incurred pertaining to the long-term debt are classified as a reduction of debt, and the costs incurred to obtain the revolving credit facility are recorded as deferred
charges and are classified within other assets in the consolidated balance sheets. Amortization of these costs is included within “Interest expense, net” in the
consolidated statements of operations.
Accounts Payable and Accrued Liabilities
Accounts payable relating to goods or services received is based on various factors including payments made subsequent to period end, vendor invoice dates,
shipping terms confirmed by certain vendors or other third party documentation. Accrued liabilities are recorded based on estimates of services received or
amounts expected to be paid to third parties. Accrued legal costs for legal contingencies are recorded when they are probable and estimable.
Self-Insurance Reserves
We maintain insurance programs which include employee health insurance; workers’ compensation; and product, professional, and general liability. Our employee
health insurance program is self-funded, with a stop-loss coverage on claims that exceed $0.8 million for any individually covered claim. We are responsible for
workers’ compensation, product, professional and general liability claims up to $0.5 million per individual incident. The insurance and self-insurance accruals
reflect the estimate of incurred but not reported losses, historical claims experience, and expected costs to settle unpaid claims and are undiscounted. We record
amounts due from insurance policies in “Other current assets” and “Other assets” while recording the estimated liability in “Accrued expenses and other current
liabilities” and “Other liabilities” in our consolidated balance sheets.
Leases
We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or
landlord incentives. Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the
lease term, including any applicable rent holidays, beginning on the lease commencement date. We exclude leases with a term of one year or less from our balance
sheet, and do not separate non-lease components from our real estate leases. Our leases may include variable payments for maintenance, which are expensed as
incurred.
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In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings. The therapeutic program
equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided.
These operating lease agreements are typically for twelve months and have a 30-day cancellation policy. Equipment acquired under a finance lease is recorded at
the present value of the future minimum lease payments. We do not separate non-lease components, consisting primarily of training, for these leases.
Income Taxes
We recognize deferred tax assets and liabilities for net operating loss and other credit carry forwards and the expected tax consequences of temporary differences
between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in
our financial statements or tax returns, and future profitability by tax jurisdiction.
We provide a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We evaluate our deferred tax assets
quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected
future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax
earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of
significant judgment. We have experienced losses from 2014 to 2017 due to impairments of our intangible assets, increased professional fees in relation to our
restatement and related remediation procedures for identified material weaknesses, and increased interest and bank fees. These losses have necessitated that we
evaluate the sufficiency of our valuation allowance.
We are in a taxable income position in 2021 and are able to utilize net operating losses. We have $1.6 million and $4.6 million of U.S. federal and $139.1 million
and $153.0 million of state net operating loss carryforwards available at December 31, 2021 and 2020, respectively. These carryforwards will be used to offset
future income but may be limited by the change in ownership rules in Section 382 of the Internal Revenue Code. These net operating loss carryforwards will expire
in varying amounts through 2041. We expect to generate income before taxes in future periods at a level that would allow for the full realization of the majority of
our net deferred tax assets. As of December 31, 2021 and 2020, we have recorded a valuation allowance of approximately $2.1 million related to various state
jurisdictions.
We believe that our 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, we are subject to periodic audits and examinations by the
Internal Revenue Service and other state and local taxing authorities. In these cases, we record the financial statement effects of a tax position when it is more
likely than not, based on the technical merits, that the position will be sustained upon examination. We record the largest amount of tax benefit that is greater than
fifty percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If not paid, the liability for
uncertain tax positions is reversed as a reduction of income tax expense at the earlier of the period when the position is effectively settled or when the statute of
limitations has expired. Although we believe that our estimates are reasonable, actual results could differ from these estimates. Interest and penalties, when
applicable, are recorded within the income tax provision.
Interest Expense, Net
We record interest expense net of interest income. In our consolidated statements of operations, interest income was $0.4 million in the year ended December 31,
2021 and not material in the years ended December 31, 2020, and 2019.
Share-Based Compensation
We primarily issue restricted common stock units under one active share-based compensation plan. Shares of common stock issued under this plan are issued from
our authorized and unissued shares.
We measure and recognize compensation expense, net of actual forfeitures, for all shares based payments at fair value. Prior to the adoption of ASU 2016-09,
compensation expense was measured and recognized net of estimated forfeitures. Our outstanding awards are comprised of restricted stock units, performance-
based restricted stock units, and stock options. The
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restricted stock units are subject to a service condition or vesting period ranging from one to four years. The performance-based restricted stock units include
performance or market and service conditions. The performance conditions are primarily based on annual earnings per share targets and the market condition
utilized in the Special Equity Plan is based on the three year absolute Common Stock price compounded annual growth rate (“CAGR”).
The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model. The expected dividend yield is
derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of our historical weekly stock prices as well as
implied volatility. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected
holding period was determined by examining historical and projected post-vesting exercise behavior activity. Forfeitures are recognized as they occur.
Compensation expense associated with restricted stock units and options is recognized on a straight-line basis over the requisite service period. Compensation
expense associated with performance-based restricted stock units is primarily recognized on a graded vesting over the requisite service period when the
performance condition is probable of being achieved. The compensation expense associated with the performance-based restricted stock subject to market
conditions is recognized on a straight-line basis over the requisite service period.
Segment Information
We have two segments: Patient Care and Products & Services. Except for the segment specific policies described above, the segments follow the same accounting
policies as followed in the consolidated financial statements. We apply the “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 our reportable
segments. The description of our reportable segments and the disclosure of segment information are presented in Note S - “Segment and Related Information” to
these consolidated financial statements.
Intersegment revenue represents sales of O&P components from our Products & Services segment to our Patient Care segment and are recorded at prices that
approximate material cost plus overhead.
Recent Developments Regarding COVID-19
We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”). The extent and
duration of the impact of the COVID-19 pandemic on our operations and financial condition remain uncertain and difficult to predict. As a result of the COVID-19
pandemic, we believe that our patients are continuing to defer visits to our O&P clinics, as well as elective surgical procedures, both of which impact our business
volumes through decreased patient encounters and physician referrals. Nevertheless, the overall adverse impact of the COVID-19 pandemic on our business
volumes has diminished and stabilized over time, and our patient appointment and other business volumes continue to gradually improve as the prevalence of the
virus decreases and COVID-19 vaccines become more widely available and accepted. It remains possible that further outbreaks of COVID-19, including the spread
of variants such as the Delta and Omicron variants, or reinstitution of restrictive measures by federal, state, and local governments could cause a recessionary
environment impacting the healthcare industry generally, including the O&P industry. The United States government has responded with fiscal policy measures
intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the
“CARES Act”) in March 2020.
CARES Act
The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $203.5
billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers
and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the
COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the
$203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.
During 2021 and 2020, we recognized a total benefit of $1.1 million and $24.0 million, respectively in our consolidated statement of operations within Other
operating costs in our Patient Care segment for the grant proceeds we received under the
76
CARES Act (“Grants”) from HHS. We accounted for the proceeds from the Grants by analogy to International Accounting Standard (“IAS 20”), Accounting for
Government Grants and Disclosure of Government Assistance and its principles surrounding the recognition of grants related to income. We recognize income
related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in
which the corresponding costs or income related to the grant are recognized. We are using the Grants for their intended purpose, and are compliant to the reporting
and audit requirements set by the terms and conditions of the grant.
The CARES Act also provided for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The
provisions allowed us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We paid the current portion of
$5.9 million in September 2021, and deferred $5.9 million of payroll taxes within Accrued compensation related costs in the consolidated balance sheet as of
December 31, 2021.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
During 2021 we adopted the following:
•
Accounting Standards Update (“ASU”) No. 2021-10, Government Assistance (Topic 832): Disclosures by Entities about Government Assistance, which
requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information
around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance, the
effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments
and contingencies. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2021, but as early adoption is
permitted, we have selected to adopt this standard for the year ended December 31, 2021.
During 2020 we adopted the following:
•
ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related clarifying
standards, as of January 1, 2020, using the modified retrospective approach. This approach allows us to apply the standard as of the adoption date and
record a cumulative-effect adjustment to the opening balance of accumulated deficit at January 1, 2020. The new standard replaces the incurred loss
impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. The resulting cumulative effect recognized at adoption to accumulated deficit was $0.2 million,
net of tax.
•
ASU No. 2018-13, Fair Value Measurement (Topic 820), as of January 1, 2020. The new standard modifies the disclosures on fair value measurements by
removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for
timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized
gains and losses included in other comprehensive income. There was no material impact on our consolidated financial position, results of operations, or
cash flows due to the adoption.
•
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as of January 1, 2020. Among other provisions, the new
standard removes the exception that limited the income tax benefit recognized in the interim period in cases when the year-to-date loss exceeds the
anticipated loss for the year. There was no material impact on our consolidated financial position, results of operations, or cash flows due to the adoption.
77
Recent Accounting Pronouncements, Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting. This ASU, effective beginning on March 12, 2020, provides optional expedients and exceptions for applying
GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply
only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be
discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and
hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has
elected certain optional expedients for and that are retained through the end of the hedging relationship. We are currently evaluating the effects that the adoption of
this guidance, and related clarifying standards, will have on our consolidated financial statements and the related disclosures.
Note B — Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common
share is computed using the weighted average number of common shares outstanding during the period plus any potentially dilutive common shares, such as stock
options, restricted stock units, and performance-based units calculated using the treasury stock method. Total anti-dilutive shares excluded from the diluted
earnings per share were 5,378 as of December 31, 2021, 3,831 as of December 31, 2020, and zero as of December 31, 2019.
Our Credit Agreement (as defined below) restricts the payment of dividends or other distributions to our shareholders by us or any of our subsidiaries. See Note M
- “Debt and Other Obligations” within these consolidated financial statements.
The reconciliation of the numerators and denominators used to calculate basic and diluted net income per share are as follows:
For the Years Ended December 31,
(in thousands, except per share data)
2021
2020
2019
Net income
$
41,982
$
38,192
$
27,525
Weighted average shares outstanding - basic
38,599,300
37,948,796
37,267,188
Effect of potentially dilutive restricted stock units and options
626,316
649,534
797,429
Weighted average shares outstanding - diluted
39,225,616
38,598,330
38,064,617
Basic income per share
$
1.09
$
1.01
$
0.74
Diluted income per share
$
1.07
$
0.99
$
0.72
Note C — Revenue Recognition
Patient Care Segment
Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the
transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to
the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the VA, or Private Pay individuals. We recognize revenue
for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit
price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.
