Quarterly Report (10-q)

Date : 08/07/2019 @ 8:19PM
Source : Edgar (US Regulatory)
Stock : Hanger Inc (HNGR)
Quote : 26.88  0.26 (0.98%) @ 9:49PM
After Hours
Last Trade
Last $ 26.88 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended June 30, 2019

 

OR

 

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

 

For the transition period from

 

to

 

Commission File Number 1-10670

 

HANGER, INC.

(Exact name of registrant as specified in its charter.)

 

Delaware
(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

 

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,  smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Emerging growth company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

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

 

As of July 30, 2019 the registrant had 37,302,689 shares of its Common Stock outstanding.

 

 

 


Table of Contents

 

PART 1.                     FINANCIAL INFORMATION

 

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except par value and share amounts)

(Unaudited)

 

 

 

As of June 30,

 

As of December 31,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

38,229

 

$

95,114

 

Accounts receivable, net

 

148,275

 

143,986

 

Inventories

 

71,110

 

67,690

 

Income taxes receivable

 

1,718

 

379

 

Other current assets

 

14,888

 

18,731

 

Total current assets

 

274,220

 

325,900

 

Non-current assets:

 

 

 

 

 

Property, plant and equipment, net

 

85,210

 

89,489

 

Goodwill

 

226,732

 

198,742

 

Other intangible assets, net

 

15,770

 

15,478

 

Deferred income taxes

 

66,682

 

65,635

 

Operating lease right-of-use assets

 

104,632

 

 

Other assets

 

7,589

 

7,766

 

Total assets

 

$

780,835

 

$

703,010

 

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

8,648

 

$

8,583

 

Accounts payable

 

52,268

 

55,797

 

Accrued expenses and other current liabilities

 

53,107

 

51,783

 

Accrued compensation related costs

 

37,309

 

55,111

 

Current portion of operating lease liabilities

 

30,592

 

 

Total current liabilities

 

181,924

 

171,274

 

Long-term liabilities:

 

 

 

 

 

Long-term debt, less current portion

 

489,662

 

502,090

 

Operating lease liabilities

 

85,046

 

 

Other liabilities

 

46,033

 

51,570

 

Total liabilities

 

802,665

 

724,934

 

Commitments and contingencies (Note R)

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

Common stock, $0.01 par value; 60,000,000 shares authorized; 37,478,087 shares issued and 37,335,266 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018

 

375

 

371

 

Additional paid-in capital

 

347,012

 

343,955

 

Accumulated other comprehensive loss

 

(12,143

)

(4,531

)

Accumulated deficit

 

(356,378

)

(361,023

)

Treasury stock, at cost; 142,821 shares at 2019 and 2018, respectively

 

(696

)

(696

)

Total shareholders’ deficit

 

(21,830

)

(21,924

)

Total liabilities and shareholders’ deficit

 

$

780,835

 

$

703,010

 

 

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

 

1


Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net revenues

 

$

281,098

 

$

266,966

 

$

517,517

 

$

500,961

 

Material costs

 

91,399

 

86,516

 

169,776

 

162,872

 

Personnel costs

 

91,490

 

89,554

 

178,201

 

175,662

 

Other operating costs

 

33,741

 

30,536

 

67,296

 

61,632

 

General and administrative expenses

 

29,358

 

26,523

 

57,640

 

52,159

 

Professional accounting and legal fees

 

3,247

 

4,236

 

5,947

 

9,082

 

Depreciation and amortization

 

8,760

 

9,272

 

17,533

 

18,602

 

Income from operations

 

23,103

 

20,329

 

21,124

 

20,952

 

Interest expense, net

 

8,481

 

7,317

 

17,019

 

19,580

 

Loss on extinguishment of debt

 

 

 

 

16,998

 

Non-service defined benefit plan expense

 

173

 

176

 

346

 

352

 

Income (loss) before income taxes

 

14,449

 

12,836

 

3,759

 

(15,978

)

Provision (benefit) for income taxes

 

4,414

 

(92

)

675

 

(6,288

)

Net income (loss)

 

$

10,035

 

$

12,928

 

$

3,084

 

$

(9,690

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Per Common Share Data:

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.27

 

$

0.35

 

$

0.08

 

$

(0.26

)

Weighted average shares used to compute basic earnings per common share

 

37,299,766

 

36,790,401

 

37,151,694

 

36,645,248

 

Diluted income (loss) per share

 

$

0.26

 

$

0.35

 

$

0.08

 

$

(0.26

)

Weighted average shares used to compute diluted earnings per common share

 

37,887,559

 

37,404,360

 

37,889,586

 

36,645,248

 

 

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

 

2


Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net income (loss)

 

$

10,035

 

$

12,928

 

$

3,084

 

$

(9,690

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on cash flow hedges, net of tax of ($1,476), $710, ($2,400), and $8, respectively

 

$

(4,688

)

$

2,314

 

$

(7,624

)

$

24

 

Unrealized gain (loss) on defined benefit plan, net of tax of $2, $0, $4, and ($105), respectively

 

6

 

26

 

12

 

(266

)

Total other comprehensive (loss) income

 

(4,682

)

2,340

 

(7,612

)

(242

)

Comprehensive income (loss)

 

$

5,353

 

$

15,268

 

$

(4,528

)

$

(9,932

)

 

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

 

3


Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(dollars and share amounts in thousands)

(Unaudited)

 

 

 

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 (Note A)

 

 

 

 

 

1,561

 

 

1,561

 

Balance, January 1, 2019

 

36,921

 

371

 

343,955

 

(4,531

)

(359,462

)

(696

)

(20,363

)

Net loss

 

 

 

 

 

(6,951

)

 

(6,951

)

Shares based compensation expense

 

 

 

3,265

 

 

 

 

3,265

 

Issuance of common stock upon vesting of restricted stock units

 

350

 

3

 

(3

)

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(3,626

)

 

 

 

(3,626

)

Total other comprehensive loss

 

 

 

 

(2,930

)

 

 

(2,930

)

Balance, March 31, 2019

 

37,271

 

$

374

 

$

343,591

 

$

(7,461

)

$

(366,413

)

$

(696

)

$

(30,605

)

Net income

 

 

 

 

 

10,035

 

 

10,035

 

Shares based compensation expense

 

 

 

3,450

 

 

 

 

3,450

 

Issuance of common stock upon vesting of restricted stock units

 

64

 

1

 

(1

)

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(28

)

 

 

 

(28

)

Total other comprehensive loss

 

 

 

 

(4,682

)

 

 

(4,682

)

Balance, June 30, 2019

 

37,335

 

$

375

 

$

347,012

 

$

(12,143

)

$

(356,378

)

$

(696

)

$

(21,830

)

 

 

 

Common
Shares,
Balance

 

Common
Stock,
Par
Value

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Treasury
Stock

 

Total

 

Balance, December 31, 2017

 

36,372

 

$

365

 

$

333,738

 

$

(1,686

)

$

(359,772

)

$

(696

)

$

(28,051

)

Cumulative effect of a change in accounting for revenue recognition

 

 

 

 

 

(759

)

 

(759

)

Balance, January 1, 2018

 

36,372

 

365

 

333,738

 

(1,686

)

(360,531

)

(696

)

(28,810

)

Net loss

 

 

 

 

 

(22,618

)

 

(22,618

)

Shares based compensation expense

 

 

 

2,585

 

 

 

 

2,585

 

Issuance of common stock upon vesting of restricted stock units

 

372

 

4

 

(4

)

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(2,150

)

 

 

 

(2,150

)

Total other comprehensive loss

 

 

 

 

(2,582

)

 

 

(2,582

)

Balance, March 31, 2018

 

36,744

 

$

369

 

$

334,169

 

$

(4,268

)

$

(383,149

)

$

(696

)

$

(53,575

)

Net income

 

 

 

 

 

12,928

 

 

12,928

 

Shares based compensation expense

 

 

 

3,320

 

 

 

 

3,320

 

Issuance of common stock upon vesting of restricted stock units

 

106

 

1

 

(1

)

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(313

)

 

 

 

(313

)

Total other comprehensive income

 

 

 

 

2,340

 

 

 

2,340

 

Balance, June 30, 2018

 

36,850

 

$

370

 

$

337,175

 

$

(1,928

)

$

(370,221

)

$

(696

)

$

(35,300

)

 

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

 

4


Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2019

 

2018

 

Cash flows (used in) provided by operating activities:

 

 

 

 

 

Net income (loss)