78
The following table disaggregates revenue from contracts with customers in our Patient Care segment for the years ended December 31, 2021, 2020, and 2019:
For the Years Ended December 31,
(in thousands)
2021
2020
2019
Patient Care Segment
Medicare
$
296,327
$
268,226
$
289,099
Medicaid
166,411
135,134
143,438
Commercial Insurance / Managed Care (excluding Medicare and Medicaid
Managed Care)
327,836
296,738
323,499
Veterans Administration
89,358
76,769
89,035
Private Pay
63,396
54,736
60,620
Total
$
943,328
$
831,603
$
905,691
The impact to revenue related to prior period performance obligations was not material for the years ended December 31, 2021, 2020, and 2019.
Products & Services Segment
Revenue in our Products & Services segment is derived from the distribution of O&P components and from therapeutic solutions which includes the leasing and
sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.
The following table disaggregates revenue from contracts with customers in our Product & Services segment for the years ended December 31, 2021, 2020, and
2019:
For the Years Ended December 31,
(in thousands)
2021
2020
2019
Products & Services Segment
Distribution services, net of intersegment revenue eliminations
$
133,636
$
124,045
$
143,400
Therapeutic solutions
43,524
45,502
48,955
Total
$
177,160
$
169,547
$
192,355
Note D — Accounts Receivable, Net
Accounts receivable, net represents outstanding amounts we expect to collect from the transfer of our products and services. Principally, these amounts are
comprised of receivables from Medicare, Medicaid, and commercial insurance plans. Our accounts receivable represent amounts outstanding from our gross
charges, net of contractual discounts, sales returns, and other implicit price concessions including estimates for payor disallowances and patient non-payments.
We are exposed to credit losses primarily through our accounts receivable. These receivables are short in nature because their due date varies between due upon
receipt of invoice and 90 days. We assess our receivables, divide them into similar risk pools, and monitor our ongoing credit exposure through active review of
our aging buckets. Our activities include timely account reconciliations, dispute resolution, and payment confirmations. We also employ collection agencies and
legal counsel to pursue recovery of defaulted receivables.
Our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current
status of our patients and customers’ trade accounts receivable balances. We also grouped our receivables into similar risk pools to better measure the risks for
each pool. After evaluating the risk for each pool, we determined that additional credit loss risk was immaterial for the Patient Care segment. For the Products &
Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” As of
December 31, 2021, we have considered the current and future economic and market conditions resulting in a decrease to the allowance for doubtful accounts by
approximately $0.8 million since December 31, 2020.
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Accounts receivable, net as of December 31, 2021 and 2020 is comprised of the following:
As of December 31, 2021
As of December 31, 2020
(in thousands)
Patient Care
Products &
Services
Consolidated
Patient Care
Products &
Services
Consolidated
Gross charges before estimates for implicit
price concessions
$
173,115
$
21,459
$
194,574
$
156,504
$
21,300
$
177,804
Less estimates for implicit price concessions:
Payor disallowances
(33,007)
—
(33,007)
(39,343)
—
(39,343)
Patient non-payments
(7,500)
—
(7,500)
(7,042)
—
(7,042)
Accounts receivable, gross
132,608
21,459
154,067
110,119
21,300
131,419
Allowance for doubtful accounts
—
(2,009)
(2,009)
—
(2,823)
(2,823)
Accounts receivable, net
$
132,608
$
19,450
$
152,058
$
110,119
$
18,477
$
128,596
Approximately 46.3% and 46.8% of gross charges before estimates for payor disallowances and patient non-payments, is due from the Federal Government
(Medicare, Medicaid, and the VA) at December 31, 2021 and 2020, respectively.
The following table summarizes activities by year for the allowance for doubtful accounts:
(in thousands)
Allowance for Doubtful
Accounts
Balance at December 31, 2018
$
2,272
Additions
1,877
Reductions
(762)
Recoveries
(746)
Balance at December 31, 2019
2,641
Additions
1,869
Reductions
(114)
Recoveries
(1,573)
Balance at December 31, 2020
2,823
Additions
907
Reductions
(759)
Recoveries
(962)
Balance at December 31, 2021
$
2,009
80
The following tables represent gross charges before estimates for payor disallowances and patient non-payments, by major payor classification and by aging
categories reduced by implicit price concessions and allowance for doubtful accounts to accounts receivable, net as of December 31, 2021 and 2020, respectively:
December 31, 2021
(in thousands)
0-60
Days
61-120
Days
121-180
Days
Over 180
Days
Total
Patient Care
Commercial insurance (excluding Medicare and Medicaid Managed
Care)
$
50,397
$
12,559
$
6,512
$
11,869
$
81,337
Private pay
938
392
284
121
1,735
Medicaid
15,595
3,404
1,698
4,135
24,832
VA
4,345
868
517
453
6,183
Non-Medicare
71,275
17,223
9,011
16,578
114,087
Medicare
35,354
6,100
3,923
13,651
59,028
Products & Services accounts receivable, before allowance
14,301
5,071
901
1,186
21,459
Gross charges before estimates for implicit price concessions and
allowance for doubtful accounts
120,930
28,394
13,835
31,415
194,574
Less estimates for implicit price concessions
(40,507)
Accounts receivable, before allowance
154,067
Allowance for doubtful accounts
(2,009)
Accounts receivable, net
$
152,058
December 31, 2020
(in thousands)
0-60
Days
61-120
Days
121-180
Days
Over 180
Days
Total
Patient Care
Commercial insurance (excluding Medicare and Medicaid Managed
Care)
$
43,069
$
10,743
$
5,335
$
12,316
$
71,463
Private pay
850
401
309
281
1,841
Medicaid
13,569
2,705
1,390
3,771
21,435
VA
4,291
692
263
279
5,525
Non-Medicare
61,779
14,541
7,297
16,647
100,264
Medicare
27,572
5,169
2,915
20,585
56,241
Products & Services accounts receivable, before allowance
14,091
4,598
841
1,769
21,299
Gross charges before estimates for implicit price concessions and
allowance for doubtful accounts
103,442
24,308
11,053
39,001
177,804
Less estimates for implicit price concessions
(46,385)
Accounts receivable, before allowance
131,419
Allowance for doubtful accounts
(2,823)
Accounts receivable, net
$
128,596
81
Note E — Inventories
Our inventories are comprised of the following:
As of December 31,
(in thousands)
2021
2020
Raw materials
$
22,759
$
19,716
Work in process
15,807
12,040
Finished goods
48,896
44,673
Total inventories
$
87,462
$
76,429
Note F — Property, Plant, and Equipment, Net
Property, plant, and equipment, net were comprised of the following:
As of December 31,
(in thousands)
2021
2020
Land
$
454
$
454
Buildings
3,031
3,044
Furniture and fixtures
14,737
15,079
Machinery and equipment
27,429
25,759
Equipment leased to third parties under operating leases
35,408
40,137
Leasehold improvements
149,337
139,322
Computers and software
83,641
80,790
Total property, plant, and equipment, gross
314,037
304,585
Less: accumulated depreciation and amortization
(231,603)
(219,712)
Total property, plant, and equipment, net
$
82,434
$
84,873
Total depreciation expense was approximately $26.9 million, $28.2 million, and $30.6 million for the years ended December 31, 2021, 2020, and 2019,
respectively.
The following table summarizes our investment in equipment leased to third parties under operating leases:
As of December 31,
(in thousands)
2021
2020
Program equipment
$
35,408
$
40,137
Less: Accumulated depreciation
(22,826)
(25,430)
Net book value
$
12,582
$
14,707
Note G — Acquisitions
2021 Acquisition Activity
During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through
the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash
flows.
•
In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P
business for total consideration of $24.2 million, of which $19.2 million was
82
cash consideration, net of cash acquired, $4.0 million was issued in the form of notes to shareholders at fair value, and $1.0 million in additional
consideration.
•
In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $21.0
million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value,
and $0.1 million in additional consideration.
•
In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P
business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of
notes to shareholders at fair value, and $0.8 million in additional consideration.
•
In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1
million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair
value.
The notes issued to shareholders are unsecured and payable in installments over a period of 2 to 5 years.
We accounted for these transactions under the acquisition method of accounting and have reported the results of operations of each acquisition as of the respective
dates of the acquisitions. We based the estimated fair values of intangible assets on an income approach utilizing the excess earnings method for customer
relationships. The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects
market participant assumptions. Other significant judgments used in the valuation of tangible assets acquired in the acquisition include estimated selling price of
inventory and estimated replacement cost for acquired property, plant, and equipment. For all other assets acquired and liabilities assumed, the fair value reflects
the carrying value of the asset or liability due to their short maturity. We recorded the excess of the fair value of the consideration transferred in the acquisitions
over the fair value of net assets acquired was recorded as goodwill. The goodwill reflects our expectations of favorable future growth opportunities, anticipated
synergies through the scale of our O&P operations, and the assembled workforce. We expect that the majority of the goodwill acquired in the first quarter of 2021,
which has been assigned to our Patient Care reporting unit, will not be deductible for federal income tax purposes. We expect that substantially all of the goodwill
acquired in the second, third, and fourth quarters of 2021, which has been assigned to our Patient Care reporting unit, will be deductible for federal income tax
purposes.
Acquisition-related costs are included in general and administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred
during the years ended December 31, 2021 and 2020 were $2.1 million and $0.9 million, respectively, which includes those costs for transactions that are in
progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the years ended December 31, 2021
and 2020 were $1.6 million and $0.6 million, respectively.
We have not presented pro forma combined results for these acquisitions because the impact on previously reported statements of operations would not have been
material individually or in the aggregate.
Purchase Price Allocation
For acquisitions that occurred after the second quarter of 2021, we have performed a preliminary valuation analysis of the fair market value of the assets acquired
and liabilities assumed in the acquisitions. The final purchase price allocations will be determined when we have completed and fully reviewed the detailed
valuations and could differ materially from the preliminary allocations. The final allocations may include changes in allocations of acquired intangible assets as
well as goodwill and other changes to assets and liabilities, including deferred taxes. The estimated useful lives of acquired intangible assets are also preliminary.
We have finalized the purchase price allocation within the measurement period for acquisitions that have been completed prior to the third quarter of 2020.
83
The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:
(in thousands)
Cash paid, net of cash acquired
$
79,927
Issuance of Seller Notes at fair value
22,706
Additional consideration, net
1,925
Aggregate purchase price
104,558
Accounts receivable
6,569
Inventories
4,683
Customer relationships (Weighted average useful life of 5.0 years)
11,745
Non-compete agreements (Weighted average useful life of 5.0 years)
558
Other assets and liabilities, net
(5,121)
Net assets acquired
18,434
Goodwill
$
86,124
Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2021 was
$8.9 million.
2020 Acquisition Activity
During 2020, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through
the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash
flows.
•
In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.2 million at fair value,
of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5
million in the form of a deferred payment obligation to the former shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes
issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining
$3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Total payments of
$4.0 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three
years thereafter. Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business
combination payable in October 2020 and is included in Accrued expenses and other liabilities in the consolidated balance sheet. The remaining
$0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition
date.