 

$

3,084

 

$

(9,690

)

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

 

 

 

 

 

Depreciation and amortization

 

17,533

 

18,602

 

Amortization of right-of-use assets

 

18,289

 

 

Provision (benefit) for doubtful accounts

 

304

 

(602

)

Stock-based compensation expense

 

6,715

 

5,906

 

Deferred income taxes

 

779

 

(6,511

)

Amortization of debt discounts and issuance costs

 

797

 

2,186

 

Loss on extinguishment of debt

 

 

16,998

 

Gain on sale and disposal of fixed assets

 

(792

)

(1,349

)

Changes in operating assets and liabilities (Note T)

 

(50,248

)

(8,632

)

Net cash (used in) provided by operating activities

 

(3,539

)

16,908

 

Cash flows used in investing activities

 

 

 

 

 

Purchase of property, plant, and equipment

 

(14,806

)

(11,322

)

Purchase of therapeutic program equipment leased to third parties under operating leases

 

(3,530

)

(3,822

)

Acquisitions, net of cash acquired

 

(27,916

)

 

Purchase of company-owned life insurance investment

 

 

(598

)

Proceeds from sale of property, plant and equipment

 

1,476

 

1,682

 

Net cash used in investing activities

 

(44,776

)

(14,060

)

Cash flows (used in) provided by financing activities

 

 

 

 

 

Borrowings under term loan, net of discount

 

 

500,204

 

Repayment of term loan

 

(2,525

)

(431,875

)

Borrowings under revolving credit agreement

 

 

3,000

 

Repayments under revolving credit agreement

 

 

(8,000

)

Payment of employee taxes on stock-based compensation

 

(3,654

)

(2,463

)

Payment on seller notes

 

(2,162

)

(1,765

)

Payment of financing lease obligations

 

(229

)

(682

)

Payment of debt issuance costs

 

 

(6,487

)

Payment of debt extinguishment costs

 

 

(8,436

)

Net cash (used in) provided by financing activities

 

(8,570

)

43,496

 

(Decrease) increase in cash, cash equivalents, and restricted cash

 

(56,885

)

46,344

 

Cash, cash equivalents, and restricted cash, at beginning of period

 

95,114

 

4,779

 

Cash, cash equivalents, and restricted cash, at end of period

 

$

38,229

 

$

51,123

 

Reconciliation of Cash, Cash Equivalents, and Restricted Cash:

 

 

 

 

 

Cash and cash equivalents, at beginning of period

 

$

95,114

 

$

1,508

 

Restricted cash, at beginning of period

 

 

3,271

 

Cash, cash equivalents, and restricted cash, at beginning of period

 

$

95,114

 

$

4,779

 

 

 

 

 

 

 

Cash and cash equivalents, at end of period

 

$

38,229

 

$

48,792

 

Restricted cash, at end of period

 

 

2,331

 

Cash, cash equivalents, and restricted cash, at end of period

 

$

38,229

 

$

51,123

 

 

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

 

5


Table of Contents

 

HANGER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note A — Organization and Summary of Significant Accounting Policies

 

Description of Business

 

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

 

Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”), as previously filed with the Securities and Exchange Commission (“SEC”).

 

In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position, and cash flows.  All such adjustments are of a normal, recurring nature.  The results of operations for the interim periods are not necessarily indicative of those to be expected for the full year.

 

A detailed description of our significant accounting policies and management judgments is contained in our 2018 Form 10-K.

 

Recently Adopted Accounting Standards

 

Leases

 

We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives.  Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the lease commencement date.  We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases.  Our leases may include variable payments for maintenance, which are expensed as incurred.

 

In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings.  The therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided.  These operating lease agreements are typically for twelve months and have a 30-day cancellation policy.  We do not separate non-lease components, consisting primarily of training, for these leases.

 

6


Table of Contents

 

Effect of Adoption of ASC 842

 

We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842), and related clarifying standards, as of January 1, 2019, using the modified retrospective approach.  This approach allows us to apply the standard as of the adoption date and record a cumulative-effect adjustment to the opening balance of accumulated deficit at January 1, 2019.  The new lease standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and recognize expenses on the consolidated statements of operations on a straight-line basis.

 

In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases.  By electing the modified retrospective approach on adoption date, prior period results will continue to be presented under legacy guidance based on the accounting standards originally in effect for such period.  We have elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.  We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective.  From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.  The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.

 

The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability.  As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term.  Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur.  We rent or sublease certain real estate to third parties.  Our sublease portfolio consists mainly of operating leases on small medical office locations.

 

The most significant impact of the new lease standard will be on the balance sheet, where values have been added for real estate operating leases, which increases both assets and liabilities.  The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard.  The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations.  The impact of applying the new lease standard to our results of operations and cash flows is not significant.

 

Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842.  Accordingly, these leases have been reassessed as operating leases as of January 1, 2019.  The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction.  The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control.  Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019.  The resulting cumulative effect recognized at adoption to accumulated deficit was $1.6 million, net of tax.

 

7


Table of Contents

 

Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 was as follows:

 

 

 

December 31, 2018

 

Effects of

 

January 1, 2019

 

(in thousands)

 

As reported

 

adoption

 

After adoption

 

Assets

 

 

 

 

 

 

 

Other current assets

 

$

18,731

 

$

(5,770

)

$

12,961

 

Total current assets

 

325,900

 

(5,770

)

320,130

 

Property, plant and equipment, net

 

89,489

 

(8,068

)

81,421

 

Other intangible assets, net

 

15,478

 

(220

)

15,258

 

Deferred income taxes

 

65,635

 

(570

)

65,065

 

Operating lease right-of-use assets

 

 

103,378

 

103,378

 

Other assets

 

7,766

 

538

 

8,304

 

Total assets

 

703,010

 

89,288

 

792,298

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

8,583

 

(619

)

7,964

 

Accrued expenses and other current liabilities

 

51,783

 

(1,352

)

50,431

 

Current portion of operating lease liabilities

 

 

31,479

 

31,479

 

Total current liabilities

 

171,274

 

29,508

 

200,782

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt, less current portion

 

502,090

 

(12,493

)

489,597

 

Operating lease liabilities

 

 

83,662

 

83,662

 

Other liabilities

 

51,570

 

(12,950

)

38,620

 

Total liabilities

 

724,934

 

87,727

 

812,661

 

Shareholders’ deficit:

 

 

 

 

 

 

 

Accumulated deficit

 

(361,023

)

1,561

 

(359,462

)

Total shareholders’ deficit

 

(21,924

)

1,561

 

(20,363

)

Total liabilities and shareholders’ deficit

 

$

703,010

 

$

89,288

 

$

792,298

 

 

Recent Accounting Pronouncements, Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and related clarifying standards, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  This ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted.  We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) , which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers.  The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income.  The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted.  We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

 

8


Table of Contents

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715) .  This ASU modifies the disclosure requirements for defined benefit and other postretirement plans.  This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations.  This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations.  The amendments in this ASU are effective for public entities for fiscal years ending after December 15, 2020 and for interim periods therein with early adoption permitted.  We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

 

In August 2018, the FASB issued ASU 2018-15,  Intangibles - Goodwill and Other - Internal-Use Software (Topic 350) .  The ASU is intended to improve the recognition and measurement of financial instruments.  The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  This ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

 

Note B — Earnings Per Share

 

Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is computed using the weighted average number of common shares outstanding during the period plus any potentially dilutive common shares, such as stock options, restricted stock units, and performance-based units calculated using the treasury stock method.  Total anti-dilutive shares excluded from the diluted earnings per share were zero for the three and six months ended June 30, 2019 and 54,467 and 119,881 for the three and six months ended June 30, 2018.

 

Our credit agreement restricts the payment of dividends or other distributions to our shareholders with respect to Hanger, Inc., or any of its subsidiaries.

 

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

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(in thousands except per share data)

 

2019

 

2018

 

2019

 

2018

 

Net income (loss)

 

$

10,035

 

$

12,928

 

$

3,084

 

$

(9,690

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

37,300

 

36,790

 

37,152

 

36,645

 

Effect of potentially dilutive restricted stock units and options (1)

 

588

 

614

 

738

 

 

Weighted average shares outstanding - diluted

 

37,888

 

37,404

 

37,890

 

36,645

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.27

 

$

0.35

 

$

0.08

 

$

(0.26

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share

 

$

0.26

 

$

0.35

 

$

0.08

 

$

(0.26

)

 


(1)  In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amounts exclude potentially dilutive shares related to unvested restricted stock units and unexercised options.  For the six months ended June 30, 2018, shares excluded were 669,641.