•
In the fourth quarter of 2020, we completed the acquisitions of all the outstanding equity interests of four O&P businesses for total consideration of $7.1
million, of which $4.9 million was cash consideration, net of cash acquired, $1.9 million was issued in the form of notes to shareholders at fair value, and
$0.3 million in additional consideration.
The notes issued to shareholders are unsecured and payable in installments over a period of 3 to 5 years.
84
The aggregate purchase price of these acquisitions was allocated as follows:
(in thousands)
Cash paid, net of cash acquired
$
21,709
Issuance of Seller Notes at fair value
23,766
Deferred payment obligation at fair value
3,468
Additional consideration, net
4,319
Aggregate purchase price
53,262
Accounts receivable
4,224
Inventories
2,276
Customer relationships (Weighted average useful life of 5.0 years)
6,358
Non-compete agreements (Weighted average useful life of 5.0 years)
200
Other assets and liabilities, net
(4,561)
Net assets acquired
8,497
Goodwill
$
44,765
Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2020 was
$5.5 million.
Note H — Goodwill and Other Intangible Assets
Goodwill
Under the provisions of ASC 350-10, Intangibles-Goodwill and Other, goodwill is not amortized. Rather, an entity’s goodwill is subject to periodic impairment
testing. ASC 350 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and
between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Accordingly, we perform our goodwill test annually as of October 1 and between annual tests whenever we identify certain triggering events or circumstances that
would more likely than not reduce the fair value of any of our reporting units below its respective carrying value. Additionally, we consider income tax effects
from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The goodwill impairment test compares a reporting unit’s fair value to its carrying amount to identify any potential impairment. We apply judgment in determining
the fair value of our reporting units for purposes of performing the goodwill impairment test. We rely on widely accepted valuation techniques, including
discounted cash flow and market multiple analysis approaches, which capture both the future income potential of the reporting unit and the market behaviors and
actions of market participants in the industry that includes the reporting unit. These types of analyses require us to make assumptions and estimates regarding
future cash flows, industry-specific economic factors, and the profitability of future business strategies. The discounted cash flow approach uses a projection of
estimated operating results and cash flows that are discounted using a weighted average cost of capital. Under the discounted cash flow approach, the projection
uses management’s best estimates of the amount and timing of expected future cash flows impacted by economic and market conditions over the projected period
for each reporting unit. Significant estimates and assumptions include terminal value growth rates, changes in working capital requirements, and weighted average
cost of capital. The market multiple analysis estimates fair value by applying revenue and earnings multiples to the reporting unit’s operating results. The multiples
are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting units.
We evaluate the reasonableness of the estimated fair value of our reporting units by reconciling the aggregate fair value of our reporting units to our total market
capitalization as of our impairment testing date, taking into account an appropriate control premium. The determination of a control premium requires the use of
judgment and is based upon control premiums observed in comparable market transactions.
85
The changes in the carrying value of goodwill of the Patient Care operating segment for the years ended December 31, 2021 and 2020 are as follows:
(in thousands)
Goodwill, Gross
Accumulated
Impairment
Goodwill,
Net
Balance at December 31, 2019
$
660,912 $
(428,668)
$
232,244
Additions from acquisitions
45,144
—
45,144
Measurement period adjustments
(165)
—
(165)
Balance at December 31, 2020
705,891
(428,668)
277,223
Additions from acquisitions
86,124
—
86,124
Measurement period adjustments
207
—
207
Balance at December 31, 2021
$
792,222 $
(428,668)
$
363,554
Measurement period adjustments relate to 2020 and prior years acquisitions of approximately $(0.2) million and are primarily attributable to adjustments to the
preliminary allocations of acquired assets.
Measurement period adjustments relate to 2021 and prior years acquisitions of approximately $0.2 million and are primarily attributable to adjustments to the
preliminary allocations of acquired assets.
As of December 31, 2017, goodwill of approximately $139.3 million within the Products and Services operating segment was impaired in full.
See Note G - “Acquisitions” within these consolidated financial statements for details surrounding goodwill acquired during the years ended December 31, 2021
and 2020.
As of October 1, 2021 and 2019, we performed a qualitative assessment of goodwill impairment for the Patient Care reporting unit, which resulted in our
determination that it was more likely than not that the carrying value of the reporting unit was less than its fair value. As of October 1, 2020, we performed a
quantitative assessment of goodwill impairment for the Patient Care reporting unit, which resulted in our determination that it was more likely than not that the
carrying value of the reporting unit was less than its fair value.
Other Intangible Assets
Under the provisions of ASC 360-10, Property, plant, and equipment, an intangible asset that has a finite life should be amortized over its estimated useful life and
should be tested for recoverability by comparing the net carrying value of the asset or asset group to the undiscounted net cash flows to be generated from the use
and eventual disposition of that asset or asset group when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the
carrying amount of a definite-lived asset or asset group is not recoverable, the fair value of the asset or asset group is measured and if the carrying amount exceeds
the fair value, an impairment loss is recognized.
Under the provisions of ASC 350, Intangibles-goodwill and other, an indefinite-lived intangible asset is not amortized but should be tested for impairment annually
and between annual tests if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The indefinite-lived intangible asset
impairment standard allows an entity first to assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if
the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying
amount. We perform our annual test for recoverability as of October 1.
(1)
(2)
(1)
(2)
86
The balances related to other intangible assets as of December 31, 2021 and 2020 are as follows:
As of December 31, 2021
(in thousands)
Gross Carrying
Amount
Accumulated
Amortization
Accumulated
Impairment
Net Carrying
Amount
Customer lists
$
28,624
$
(9,973)
$
—
$
18,651
Trade name
255
(202)
—
53
Patents and other intangibles
9,572
(6,501)
—
3,071
Definite-lived intangible assets
38,451
(16,676)
—
21,775
Indefinite-lived trade name
9,070
—
(4,953)
4,117
Total other intangible assets
$
47,521
$
(16,676)
$
(4,953)
$
25,892
As of December 31, 2020
(in thousands)
Gross Carrying
Amount
Accumulated
Amortization
Accumulated
Impairment
Net Carrying
Amount
Customer lists
$
16,879
$
(5,845)
$
—
$
11,034
Trade name
255
(176)
—
79
Patents and other intangibles
9,011
(5,810)
—
3,201
Definite-lived intangible assets
26,145
(11,831)
—
14,314
Indefinite-lived trade name
9,070
—
(4,953)
4,117
Total other intangible assets
$
35,215
$
(11,831)
$
(4,953)
$
18,431
The fair value of acquired customer list intangibles is estimated using an excess earnings model. Key assumptions utilized in the valuation model include pro-
forma projected cash flows adjusted for market-participant assumptions, forecasted customer retention rates, and discount rates. Existing customer intangibles are
amortized using the straight-line method over an estimated useful life of four to ten years. The fair value of non-compete agreements are estimated at
management’s discretion using a discounted cash flow model or using potential loss exposure of acquired clinicians based on an average amount of revenue
generated by clinicians utilizing internal data. Due to the inherent judgmental nature of these assumptions, management will perform a sensitivity analysis on an
acquisition by acquisition basis, considering the facts and circumstances of each acquisition. The related intangible assets are amortized, using the straight-line
method, over their contractual term which ranges from two to twelve 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 nineteen years. The fair value associated with trade names is estimated using the relief-from-royalty
method with the primary assumptions being the royalty rate and expected revenues associated with the trade names. These assets, some of which have indefinite
lives, are primarily included in the Products & Services segment. Indefinite-lived trade name intangible assets are assessed for impairment in the fourth quarter of
each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. There was no impairment on our indefinite-lived
trade name for the years ended December 31, 2021, 2020, and 2019, respectively. Trade name intangible assets with definite lives are amortized over their
estimated useful lives of up to ten years.
Amortization expense related to other intangible assets was approximately $4.9 million, $6.0 million, and $5.0 million for the years ended December 31, 2021,
2020, and 2019, respectively.
87
Estimated aggregate amortization expense for definite-lived intangible assets for each of the next five years ended December 31, and thereafter is as follows:
(in thousands)
2022
$
6,307
2023
6,045
2024
4,554
2025
3,366
2026
1,500
Thereafter
3
Total
$
21,775
Note I — Other Current Assets and Other Assets
Other current assets consist of the following:
As of December 31,
(in thousands)
2021
2020
Non-trade receivables
$
7,725
$
6,063
Prepaid maintenance
4,553
2,942
Prepaid insurance
510
266
Other prepaid assets
3,748
3,086
Total other current assets
$
16,536
$
12,357
Non-trade receivables primarily relate to vendor rebate receivables, tenant improvement allowance receivables under previous lease accounting guidance, and other
non-trade receivables. Prepaid maintenance primarily relates to prepaid software and hardware maintenance and software license fees. Prepaid insurance is for
product and general liability insurance. Other prepaid assets includes future rent expense paid in advance of the rental period, employer’s portion of health savings
accounts, board member fees, tax and accounting services, unit commitments to fulfill our obligation with one of our product suppliers, education and training for
our annual Hanger LIVE event generally held in the first quarter of each fiscal year, telecommunication, broker fees, and other miscellaneous prepaid expenses.
Other assets consist of the following:
As of December 31,
(in thousands)
2021
2020
Implementation costs for cloud computing arrangements
$
6,459
$
4,811
Cash surrender value of company-owned life insurance
4,471
3,973
Finance lease right-of-use assets
2,732
3,016
Deposits
2,178
2,144
Non-trade receivables
1,172
1,274
Other
933
516
Total other assets
$
17,945
$
15,734
Implementation costs for cloud computing arrangements relate to capitalized costs of our new financial and supply chain systems. The cash surrender value of
company-owned life insurance (“COLI”) funded our Defined Contribution Supplemental Executive Retirement Plan (“DC SERP”) at December 31, 2021 and
December 31, 2020. See Note Q - “Employee Benefits” for additional information. Finance lease right-of-use assets relate to the recognition of right-of-use assets
in connection with finance leases. Deposits primarily relate to security deposits made in connection with property leases. Non-trade receivables primarily relate to
estimated receivables due from our various business insurance policies. Other relates to prepaid maintenance fees, prepaid license fees, and revolver facility fees.
88
Note J — Accrued Expenses and Other Current Liabilities and Other Liabilities
Accrued expenses and other current liabilities consist of:
As of December 31,
(in thousands)
2021
2020
Patient prepayments, deposits, and refunds payable
$
26,475
$
27,195
Insurance and self-insurance accruals
8,943
7,651
Accrued sales taxes and other taxes
7,803
9,863
Derivative liability
6,425
7,686
Accrued professional fees
750
1,016
Accrued interest payable
707
440
Other current liabilities
9,296
9,010
Total
$
60,399
$
62,861
Patient prepayment deposits and refunds includes funds received for devices not yet delivered to a patient and refunds for overpayments. Accrued insurance
primarily relates to accruals for estimated losses for certain self-insured risks including property, professional and general liability, and employee health care costs.