 

9


Table of Contents

 

Note C — Revenue Recognition

 

Patient Care Segment

 

Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device.  At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs, and private or patient pay (“Private Pay”) individuals.  We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit price concessions.  These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.

 

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three and six months ended June 30, 2019 and 2018:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2019

 

2018

 

2019

 

2018

 

Patient Care Segment

 

 

 

 

 

 

 

 

 

Medicare

 

$

75,640

 

$

70,469

 

$

133,416

 

$

127,781

 

Medicaid

 

37,344

 

33,648

 

67,491

 

63,400

 

Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)

 

78,808

 

77,621

 

149,026

 

148,432

 

Veterans Administration

 

22,497

 

20,904

 

40,819

 

37,547

 

Private Pay

 

16,879

 

15,516

 

31,017

 

29,505

 

Total

 

$

231,168

 

$

218,158

 

$

421,769

 

$

406,665

 

 

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

 

Products & Services Segment

 

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

 

The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three and six months ended June 30, 2019 and 2018:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2019

 

2018

 

2019

 

2018

 

Products & Services Segment

 

 

 

 

 

 

 

 

 

Distribution services, net of intersegment revenue eliminations

 

$

37,662

 

$

34,684

 

$

70,857

 

$

66,035

 

Therapeutic solutions

 

12,268

 

14,124

 

24,891

 

28,261

 

Total

 

$

49,930

 

$

48,808

 

$

95,748

 

$

94,296

 

 

10


Table of Contents

 

Note D — Accounts Receivable, Net

 

Accounts receivable, net represents outstanding amounts we expect to collect from the transfer of our products and services.  Principally, these amounts are comprised of receivables from Medicare, Medicaid, and commercial insurance plans.  Our accounts receivable represent amounts outstanding from our gross billings, net of contractual discounts and other implicit price concessions including estimates for payor disallowances, sales returns, and patient non-payments.

 

An allowance for doubtful accounts is also recorded for our Products & Services segment which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.”  Accounts receivable, net as of June 30, 2019 and December 31, 2018 is comprised of the following:

 

 

 

As of June 30, 2019

 

As of December 31, 2018

 

(in thousands)

 

Patient Care

 

Products &
Services

 

Consolidated

 

Patient Care

 

Products &
Services

 

Consolidated

 

Accounts receivable, before allowances

 

$

186,959

 

$

27,615

 

$

214,574

 

$

182,338

 

$

24,542

 

$

206,880

 

Allowances for estimated implicit price concessions arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Payor disallowances

 

(55,900

)

 

(55,900

)

(53,378

)

 

(53,378

)

Patient non-payments

 

(8,066

)

 

(8,066

)

(7,244

)

 

(7,244

)

Accounts receivable, gross

 

122,993

 

27,615

 

150,608

 

121,716

 

24,542

 

146,258

 

Allowance for doubtful accounts

 

 

(2,333

)

(2,333

)

 

(2,272

)

(2,272

)

Accounts receivable, net

 

$

122,993

 

$

25,282

 

$

148,275

 

$

121,716

 

$

22,270

 

$

143,986

 

 

Note E — Inventories

 

Our inventories are comprised of the following:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Raw materials

 

$

20,574

 

$

19,632

 

Work in process

 

13,136

 

9,278

 

Finished goods

 

37,400

 

38,780

 

Total inventories

 

$

71,110

 

$

67,690

 

 

11


Table of Contents

 

Note F — Property, Plant and Equipment, Net

 

Property, plant and equipment, net were comprised of the following:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Land

 

$

634

 

$

644

 

Buildings (1)

 

3,986

 

24,558

 

Furniture and fixtures

 

13,561

 

13,121

 

Machinery and equipment

 

27,089

 

27,452

 

Equipment leased to third parties under operating leases

 

29,633

 

30,093

 

Leasehold improvements

 

127,368

 

111,247

 

Computers and software

 

73,563

 

69,173

 

Total property, plant and equipment, gross

 

275,834

 

276,288

 

Less: accumulated depreciation

 

(190,624

)

(186,799

)

Total property, plant and equipment, net

 

$

85,210

 

$

89,489

 

 


(1)  As discussed in Note A - “ Organization and Summary of Significant Accounting Policies ”, the new lease standard resulted in the removal of assets associated with build-to-suit leases.