Taxes primarily includes accrued sales, property, and franchise tax liabilities. Derivative liability relates to our cash flow hedge; refer to Note O - “Derivative
Financial Instruments.” Accrued professional fees primarily relate to accruals for professional accounting and legal fees. Accrued interest payable relates to interest
on our debt obligation. Other current liabilities are primarily related to accruals for deferred revenue and warranty liabilities.
Other liabilities consist of:
As of December 31,
(in thousands)
2021
2020
Supplemental executive retirement plan obligations
$
20,779
$
21,503
Long-term insurance accruals
7,112
7,326
Derivative liability
4,664
14,388
Deferred payroll taxes
—
5,918
Unrecognized tax benefits
—
5,465
Other
2,285
1,993
Total
$
34,840
$
56,593
Supplemental executive retirement plan obligations include obligations due on both the Defined Benefit Supplemental Executive Retirement Plan (“DB SERP”)
and DC SERP. See Note Q - “Employee Benefits” within these consolidated financial statements. Derivative liability relates to our cash flow hedge; refer to Note
O - “Derivative Financial Instruments.” Deferred payroll taxes represents deferred liabilities associated with the CARES Act. Unrecognized tax benefits represent
the difference between tax positions that we expect to take, or take on our income tax returns and the benefit we recognize on our financial statements. Other
includes asset retirement obligations, which is the liability to return a leased building to the state before it was occupied, fair market value lease differential
liability, and other long-term accrued expenses.
89
Note K — Income Taxes
Components of provision for income taxes are as follows:
Years Ended December 31,
(in thousands)
2021
2020
2019
Current:
Federal
$
(4,937)
$
(16,986)
$
5,461
State
483
192
719
Total current
(4,454)
(16,794)
6,180
Deferred:
Federal
4,065
15,169
1,803
State
1,547
2,263
(5,029)
Total deferred
5,612
17,432
(3,226)
Total provision for income taxes
$
1,158
$
638
$
2,954
A reconciliation of the federal statutory tax rate to our effective tax rate applicable to continuing operations is as follows:
Years Ended December 31,
2021
2020
2019
Federal statutory tax rate
21.0 %
21.0 %
21.0 %
State and local income taxes
5.3 %
4.5 %
6.0 %
Research and development credits
(17.2)%
(28.0)%
— %
Change in uncertain tax positions
(6.3)%
6.9 %
0.2 %
Tax benefit from net operating loss carryback
— %
(10.2)%
— %
Permanent items
1.4 %
5.4 %
2.3 %
State tax rate change effect on deferred balance
(0.8)%
1.7 %
— %
Other tax credits
(0.2)%
(0.1)%
(0.1)%
Tax audit adjustments
(0.1)%
— %
0.9 %
Change in valuation allowance
— %
— %
(22.5)%
Other
(0.4)%
0.4 %
1.9 %
Tax provision
2.7 %
1.6 %
9.7 %
90
The significant components of our deferred tax assets and liabilities are presented in the following table:
As of December 31,
(in thousands)
2021
2020
Deferred tax assets:
Lease liabilities
$
40,389
$
35,801
Research and development credits
13,332
9,637
Accrued expenses
13,260
15,611
Provision for doubtful accounts and implicit price concessions
12,154
13,291
Deferred benefit plan compensation
8,316
11,199
Net operating loss carryforwards
7,714
8,907
Inventory reserves
3,425
2,945
Share-based compensation
2,998
3,437
Refund liabilities
2,169
2,518
Other
2,857
3,378
Deferred tax assets
106,614
106,724
Less: Valuation allowance
(2,075)
(2,112)
Total deferred tax assets
104,539
104,612
Deferred tax liabilities:
Lease assets
37,095
32,069
Goodwill
12,116
9,368
Property, plant, and equipment
6,731
7,198
Prepaid expenses
3,103
1,100
Total deferred tax liabilities
59,045
49,735
Net deferred tax assets
$
45,494
$
54,877
We provide a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have $1.6 million and $4.6 million
of U.S. federal net operating loss carryforwards available as of December 31, 2021 and 2020, respectively. We have $139.1 million and $153.0 million of state net
operating loss carryforwards available as of December 31, 2021 and 2020, respectively. These carryforwards will be used to offset future income but may be
limited by the change in ownership rules in Section 382 of the Internal Revenue Code. These net operating loss carryforwards will expire in varying amounts
through 2041.
We establish valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. As of December 31, 2021 and 2020, we have
recorded a valuation allowance of approximately $2.1 million related to various state jurisdictions. In our assessment of the valuation allowance, we consider a
number of types of evidence on a taxing jurisdiction and legal entity basis in each reporting period, including the nature, frequency, and severity of current and
cumulative financial reporting income and losses, sources of future taxable income, future reversals of existing taxable temporary differences, and prudent and
feasible tax planning strategies, weighted by objectivity. The Company’s valuation allowance position in 2021 has not changed based on assessment of all
available positive and negative evidence.
The following schedule presents the activity in the valuation allowance:
(in thousands)
Year
Balance at Beginning
of Year
Acquisitions
Provision
Released
Balance at End of
Year
2021
$
2,112
$
—
$
(37)
$
—
$
2,075
2020
$
2,065
$
—
$
47
$
—
$
2,112
2019
$
8,930
$
—
$
238
$
7,103
$
2,065
91
A reconciliation of our liability for unrecognized tax benefits is as follows:
(in thousands)
2021
2020
2019
Unrecognized tax benefits, at beginning of the year
$
6,896
$
4,331
$
4,765
Additions for tax positions related to the current year
1,489
1,026
247
Increase related to prior year positions
546
1,891
—
Decrease related to prior year positions
(400)
(352)
(337)
Decrease for lapse of applicable statute of limitations
(3,979)
—
(344)
Unrecognized tax benefits, at end of the year
$
4,552
$
6,896
$
4,331
As of December 31, 2021, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $4.6 million.
During the year ended December 31, 2021, we released $4.0 million of unrecognized tax benefits and $1.3 million of interest expense due to lapse of statute of
limitations for the applicable tax years. We do not anticipate further significant release of unrecognized tax benefits within the next twelve months. We recognize
accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2021, 2020, and 2019, the amount
of accrued interest and penalties was approximately $0.0 million, $1.2 million, and $1.0 million, respectively.
We are subject to income tax in the U.S. federal, state, and local jurisdictions. We are no longer subject to U.S. federal income tax examinations for years prior to
2017. However, due to net operating loss carryforwards, tax authorities have the ability to adjust those net operating losses related to closed years. We believe the
ultimate resolution of income tax examinations will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
For the year ended December 31, 2020, we completed a formal study to identify qualifying research and development expenses resulting in the recognition of tax
benefits of $3.3 million, net of tax reserves, related to 2020 and $6.1 million, net of tax reserves, relating to the prior years. For the year ended December 31, 2021,
we recorded a federal tax benefit of $4.3 million, net of tax reserves, as a deferred tax asset.
Note L — Leases
The information pertaining to leases on the consolidated balance sheet is as follows:
As of December 31,
(in thousands)
Classification
2021
2020
Assets
Operating lease right-of-use assets
Operating lease right-of-use assets
$
144,491 $
124,741
Finance lease right-of-use assets
Other assets
2,732
3,016
Total lease assets
$
147,223 $
127,757
Liabilities
Current
Operating
Current portion of operating lease liabilities
$
33,438 $
35,002
Finance
Current portion of long-term debt
739
707
Noncurrent
Operating
Operating lease liabilities
124,016
104,589
Finance
Long-term debt, less current portion
2,177
2,472
Total lease liabilities
$
160,370 $
142,770
92
The components of lease cost recognized in the consolidated statement of operations are as follows:
For the Years Ended
(in thousands)
2021
2020
Operating lease cost
$
48,130 $
47,242
Finance lease cost
Amortization of right-of-use assets
750
615
Interest on lease liabilities
117
99
Sublease income
(157)
(248)
Short-term lease cost
862
472
Variable lease cost
5,755
5,590
Total lease cost
$
55,457 $
53,770
Maturities of our lease liabilities, by year and in the aggregate, under operating and financing obligations with terms of one year or more at December 31, 2021 are
as follows:
(in thousands)
Finance
Leases
Operating
Leases
Total Leases
2022
$
835
$
42,754
$
43,589
2023
777
35,346
36,123
2024
741
26,853
27,594
2025
572
19,179
19,751
2026
215
13,082
13,297
Thereafter
—
52,826
52,826
Total lease payments
3,140
190,040
193,180
Imputed interest
(224)
(32,586)
(32,810)
Total
$
2,916
$
157,454
$
160,370
The lease term and discount rates are as follows:
December 31,
2021
2020
Weighted average remaining lease term (years)
Operating leases
6.69
5.91
Finance leases
4.01
4.72
Weighted average discount rate
Operating leases
4.59 %
5.16 %
Finance leases
3.87 %
4.03 %
93
Supplemental cash flow information related to leases is as follows:
For the Years Ended December 31,
(in thousands)
2021
2020
Cash flows for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
50,497 $
44,814
Operating cash flows from finance leases
104
99
Financing cash flows from finance leases
832
556
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
52,937
49,380
Finance leases
477
2,393
Right-of-use assets acquired and lease liabilities assumed in acquisitions
8,968
5,469
Note M — Debt and Other Obligations
Debt consists of the following:
(in thousands)
As of December 31, 2021
As of December 31, 2020
Debt:
Term Loan B
$
486,063
$
491,113
Seller Notes
29,812
11,510
Deferred payment obligation
4,000
4,000
Finance lease liabilities and other
3,344
3,869
Total debt before unamortized discount and debt issuance costs
523,219
510,492
Unamortized discount and debt issuance costs, net
(5,974)
(7,395)
Total debt
517,245
503,097
Current portion of long-term debt:
Term Loan B
5,050
5,050
Seller Notes
8,969
4,060
Finance lease liabilities and other
919
975
Total current portion of long-term debt
14,938
10,085
Long-term debt
$
502,307
$
493,012
Refinancing of Credit Agreement and Term B Borrowings
On March 6, 2018, we entered into a $605.0 million Senior Credit Facility (the “Credit Agreement”). The Credit Agreement provides for (i) a revolving credit
facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term Loan B facility due
in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025. Availability under the
revolving credit facility is reduced by outstanding letters of credit, which were approximately $5.7 million as of December 31, 2021. We may (a) increase the
aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b)
increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an
aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash
proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the
consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of
default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility. In connection with
the Credit Agreement, we paid debt issuance costs of approximately $6.8 million.
94
Net proceeds from our initial borrowings under the Credit Agreement, which totaled approximately $501.5 million, were used in part to repay in full all previously
existing loans outstanding under our previous credit agreement and Term B credit agreement during the first quarter of 2018. Proceeds were also used to pay
various transaction costs including fees paid to respective lenders and accrued and unpaid interest. The remainder of the proceeds are being used to provide
ongoing working capital and capital for other general corporate purposes.
In March 2020, we borrowed $79.0 million under our revolving credit facility, which was due in March 2023. In June 2020, we repaid $57.0 million in borrowings
under this revolving credit facility, and in September 2020, we repaid the remaining $22.0 million in borrowings under the facility. We had approximately $129.3
million in available borrowing capacity under our $135.0 million revolving credit facility as of December 31, 2021.
Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in
each case to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by
first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.
Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a)
Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. For the years
ended December 31, 2021 and 2020, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 3.6% and
4.1%, respectively. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note O -
“Derivative Financial Instruments.”
We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit
commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit
Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to
time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement,
the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such
letter of credit.
The Credit Agreement contains various restrictions and covenants, including: i) requirements that we maintain certain financial ratios at prescribed levels, ii) a
prohibition on payment of dividends and other distributions and iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens,
incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry. The Credit Agreement includes the following financial
covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement (some of which were
amended in May 2020 by the Amendment (as defined and described below)): (i) a maximum consolidated first lien net leverage ratio (“Net Leverage Ratio”)
(defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation,
amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are
available) of 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the
last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated
interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.
The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may
declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default
as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under
the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding
under the revolving credit facility to be due and payable. In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings
under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and
payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) upon
acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the lenders’ request, during the continuance of any other event of default.
95
In May 2020, we entered into an amendment to the Credit Agreement (the “Amendment”) that provided for, amongst other things, an increase in the maximum Net
Leverage Ratio to 5.25 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through
September 30, 2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter. In addition, the Amendment
changed the definition of EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the
COVID-19 pandemic. Borrowings under the revolving credit facility will bear interest at a variable rate equal to the greater of LIBOR or 1%, plus 3.75%. In
addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries’ ability, to consolidate or merge,
create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed with the proceeds of an equity offering, except that certain
acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. We capitalized debt issuance costs of
$0.2 million in connection with the Amendment, which were recorded in Other assets.
On November 23, 2021, we entered into a Second Amendment to Credit Agreement (the “Second Amendment”) among us, the subsidiary guarantors party thereto,
the revolving lenders party thereto and Bank of America, N.A., as agent (the “Agent”), which amends the Credit Agreement, dated as of March 6, 2018, among us,
the lenders from time to time party thereto and the Agent (as amended by the First Amendment to Credit Agreement dated as of May 4, 2020, the “Existing Credit
Agreement”; the Existing Credit Agreement as amended by the Second Amendment, the “Credit Agreement”).
The Second Amendment revises certain provisions of the Existing Credit Agreement to, among other things, (i) increase the aggregate amount of the revolving
loan commitments by $35 million to an aggregate total amount of $135 million, (ii) extend the scheduled maturity date of the revolving loan facility to November
23, 2026 (subject to a springing maturity if the term loans outstanding under the Existing Credit Agreement are not repaid prior to the date that is 91 days prior to
the stated maturity thereof), (iii) decrease the applicable margin on LIBOR and base rate revolving loan borrowings by 0.75% per annum, (iv) decrease the LIBOR
interest rate floor in respect of revolving loan borrowings to 0.00% per annum, (v) decrease the revolving loan facility commitment fee to 0.30% per annum, (vi)
increase the maximum allowable leverage ratio for covenant purposes such that the maximum consolidated first lien net leverage ratio shall be up to (a) 5.00 to
1.00 for the fiscal quarters ending December 31, 2021, March 31, 2022, June 30, 2022, and September 30, 2022 and (b) 4.75 to 1.00 for the fiscal quarter ending
December 31, 2022 and the last day of each fiscal quarter thereafter, and (vii) permit, at our election and up to three times during the term of the Credit Agreement,
the maximum allowable leverage ratio for covenant purposes to be temporarily increased by an additional 0.50 to 1.00 for four consecutive fiscal quarters in
connection with certain material acquisitions. We capitalized debt issuance costs of $0.6 million in connection with the Second Amendment, which were recorded
in Other assets.
We were in compliance with all covenants at December 31, 2021.
Subsidiary Guarantees
The obligations under the Credit Agreement are guaranteed by our material domestic subsidiaries, which incorporates subsidiaries that both make up no less than
90% of our total net revenues and make up no less than 90% of our total assets. Separate condensed consolidating information is not included as the parent
company does not have independent assets or operations, and the guarantees are full and unconditional and joint and several.
Other Restrictions
The Credit Agreement limits our 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.
Seller Notes and the Deferred Payment Obligation
We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are
unsecured and are presented net of unamortized discount of $0.9 million as of December 31, 2021 and 2020. We measure these instruments at their estimated fair
values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.50% to 3.00%. Principal and interest are payable in
quarterly or annual installments and mature through November 2026.
96
Amounts due under the deferred payment obligation to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized
discount of $0.4 million and $0.5 million as of December 31, 2021 and December 31, 2020, respectively. The deferred payment obligation was measured at its
estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due
in annual installments beginning in 2024 and for three years thereafter.
Scheduled Maturities of Total Debt
Scheduled maturities of debt at December 31, 2021 were as follows:
(in thousands)
2022
$
15,281
2023
15,243
2024
14,703
2025
474,246
2026
2,603
Thereafter
1,143
Total debt before unamortized discount and debt issuance costs, net
523,219
Unamortized discount and debt issuance costs, net
(5,974)
Total debt
$
517,245
Note N — Fair Value Measurements
Financial Instruments
The carrying value of our outstanding term loan as of December 31, 2021 (excluding unamortized discounts and debt issuance costs of $5.1 million) was
$486.1 million compared to its fair value of $484.8 million. The carrying value of our outstanding term loan as of December 31, 2020 (excluding unamortized
discounts and debt issuance costs of $6.5 million) was $491.1 million compared to its fair value of $489.9 million. Our estimates of fair value are based on a
discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.
We have interest rate swap agreements designated as cash flow hedges and are measured at fair value based on inputs other than quoted market prices that are
observable, which represents a Level 2 measurement. See Note M - “Debt and Other Obligations” and Note O - “Derivative Financial Instruments” for further
information.
We believe that the carrying value of the Seller Notes and the deferred payment obligation approximates their fair values based on a discounted cash flow model
using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement. The carrying value of our outstanding
Seller Notes and the deferred payment obligation issued in connection with past acquisitions as of December 31, 2021 and December 31, 2020 was $32.9 million
and $14.6 million, respectively, net of unamortized discounts of $0.9 million.
Note O — Derivative Financial Instruments
Cash Flow Hedges of Interest Rate Risk
In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million, at inception, which reduces $12.5 million annually until the
swaps mature on March 6, 2024. As of December 31, 2021 and December 31, 2020, our swaps, had a notional value outstanding of $287.5 million and
$300.0 million, respectively.
97
Changes in Net Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the years ended December 31, 2021 and 2020:
(in thousands)
Cash Flow Hedges
Balance as of December 31, 2019
$
(10,137)
Unrealized loss recognized in other comprehensive income, net of tax
(13,230)
Reclassification to interest expense, net of tax
6,596
Balance as of December 31, 2020
$
(16,771)
Unrealized gain recognized in other comprehensive income, net of tax
400
Reclassification to interest expense, net of tax
7,867
Balance as of December 31, 2021
$
(8,504)
The following table presents the fair value of derivative liabilities within the consolidated balance sheets as of December 31, 2021 and December 31, 2020:
As of December 31, 2021
As of December 31, 2020
(in thousands)
Assets
Liabilities
Assets
Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities
$
—
$
6,425
$
—
$
7,686
Other liabilities
—
4,664
—
14,388
Note P — Share-Based Compensation
On May 17, 2019, the shareholders approved the Hanger, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan authorizes the issuance of (a) up to
2,025,000 shares of Common Stock, plus (b) 243,611 shares available for issuance under the Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”). Upon
approval of the 2019 Plan, the 2016 Plan was no longer available for future awards.
On May 19, 2017, the Board of Directors approved the Hanger, Inc. Special Equity Plan (the “Special Equity Plan”). The Special Equity Plan authorized up to
1.5 million shares of Common Stock and operates completely independent from our 2016 Omnibus Incentive Plan. All awards under the Special Equity Plan were
made on May 19, 2017 which consisted of 0.8 million stock options and 0.3 million performance-based stock awards. No further grants of awards will be
authorized or issued under the Special Equity Plan.
As of December 31, 2021, approximately 1.1 million shares were available for future issuance under the 2019 Plan. The available shares consisted of (a)
2.0 million shares of common stock originally authorized for issuance under the amended 2019 Plan, plus (b) 0.2 million shares rolled forward from the 2016 Plan,
plus (c) 0.3 million shares forfeited and added back to the pool, less (d) 1.4 million shares issued for awards. In 2021, shares issued under equity plans were issued
from authorized and unissued shares.
For the years ended December 31, 2021, 2020, and 2019, we recognized share-based compensation expense of approximately $12.3 million, $18.4 million, and
$13.4 million. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and options.
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Restricted Stock Units
The summary of restricted stock units, performance-based stock units, and weighted average grant date fair values are as follows:
Employee Service-Based Awards
Employee Performance-Based
Awards
Director Awards
Units
Weighted
Average Grant
Date Fair
Value
Units
Weighted
Average Grant
Date Fair
Value
Units
Weighted
Average Grant
Date Fair
Value
Nonvested at December 31, 2019
1,164,224
$
16.32
599,484
$
17.82
55,752
$
20.10
Granted
427,851
21.81
523,972
25.95
70,623
17.07
Vested
(489,026)
14.18
(541,923)
24.36
(55,752)
20.09
Forfeited
(21,289)
18.97
(260,852)
19.29
—
—
Nonvested at December 31, 2020
1,081,760
18.90
320,681
18.86
70,623
17.07
Granted
462,316
23.28
121,809
23.66
49,356
25.53
Vested
(433,499)
17.55
(132,095)
17.47
(70,623)
17.07
Forfeited
(91,370)
20.88
—
—
—
—
Nonvested at December 31, 2021
1,019,207
$
21.28
310,395
$
21.61
49,356
$
25.53
During the years ended December 31, 2021, 2020, and 2019, approximately 0.6 million, 1.1 million, and 0.6 million of restricted common stock units with an
intrinsic value of $15.1 million, $21.3 million, and $12.3 million, respectively, became fully vested. As of December 31, 2021, total unrecognized compensation
expense related to unvested restricted stock units and unvested performance based restricted stock units for which we have concluded the performance condition
was probable of achievement was approximately $18.5 million and the related weighted-average period over which it is expected to be recognized is approximately
2.4 years. The aggregate granted units have vesting dates through June 2022. The 2021, 2020, and 2019 aggregate grants had total estimated grant date fair values
of $15.7 million, $24.1 million, and $12.9 million, respectively.