 

Total depreciation expense was approximately $7.7 million and $15.1 million for the three and six months ended June 30, 2019 and $7.5 million and $14.8 million for the three and six months ended June 30, 2018.

 

Note G — Acquisitions

 

2019 Acquisition Activity

 

During 2019, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows.  Each acquisition is intended to expand our continuum of patient care through the acquisitions of high quality O&P providers in new geographic markets.

 

·                   In January 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $32.8 million, of which $27.7 million was cash consideration, net of cash acquired, $4.4 million was issued in the form of notes to shareholders at fair value, and $0.7 million is estimated additional consideration expected to be paid in the third quarter of 2019.

 

·                   In May 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $0.5 million, of which $0.2 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

 

The notes issued to shareholders are unsecured and payable in installments over a period of 3 to 5 years.

 

12


Table of Contents

 

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.  The estimated fair values of intangible assets were based on an income approach utilizing primarily discounted cash flow techniques for non-compete agreements and an income approach utilizing the excess earnings method for customer relationships.  The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions.  Other significant judgments used in the valuation of tangible assets acquired in the acquisition include estimated selling price of inventory and estimated replacement costs for acquired property, plant and equipment.  For all other assets acquired and liabilities assumed, the fair value reflects the carrying value of the asset or liability due to their short maturity.  The excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired was recorded as goodwill.  The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce.  We expect that substantially all of the goodwill, which has been assigned to our Patient Care reporting unit, will be deductible for federal income tax purposes.

 

Acquisition-related costs of $0.3 million and $0.5 million for the three and six months ended June 30, 2019 related to the acquisition are included in General and administrative expenses in our consolidated statement of operations.

 

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

 

Purchase Price Allocation

 

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the 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.

 

The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows (in thousands):

 

Cash paid, net of cash acquired

 

$

27,916

 

Issuance of seller notes at fair value

 

4,686

 

Additional consideration (1)

 

659

 

Aggregate purchase price

 

33,261

 

 

 

 

 

Accounts receivable, net

 

3,561

 

Inventories

 

1,558

 

Customer relationships (Useful life of 3.0 years)

 

2,368

 

Non-compete agreements (Weighted average useful life of 4.9 years)

 

349

 

Other assets

 

413

 

Accounts payable

 

(1,264

)

Accrued expenses and other liabilities

 

(1,714

)

Net assets acquired

 

5,271

 

Goodwill

 

$

27,990

 

 


(1)  Represents additional consideration that we anticipate will be payable to the seller in the third quarter of 2019, subject to agreement of certain tax elections with the seller.

 

13


Table of Contents

 

2018 Acquisition Activity

 

In the fourth quarter of 2018, we acquired two O&P businesses for an aggregate purchase price of $3.1 million, net of cash acquired.  These acquisitions were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction.

 

The aggregate purchase price for these acquisitions was allocated as follows (in thousands):

 

Cash paid, net of cash acquired

 

$

1,978

 

Issuance of seller notes

 

1,120

 

Aggregate purchase price

 

3,098

 

 

 

 

 

Accounts receivable, net

 

256

 

Inventories

 

302

 

Customer relationships (Weighted average useful life of 4.0 years)

 

260

 

Non-compete agreements (Weighted average useful life of 4.6 years)

 

214

 

Other assets

 

90

 

Accounts payable

 

(59

)

Accrued expenses and other liabilities

 

(364

)

Net assets acquired

 

699

 

Goodwill

 

$

2,399

 

 

Note H — Goodwill and Other Intangible Assets

 

We assess goodwill and indefinite-lived intangible assets for impairment annually on October 1st, and between annual tests if an event occurs, or circumstances change, that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

 

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

 

 

 

For the Six Months Ended June 30, 2019

 

 

 

Patient Care

 

Products & Services

 

Consolidated

 

(in thousands)

 

Goodwill,
Gross

 

Accumulated
Impairment

 

Goodwill,
Net

 

Goodwill,
Gross

 

Accumulated
Impairment

 

Goodwill,
Net

 

Goodwill,
Gross

 

Accumulated
Impairment

 