A special equity grant of performance-based restricted stock units was granted on May 19, 2017 under the Special Equity Plan and was initially granted to vest
100% three years after the date of issuance, assuming the performance goal is achieved. The financial target for this grant was originally to achieve a compounded
annual growth rate (“CAGR”) of our common stock price of 20% as of market close on May 18, 2020. This equated to a share price on that date of $22.07
compared to the closing price on the eve of grant of $12.77. The grant provided for the vesting of 50% of the original targeted shares if a CAGR of 10% (a stock
price of $17.00) is achieved. The grant also provided for the vesting of up to 200% of the original targeted shares if a CAGR of 30% (a stock price of $28.06) or
more is achieved. The percentage of vested shares will be interpolated on a linear basis between 50% and 200% for a CAGR between 10% and 30%. The stock
price at time of award was $12.77, but given market condition performance criteria, the Monte Carlo Simulation valuation was used to calculate a fair value of
$19.29 per share. The key assumptions used were a volatility rate of 109.5%, a risk-free interest rate of 1.44%, and a performance period of 3 years.
In November 2019, the special equity grant was amended by adjusting the calculation of the CAGR of our common stock price from the third anniversary of the
grant date to the average closing price for the 25 trading days ending on and including the last day of the three year performance period (i.e., May 18, 2020). This
adjustment was considered a modification per ASC 718, Compensation - Stock Compensation, and therefore, any incremental fair value arising from the
modification of an award with market conditions would be recognized over the remaining service period. The valuation concluded there was an additional
$34.0 thousand in incremental fair value that will be expensed ratably over the remainder of the service period.
In May 2020, the special equity grant was amended to modify the performance period ending date for purposes of the compounded annual growth rate calculation
to February 20, 2020, shortening the performance period to approximately 33 months, representing a reduction of three months. This adjustment was considered a
modification per ASC 718, Compensation - Stock Compensation, and, therefore, any incremental fair value arising from the modification of an award with market
conditions would be recognized over the remaining service period. As a result of the modification, we recognized an additional $5.9 million in share-based
compensation expense during the second quarter of 2020.
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Performance-based restricted stock units were granted on March 9, 2020. The grants were made prior to knowing the impact of the COVID-19 pandemic on the
company’s business and industry. The stock units would only be earned if we achieved the adjusted earnings per share (“Adjusted EPS”) performance goal for
2020. If earned, they would vest 25% annually over four years on the anniversary of the grant date, commencing on the first anniversary. In November 2020, the
performance-based grant was amended by adjusting the Adjusted EPS performance goal for these awards to reflect our July 2020 revised financial forecast for the
year, which gave consideration to the challenges we faced during the first half of the year and the expected performance for the remainder of the year, taking into
account the expected impact of the COVID-19 pandemic. In addition, it also reduced the number of shares the participants could receive pursuant to their
previously granted awards to 85% of the original target number.
Options
Certain options were granted in 2017 under the Special Equity Plan. The fair value of each employee stock option award was estimated on the date of grant of May
19, 2017 using the Black-Scholes option-pricing model and calculated a grant date fair value of $8.67 per option. The key assumptions used were an expected
dividend yield of zero, an expected stock volatility of 92.48%, a risk-free interest rate of 1.68%, and an expected term of 4.38 years.
The summary of option activity and weighted average exercise prices are as follows:
Shares
Weighted Average
Exercise Price
Aggregate
Intrinsic Value
Weighted Average
Remaining Contractual
Term (Years)
Outstanding at December 31, 2019
523,105
$
12.77
$
7,762,878
Granted
—
—
Terminated
—
—
Exercised
(7,193)
12.77
Outstanding at December 31, 2020
515,912
12.77
4,756,709
5.6
Granted
—
—
Terminated
—
—
Exercised
(240,129)
12.77
Outstanding at December 31, 2021
275,783
$
12.77
$
1,478,197
5.4
At December 31, 2021, 0.3 million options were outstanding but not yet exercisable with a weighted average exercise price of $12.77, average remaining
contractual terms of 5.4 years and aggregate intrinsic values of approximately $1.5 million. At December 31, 2020, 0.5 million options were outstanding but not
yet exercisable with a weighted average exercise price of $12.77, average remaining contractual terms of 5.6 years and aggregate intrinsic values of approximately
$4.8 million.
Note Q — Employee Benefits
Savings Plan
We maintain a 401(k) Savings and Retirement plan that covers all of our employees. Under the plan, employees may defer a portion of their compensation up to
the levels permitted by the Internal Revenue Service. We recorded matching contributions of approximately $7.0 million, $6.5 million, and $6.1 million under this
plan during 2021, 2020, and 2019, respectively, which were included within “Personnel costs” and “General and administrative expenses” in our consolidated
statements of operations.
Defined Benefit Supplemental Executive Retirement Plan
Effective January 2004, we implemented an unfunded noncontributory DB SERP for certain senior executives. The DB SERP, which we administer, calls for
fifteen annual payments upon retirement with the payment amount based on years of service and final average salary. Benefit costs and liability balances are
calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates, and other factors. We engaged an actuary to
calculate the related benefit obligation at December 31, 2021 and 2020 as well as net periodic benefit plan expense for the years ended December 31, 2021, 2020,
and 2019. As of December 31, 2021 and 2020, the average remaining service period of plan
100
participants is 7.5 and 8.5 years, respectively. We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual
experience may affect our benefit obligation and future expenses. Actual results that differ from the assumptions are accumulated and amortized over future
periods, affecting the recorded obligation and expense in future periods.
The DB SERP’s net benefit obligation is as follows:
Change in Benefit Obligation
(in thousands)
Benefit obligation as of December 31, 2018
$
18,927
Service cost
335
Interest cost
658
Payments
(1,913)
Actuarial loss
1,207
Benefit obligation as of December 31, 2019
19,214
Service cost
392
Interest cost
485
Payments
(1,913)
Actuarial loss
1,568
Benefit obligation as of December 31, 2020
19,746
Service cost
493
Interest cost
349
Payments
(1,913)
Actuarial gain
(740)
Benefit obligation as of December 31, 2021
$
17,935
The funded status of the DB SERP’s net benefit obligation is as follows:
December 31,
(in thousands)
2021
2020
Unfunded status
$
14,374
$
15,125
Unamortized net loss
3,561
4,621
Net amount recognized
$
17,935
$
19,746
Amounts Recognized in the Consolidated Balance Sheets:
December 31,
(in thousands)
2021
2020
Current accrued expenses and other current liabilities
$
1,913
$
1,913
Non-current other liabilities
16,022
17,833
Total accrued liabilities
$
17,935
$
19,746
We recorded gross actuarial (gains) losses under the DB SERP of approximately $(0.7) million, $1.6 million, and $1.2 million in 2021, 2020, and 2019,
respectively, in other comprehensive income (loss). There were no other components such as prior service costs or transition obligations relating to the DB SERP
costs recorded within other comprehensive loss during 2021, 2020, or 2019.
The following weighted average assumptions were used to determine the benefit obligation as of December 31 of each year. Net periodic benefit cost for each year
was determined using the weighted average assumptions as of the prior year. We used a third party actuarial specialist to assist in determining, among other things,
the discount rate for all three years presented.
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Our assumed weighted average discount rate for the defined benefit plan reflects the hypothetical rate at which the projected benefit obligation could be effectively
settled or paid out to participants. We determine our discount rate based on a range of factors, including a yield curve composed of rates of return on high-quality,
fixed income corporate bonds.
2021
2020
2019
Discount rate
2.6 %
2.0 %
2.9 %
Average rate of increase in compensation
3.0 %
3.0 %
2.5 %
At December 31, 2021, the estimated accumulated benefit obligation is $17.9 million. Future payments under the DB SERP are as follows:
(in thousands)
2022
$
1,913
2023
1,913
2024
1,913
2025
1,913
2026
1,913
Thereafter
8,370
$
17,935
Defined Contribution Supplemental Executive Retirement Plan
In 2013, we established a defined contribution plan that covers certain of our senior executives. Each participant is given a notional account to manage his or her
annual distributions and allocate the funds among various investment options (e.g., mutual funds). These accounts are tracking accounts only for the purpose of
calculating the participant’s benefit. The participant does not have ownership of the underlying mutual funds. When a participant initiates or changes the allocation
of his or her notional account, we will generally make an allocation of our investments to match those chosen by the participant. While the allocation of our sub
accounts is generally intended to mirror the participant’s account records (i.e., the distributions and gains or losses on those funds), the employee does not have
legal ownership of any funds until payout upon retirement. The underlying investments are owned by the insurance company with which we own an insurance
policy.
As of December 31, 2021 and 2020, the estimated accumulated benefit obligation is $4.8 million and $4.5 million, respectively, of which $4.1 million and
$4.0 million is funded and $0.6 million and $0.5 million is unfunded at December 31, 2021 and 2020, respectively.
In connection with the DC SERP benefit obligation, we maintain a COLI policy. The carrying value of the COLI is measured at its cash surrender value and is
presented within “Other assets” in our consolidated balance sheets. See Note I - “Other Current Assets and Other Assets” for additional information.
Note R — Commitments and Contingencies
Guarantees and Indemnification
In the ordinary course of our business, we may enter into service agreements with service providers in which we agree to indemnify or limit the service provider
against certain losses and liabilities arising from the service provider’s performance of the agreement. We have reviewed our existing contracts containing
indemnification or clauses of guarantees and do not believe that our liability under such agreements is material.
Other Matters
From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, and are also subject to additional payments
under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially
adverse effect on our consolidated financial position, liquidity, or results of our operations.
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We operate in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries
relating to our billing activities. No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on
our consolidated financial statements.
Note S — Segment and Related Information
We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each operating segment’s
income from operations. The operating segments are described further below:
Patient Care - This segment consists of (i) our owned and operated patient care clinics, and (ii) our contracting and network management business. The patient
care clinics provide services to design and fit O&P devices to patients. These clinics also instruct patients in the use, care, and maintenance of the devices. The
principal reimbursement sources for our services are:
•
Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, 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 persons with
disabilities, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules (generally with either 10
regional pricing areas or state level prices) for prosthetics and orthotics and by state for durable medical equipment (DMEPOS);
•
Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons requiring
financial assistance, regardless of age, which may supplement Medicare benefits for persons aged 65 or older requiring financial assistance; and
•
U.S. Department of Veterans Affairs.
Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market and is
focused on managing the O&P services of national and regional insurance companies. We partner with healthcare insurance companies by securing a national or
regional contract either as a preferred provider or to manage their O&P network of providers.
Products & Services - This segment consists of our distribution business, which distributes and fabricates O&P products and components to sell to both the O&P
industry and our own patient care clinics, and our therapeutic solutions business. The therapeutic solutions business leases and sells rehabilitation equipment and
ancillary consumable supplies combined with equipment maintenance, education, and training.
Corporate & Other - This consists of corporate overhead and includes unallocated expense such as personnel costs, professional fees, and corporate offices
expenses.
The accounting policies of the segments are the same as those described in Note A - “Organization and Summary of Significant Accounting Policies.”
Intersegment revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care segment. The sales are priced at the
cost of the related materials plus overhead.
We had no foreign and export sales or assets for the years ended December 31, 2021, 2020, and 2019.
For the Patient Care segment, government reimbursement, comprised of Medicare, Medicaid, and the VA, in the aggregate, accounted for approximately, 58.5%,
57.7%, and 57.5% of their net revenue in 2021, 2020, and 2019, respectively.
Additionally, for the Products & Services segment, no single customer accounted for more than 10% of net revenues in 2021, 2020, or 2019, respectively.
Summarized financial information concerning our reporting segments is shown in the following tables.
103
Patient Care
Products & Services
For the Year Ended December 31,
For the Year Ended December 31,
(in thousands)
2021
2020
2019
2021
2020
2019
Net revenue
Third party
$
943,328
$
831,603
$
905,691
$
177,160
$
169,547
$
192,355
Intersegments
—
—
—
220,792
189,604
203,496
Total net revenue
943,328
831,603
905,691
397,952
359,151
395,851
Material costs
Third party suppliers
248,961
221,566
250,407
105,381
93,844
107,364
Intersegments
38,243
25,818
24,394
182,549
163,786
179,102
Total material costs
287,204
247,384
274,801
287,930
257,630
286,466
Personnel expenses
339,578
302,206
319,633
57,996
48,985
52,592
Other expenses
152,947
115,924
151,140
26,951
24,638
28,178
Depreciation & amortization
19,622
18,892
18,541
7,860
10,173
10,650
Segment income from operations
$
143,977
$
147,197
$
141,576
$
17,215
$
17,725
$
17,965
Purchase of property, plant and equipment
$
10,242
$
10,607
$
16,102
$
9,215
$
11,040
$
2,368
Purchase of therapeutic program equipment leased
to third parties under operating leases
$
—
$
—
$
—
$
2,280
$
3,592
$
6,672
A reconciliation of the total of the reportable segment’s income (loss) from operations to consolidated income from operations is as follows:
(in thousands)
2021
2020
2019
Income from operations
Patient Care
$
143,977
$
147,197
$
141,576
Products & Services
17,215
17,725
17,965
Corporate & other
(88,521)
(93,015)
(94,113)
Income from operations
72,671
71,907
65,428
Interest expense, net
28,864
32,445
34,258
Non-service defined benefit plan expense
667
632
691
Income before income taxes
43,140
38,830
30,479
Provision for income taxes
1,158
638
2,954
Net income
$
41,982
$
38,192
$
27,525
A reconciliation of the reportable segment’s net revenue (loss) to consolidated net revenue is as follows:
(in thousands)
2021
2020
2019
Net Revenue
Patient Care
$
943,328
$
831,603
$
905,691
Products & Services
397,952
359,151
395,851
Corporate & other
—
—
—
Consolidating adjustments
(220,792)
(189,604)
(203,496)
Consolidated net revenue
$
1,120,488
$
1,001,150
$
1,098,046
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A reconciliation of the reportable segment’s material costs to consolidated material costs is as follows:
(in thousands)
2021
2020
2019
Material costs
Patient Care
$
287,204
$
247,384
$
274,801
Products & Services
287,930
257,630
286,466
Corporate & other
—
—
—
Consolidating adjustments
(220,792)
(189,604)
(203,496)
Consolidated material costs
$
354,342
$
315,410
$
357,771
A reconciliation of the reportable segment’s purchase of property, plant and equipment to consolidated purchase of property, plant and equipment, including
purchases of therapeutic program equipment leased to third parties under operating leases, is as follows:
(in thousands)
2021
2020
2019
Purchase of property, plant and equipment and therapeutic program
equipment leased to third parties under operating leases
Patient Care
$
10,242
$
10,607
$
16,102
Products & Services
Property, plant and equipment
9,215
11,040
2,368
Therapeutic program equipment leased to third parties under operating leases
2,280
3,592
6,672
Corporate & other
3,122
2,853
7,963
Total consolidated purchase of property, plant and equipment and therapeutic
program equipment leased to third parties under operating leases
$
24,859
$
28,092
$
33,105
A reconciliation of the total of the reportable segment’s assets to consolidated assets is as follows:
(in thousands)
2021
2020
Assets
Patient Care
$
705,614
$
578,319
Products & Services
133,075
121,564
Corporate & other
159,450
250,868
Total consolidated assets
$
998,139
$
950,751
Note T — Subsequent Events
During the first quarter of 2022 to date, we completed the acquisition of one O&P business for a total purchase price of $5.0 million. Total consideration
transferred for this acquisition is comprised of $4.0 million in cash consideration, $1.0 million in the form of notes to the former shareholders. Due to the proximity
in time of this transaction to the filing of this Form 10-K, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets
purchased and liabilities assumed in the acquisition. Acquisition-related expenses related to this transaction were not material.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be
disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules
and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to
allow timely decisions regarding required disclosures.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the design and effectiveness of our disclosure controls and procedures as of December 31, 2021. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2021.
Management’s Report on Internal Control over Financial Reporting
Management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process
designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP.
Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, (c) provide reasonable assurance that receipts and expenditures are being made
only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented
by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a
timely basis. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate in the future.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2021, based on the criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and has concluded that we maintained effective internal control over
financial reporting as of December 31, 2021.
PricewaterhouseCoopers LLP has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, which is
included in Part II, Item 8 of this annual report.
106
Changes in Internal Control over Financial Reporting
We are implementing an enterprise resource planning (“ERP”) system using a phased approach, and transitioned from our prior corporate financial systems to the
new ERP system in the third quarter of 2021. In connection with the implementation, we modified the design and documentation of certain internal control
processes and procedures as necessary. We will continue to evaluate each phase’s effect on our internal controls over financial reporting.
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION
Not applicable.
107
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The information in the sections titled “Proposal 1: Election of Directors,” “Corporate Governance Matters,” “Principal Stockholders,” and, if necessary,
“Delinquent Section 16(a) Reports” in the Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2022 (the “2022 Proxy Statement”) is
incorporated by reference herein. Information with respect to our executive officers appears in Part I of this Annual Report on Form 10-K.
Information required under this item with respect to executive officers is contained in Part I of this Form 10-K under the caption “Information About Our
Executive Officers.”
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all our directors, officers and employees. The Code is available on our
website, along with our current Corporate Governance Guidelines, at www.hanger.com. The Code and our Corporate Governance Guidelines are also available in
print to any shareholder who requests a copy in writing from the Corporate Secretary of Hanger. We intend to disclose through our website any amendments to, or
waivers from, the provisions of these codes.
ITEM 11. EXECUTIVE COMPENSATION.
The information in the sections titled “Compensation Discussion and Analysis,” “Executive Compensation,” “Report of the Corporate Governance and Nominating
Committee,” “Director Compensation,” and “Compensation Committee Interlocks and Insider Participation” in the 2022 Proxy Statement is incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information in the section titled “Principal Stockholders” in the 2022 Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information in the section titled “Corporate Governance Matters” in the 2022 Proxy Statement is incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information in the section titled “Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm” in the 2022 Proxy Statement is
incorporated by reference herein.
108
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Financial Statement Schedules:
(1) Financial Statements:
The information required by this Item is incorporated herein by reference to the financial statements set forth under Item 8 “Financial Statements and
Supplementary Data” of Part II of this Form 10-K.
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits:
See Part (b) of this Item 15.
(b) Exhibits: The following exhibits are filed herewith or incorporated herein by reference:
Exhibit No.
Document
3.1
Restated Certificate of Incorporation of Hanger, Inc., dated August 27, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed by the Registrant on August 29, 2012.)
3.2
Amended and Restated By-Laws of Hanger Orthopedic Group, Inc., as amended effective February 2, 2012. (Incorporated herein by reference
to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 6, 2012.)
4.1
Credit Agreement, dated March 6, 2018, among Hanger, Inc. and the lenders and agents party thereto. (Incorporated herein by reference to
Exhibit 4.1 to the Current Report on Form 8-K filed by the Registrant on March 6, 2018.)
4.2
First Amendment to Credit Agreement, dated as of May 4, 2020, among Hanger, Inc., the subsidiary guarantors party thereto, the revolving
lenders party thereto and Bank of America, N.A., as agent. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed by the Registrant on May 7, 2020.)
4.3
Second Amendment to Credit Agreement, dated as of November 23, 2021, among Hanger, Inc., the subsidiary guarantors party thereto, the
revolving lenders party thereto and Bank of America, N.A., as agent. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed by the Registrant on November 9, 2021.)
4.4
Description of Registrant’s Securities (Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2019.)
10.1
Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2011 (Incorporated herein by reference to Exhibit 10.4
to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010.)*
10.2
Hanger Orthopedic Group, Inc. 2010 Omnibus Incentive Plan. (Incorporated herein by reference to Annex A to Registrant’s Proxy Statement,
dated April 2, 2010, relating to the Registrant’s Annual Meeting of Stockholders held on May 13, 2010.)*
10.3
Form of Restricted Stock Agreement for Non-Employee Directors. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.)*
10.4
Form of Restricted Stock Agreement for Executives. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2010.)*
10.5
Form of Restricted Stock Agreement for Employees. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2010.)*
10.6
Form of Non-Employee Director Non-Qualified Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.)*
10.7
Form of Executive Non-Qualified Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2010.)*
109
10.8
Form of Non-Qualified Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2010.)*
10.9
Second Amended and Restated Employment Agreement, dated as of March 19, 2019, between Thomas E. Hartman and Hanger Prosthetics &
Orthotics, Inc. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 8-K filed by the Registrant on March
20, 2019.)*
10.10
Third Amended and Restated Employment Agreement, dated March 19, 2019, by and between Vinit K. Asar and Hanger, Inc. (Incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 20, 2019.)*
10.11
Defined Contribution Supplemental Retirement Plan, dated May 1, 2013. (Incorporated herein by reference to Exhibit 10.1 to the Current Report
on Form 8-K filed by the Registration on May 13, 2013.)*
10.12
Amended and Restated Employment Agreement, dated March 19, 2019, by and between Samuel M. Liang and Hanger Prosthetics & Orthotics,
Inc. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on March 20, 2019.)*
10.13
Amended and Restated Employment Agreement, dated March 19, 2019, by and between Thomas E. Kiraly and Hanger Prosthetics & Orthotics,
Inc. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on March 20, 2019.)*
10.14
Assignment of Employment Agreement, effective March 1, 2017, by and among Hanger Prosthetics & Orthotics, Inc., Hanger, Inc. and Vinit K.