Goodwill,
Net

 

As of December 31, 2018

 

$

627,410

 

$

(428,668

)

198,742

 

$

139,299

 

$

(139,299

)

 

$

766,709

 

$

(567,967

)

198,742

 

Additions from acquisitions

 

27,961

 

 

27,961

 

 

 

 

27,961

 

 

27,961

 

Measurement period adjustments

 

29

 

 

29

 

 

 

 

29

 

 

29

 

As of June 30, 2019

 

$

655,400

 

$

(428,668

)

$

226,732

 

$

139,299

 

$

(139,299

)

$

 

$

794,699

 

$

(567,967

)

$

226,732

 

 

 

 

For the Year Ended December 31, 2018

 

 

 

Patient Care

 

Products & Services

 

Consolidated

 

(in thousands)

 

Goodwill,
Gross

 

Accumulated
Impairment

 

Goodwill,
Net

 

Goodwill,
Gross

 

Accumulated
Impairment

 

Goodwill,
Net

 

Goodwill,
Gross

 

Accumulated
Impairment

 

Goodwill,
Net

 

As of December 31, 2017

 

$

625,011

 

$

(428,668

)

$

196,343

 

$

139,299

 

$

(139,299

)

$

 

$

764,310

 

$

(567,967

)

$

196,343

 

Additions from acquisitions

 

2,399

 

 

2,399

 

 

 

 

2,399

 

 

2,399

 

As of December 31, 2018

 

$

627,410

 

$

(428,668

)

$

198,742

 

$

139,299

 

$

(139,299

)

$

 

$

766,709

 

$

(567,967

)

$

198,742

 

 

14


Table of Contents

 

The balances related to intangible assets as of June 30, 2019 and December 31, 2018 are as follows:

 

 

 

As of June 30, 2019

 

(in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Accumulated
Impairment

 

Net Carrying
Amount

 

Customer lists

 

$

27,825

 

$

(20,311

)

$

 

$

7,514

 

Trade name

 

255

 

(138

)

 

117

 

Patents and other intangibles

 

9,238

 

(5,216

)

 

4,022

 

Definite-lived intangible assets

 

37,318

 

(25,665

)

 

11,653

 

Indefinite-lived trade names

 

9,070

 

 

(4,953

)

4,117

 

Total other intangible assets

 

$

46,388

 

$

(25,665

)

$

(4,953

)

$

15,770

 

 

 

 

As of December 31, 2018

 

(in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Accumulated
Impairment

 

Net Carrying
Amount

 

Customer lists

 

$

26,036

 

$

(19,051

)

$

 

$

6,985

 

Trade name

 

255

 

(125

)

 

130

 

Patents and other intangibles

 

9,391

 

(5,145

)

 

4,246

 

Definite-lived intangible assets

 

35,682

 

(24,321

)

 

11,361

 

Indefinite-lived trade names

 

9,070

 

 

(4,953

)

4,117

 

Total other intangible assets

 

$

44,752

 

$

(24,321

)

$

(4,953

)

$

15,478

 

 

Total intangible amortization expense was approximately $1.1 million and $2.4 million for the three and six months ended June 30, 2019 and $1.8 million and $3.8 million for the three and six months ended June 30, 2018.

 

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

 

(in thousands)

 

 

 

2019 (remainder of the year)

 

$

2,235

 

2020

 

4,211

 

2021

 

1,628

 

2022

 

1,556

 

2023

 

914

 

Thereafter

 

1,109

 

Total

 

$

11,653

 

 

15


Table of Contents

 

Note I — Other Current Assets and Other Assets

 

Other current assets consist of the following:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Non-trade receivables

 

$

5,674

 

$

7,848

 

Prepaid maintenance

 

4,016

 

3,330

 

Prepaid other

 

1,666

 

1,101

 

Prepaid insurance

 

1,217

 

258

 

Prepaid purchase orders

 

890

 

998

 

Prepaid rent

 

773

 

4,442

 

Prepaid education and training

 

586

 

597

 

Other

 

66

 

157

 

Total other current assets

 

$

14,888

 

$

18,731

 

 

Other assets consist of the following:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Cash surrender value of company-owned life insurance

 

$

3,027

 

$

2,918

 

Non-trade receivables

 

1,903

 

1,904

 

Deposits

 