Asar. (Incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K for the year ended December 31, 2014.)*
10.15
Assignment of Employment Agreement, effective March 1, 2017, by and among Hanger Prosthetics & Orthotics, Inc., Hanger, Inc. and Thomas
E. Kiraly. (Incorporated herein by reference to Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2014.)*
10.16
Hanger, Inc. 2016 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed by the Registrant on April 18, 2016.)*
10.17
Form of Executive Non-Qualified Stock Option Agreement under the 2016 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed by the Registrant on April 18, 2016.)*
10.18
Form of Non-Qualified Stock Option Agreement under the 2016 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to
the Registrant’s Current Report on Form 8-K filed by the Registrant on April 18, 2016.)*
10.19
Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2016 Omnibus Incentive Plan. (Incorporated herein by
reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed by the Registrant on April 18, 2016.)*
10.20
Form of Restricted Stock Unit Agreement for Executives under the 2016 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit
10.5 to the Registrant’s Current Report on Form 8-K filed by the Registrant on April 18, 2016.)*
10.21
Form of Restricted Stock Unit Agreement for Employees under the 2016 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit
10.6 to the Registrant’s Current Report on Form 8-K filed by the Registrant on April 18, 2016.)*
10.22
Form of Restricted Stock Unit Agreement for Non-Employee Directors under the 2016 Omnibus Incentive Plan. (Incorporated herein by
reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed by the Registrant on April 18, 2016.)*
10.23
Hanger, Inc. 2017 Special Equity Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed by
the Registrant on May 23, 2017.)*
10.24
Form of Non-Qualified Stock Option Agreement for Executives under the 2017 Special Equity Plan. (Incorporated herein by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed by the Registrant on May 23, 2017.)*
10.25
Form of Non-Qualified Stock Option Agreement for Employees under the 2017 Special Equity Plan. (Incorporated herein by reference to Exhibit
10.3 to the Registrant’s Current Report on Form 8-K filed by the Registrant on May 23, 2017.)*
10.26
Form of Performance Share Unit Agreement for Executives under the 2017 Special Equity Plan. (Incorporated herein by reference to Exhibit
10.4 to the Registrant’s Current Report on Form 8-K filed by the Registrant on May 23, 2017.)*
10.27
Form of Performance Share Unit Agreement for Employees under the 2017 Special Equity Plan. (Incorporated herein by reference to Exhibit
10.5 to the Registrant’s Current Report on Form 8-K filed by the Registrant on May 23, 2017.)*
10.28
Hanger, Inc. 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Annex A to the Company’s Definitive Proxy Statement for its
2019 Annual Meeting of Stockholders.)*
110
10.29
Form of Restricted Stock Unit Agreement for Employees under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to
Exhibit 4.4 to the Registrant’s Current Report on Form S-8 filed by the Registrant on May 20, 2019.)*
10.30
Form of Non-Qualified Stock Unit Agreement for Employees under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to
Exhibit 4.5 to the Registrant’s Current Report on Form S-8 filed by the Registrant on May 20, 2019.)*
10.31
Form of Performance Share Unit Agreement for Executives under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to
Exhibit 4.6 to the Registrant’s Current Report on Form S-8 filed by the Registrant on May 20, 2019.)*
10.32
Form of Non-Employee Director Restricted Stock Unit Agreement under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference
to Exhibit 4.7 to the Registrant’s Current Report on Form S-8 filed by the Registrant on May 20, 2019.)*
10.33
Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2019 Omnibus Incentive Plan. (Incorporated herein by
reference to Exhibit 4.8 to the Registrant’s Current Report on Form S-8 filed by the Registrant on May 20, 2019.)*
10.34
Amended and Restated Employment Agreement, dated March 11, 2019, by and between Scott Ranson and Hanger, Inc. (Incorporated herein
by reference to Exhibit 10.28 to the Registrant’s Current Annual Report on Form 10-K filed by the Registrant on March 14, 2019.)*
10.35
Form of Employment Agreement by and between certain executive officers and Hanger, Inc. (Incorporated herein by reference to Exhibit
10.29 to the Registrant’s Current Annual Report on Form 10-K filed by the Registrant on March 14, 2019.)*
10.36
Employment Agreement, dated November 2, 2020, between Peter A. Stoy and Hanger, Inc. (Incorporated herein by reference to Exhibit 10.29
to the Registrant’s Current Annual Report on Form 10-K filed by the Registrant on March 1, 2020.)*
21
List of Subsidiaries of the Registrant. (Filed herewith.)
23
Consent of Independent Registered Public Accounting Firm (Filed herewith.)
31.1
Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
31.2
Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
32
Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
101.INS
XBRL Instance Document. (Filed herewith.)
101.SCH
XBRL Taxonomy Extension Schema. (Filed herewith.)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LAB
XBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEF
XBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.)
__________________________
* Management contract or compensatory plan
ITEM 16. FORM 10-K SUMMARY.
None.
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 28, 2022
By:
/s/ VINIT K. ASAR
Vinit K. Asar
Chief Executive Officer
112
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Dated: February 28, 2022
/s/ VINIT K. ASAR
Vinit K. Asar
Chief Executive Officer and Director
(Principal Executive Officer)
Dated: February 28, 2022
/s/ THOMAS E. KIRALY
Thomas E. Kiraly
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: February 28, 2022
/s/ GABRIELLE B. ADAMS
Gabrielle B. Adams
Vice President - Chief Accounting Officer (Principal Accounting Officer)
Dated: February 28, 2022
/s/ ASIF AHMAD
Asif Ahmad
Director
Dated: February 28, 2022
/s/ CHRISTOPHER B. BEGLEY
Christopher B. Begley
Director
Dated: February 28, 2022
/s/ JOHN T. FOX
John T. Fox
Director
Dated: February 28, 2022
/s/ THOMAS C. FREYMAN
Thomas C. Freyman
Director
Dated: February 28, 2022
/s/ STEPHEN E. HARE
Stephen E. Hare
Director
Dated: February 28, 2022
/s/ MARK M. JONES
Mark M. Jones
Director
Dated: February 28, 2022
/s/ CYNTHIA L. LUCCHESE
Cynthia L. Lucchese Director
Dated: February 28, 2022
/s/ RICHARD R. PETTINGILL
Richard R. Pettingill
Director
Dated: February 28, 2022
/s/ KATHRYN M. SULLIVAN
Kathryn M. Sullivan
Director
113
Exhibit 21
Subsidiaries of Hanger, Inc. as of December 31, 2021
State or Other Jurisdiction of Incorporation or
Name
Organization
Accelerated Care Plus Corp.
Delaware
Accelerated Care Plus Leasing, Inc.
Delaware
Advanced Orthopro, Inc
Indiana
Advanced Prosthetics Center, LLC
Nebraska
Alliance Orthotics and Prosthetics, LLC
Texas
Bio-Tech Prosthetics and Orthotics, Inc.
North Carolina
Bio-Tech Prosthetics and Orthotics of High Point, Inc.
North Carolina
BioTech Prosthetics and Orthotics of Durham, Inc.
North Carolina
Boas Surgical, Inc.
Pennsylvania
Center for Orthotic & Prosthetic Care of North Carolina, Inc.
North Carolina
Center for Orthotic & Prosthetic Care of Scranton, LLC
Pennsylvania
Central Texas Orthotics & Prosthetics,LP
Texas
Corpus Christi Prosthetics, Inc.
Texas
Eastern Shore Orthotics & Prosthetics, Inc.
Alabama
Excel Prosthetics & Orthotics, Inc.
Virginia
Fountain Valley Orthotics and Prosthetics
California
Hanger, Inc.
Delaware
Hanger Fabrication Network LLC
Delaware
Hanger Institute for Clinical Research and Education, LLC
Delaware
Hanger Prosthetics & Orthotics, Inc.
Delaware
Hanger Prosthetics & Orthotics East, Inc.
Delaware
Hanger Prosthetics & Orthotics West, Inc.
California
Hanger VI, LLC
Delaware
Innovative Neurotronics, Inc.
Delaware
Linkia, LLC
Maryland
Midlands Prosthetics & Orthotics, Inc.
South Carolina
Mobility Prosthetics & Orthotics, Inc
Virginia
MMAR Medical Group, Inc.
Texas
Nascott, Inc.
Delaware
Next Step Orthopaedics, Inc.
New Jersey
Nobbe Orthopedics, Inc.
California
Northern Care, Inc.
Montana
Northern Orthopedics, Inc.
Alaska
Riverview Orthotics Prosthetics, Inc.
Pennsylvania
Round Rock Orthotics & Prosthetics, Inc.
Texas
Sawtooth Orthotics and Prosthetics, Inc.
Idaho
Scheck & Siress Prosthetics, Inc.
Illinois
Southern Prosthetic Supply, Inc.
Georgia
SureFit Shoes, LLC
Delaware
Symbiont Logistics, LLC
Delaware
Teter Orthotics & Prosthetics, Inc.
Michigan
The Center for Orthotic & Prosthetic Care of Kentucky, LLC
Kentucky
TMC Orthopedic, LP
Texas
Verhi, Inc.
Florida
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes‑Oxley Act and Rule 13a‑ 14(a)
or 15d‑14(a) under the Securities Exchange Act of 1934
I, Vinit K. Asar, certify that:
1. I have reviewed this annual report on Form 10-K of Hanger, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors, and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 28, 2022
By:
/s/ VINIT K. ASAR
Vinit K. Asar
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes‑Oxley Act and Rule 13a‑ 14(a)
or 15d‑14(a) under the Securities Exchange Act of 1934
I, Thomas E. Kiraly, certify that:
1. I have reviewed this annual report on Form 10-K of Hanger, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors, and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 28, 2022
By:
/s/ THOMAS E. KIRALY
Thomas E. Kiraly
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
Written Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002
Solely for the purposes of complying with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief
Executive Officer and Chief Financial Officer of Hanger, Inc. (the “Company”), hereby certify, based on our knowledge, that the Annual Report on Form 10-K of
the Company for the period ended December 31, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ VINIT K. ASAR
Vinit K. Asar
Chief Executive Officer
(Principal Executive Officer)
/s/ THOMAS E. KIRALY
Thomas E. Kiraly
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Dated: February 28, 2022