1,828

 

1,698

 

Finance lease right-of-use assets

 

614

 

 

Surety bond collateral

 

 

1,000

 

Other

 

217

 

246

 

Total other assets

 

$

7,589

 

$

7,766

 

 

Note J — Accrued Expenses and Other Current Liabilities and Other Liabilities

 

Accrued expenses and other current liabilities consist of:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Patient prepayments, deposits and refunds payable

 

$

25,006

 

$

24,563

 

Insurance and self-insurance accruals

 

8,330

 

8,886

 

Accrued sales taxes and other taxes

 

8,195

 

6,810

 

Derivative liability

 

2,805

 

724

 

Accrued professional fees

 

1,339

 

3,751

 

Accrued interest payable

 

501

 

332

 

Other current liabilities

 

6,931

 

6,717

 

Total accrued expenses and other current liabilities

 

$

53,107

 

$

51,783

 

 

16


Table of Contents

 

Other liabilities consist of:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Supplemental executive retirement plan obligations

 

$

18,865

 

$

20,195

 

Derivative liability

 

11,078

 

3,134

 

Long-term insurance accruals

 

8,393

 

8,713

 

Unrecognized tax benefits, and related interest and penalties

 

5,407

 

5,458

 

Deferred tenant improvement allowances

 

 

8,570

 

Deferred rent

 

 

4,455

 

Other

 

2,290

 

1,045

 

Total other liabilities

 

$

46,033

 

$

51,570

 

 

Note K — Income Taxes

 

We recorded a provision for income taxes of $4.4 million and $0.7 million for the three and six months ended June 30, 2019.  The effective tax rate was 30.5% and 18.0% for the three and six months ended June 30, 2019.  We recorded a benefit for income taxes of $0.1 million and $6.3 million for the three and six months ended June 30, 2018.  The effective rate was (0.7)% and 39.4% for the three and six months ended June 30, 2018.

 

The increase in the effective tax rate for the three months ended June 30, 2019 compared with the three months ended June 30, 2018 is primarily attributable to the change to the annualized effective tax rate method from the discrete method used during the prior period, an increased estimated annual pre-tax book income, and the windfall from stock-based compensation during the period.  Our effective tax rate for the three months ended June 30, 2019 and June 30, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the windfall from stock-based compensation during the period.

 

The decrease in the effective tax rate for the six months ended June 30, 2019 compared with the six months ended June 30, 2018 is primarily attributable to an increased estimated annual income, an increase in pre-tax book income for the six months ended June 30, 2019, and the windfall from stock-based compensation during the period.  Our effective tax rate for the six months ended June 30, 2019 and June 30, 2018 differed from the federal statutory tax rate of 21% primarily due to the windfall and shortfall from stock based compensation expense in the respective periods, as well as non-deductible expenses.

 

17


Table of Contents

 

Note L — Leases

 

The information pertaining to leases on the condensed consolidated balance sheet is as follows:

 

(in thousands)

 

Classification

 

As of June 30, 2019

 

Assets

 

 

 

 

 

Operating lease right-of-use assets

 

Operating lease right-of-use assets

 

$

104,632

 

Finance lease right-of-use assets

 

Other assets

 

614

 

Total lease assets

 

 

 

$

105,246

 

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Operating

 

Current portion of operating lease liabilities

 

$

30,592

 

Finance

 

Current portion of long-term debt

 

259

 

Noncurrent

 

 

 

 

 

Operating

 

Operating lease liabilities

 

85,046

 

Finance

 

Long-term debt, less current portion

 

368

 

Total lease liabilities

 

 

 

$

116,265

 

 

The components of lease cost recognized in the condensed consolidated statement of operations are as follows:

 

(in thousands)

 

For the Three Months Ended
June 30, 2019

 

For the Six Months Ended
June 30, 2019

 

Operating lease cost

 

$

10,794

 

$

21,630

 

Finance lease cost

 

 

 

 

 

Amortization of right-of-use assets

 

75

 

150

 

Interest on lease liabilities

 

6

 

12

 

Sublease income

 

(46

)

(79

)

Short-term lease cost

 

222

 

414

 

Variable lease cost

 

1,813

 

3,030

 

Total lease cost

 

$

12,864

 

$

25,157

 

 

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at June 30, 2019 are as follows:

 

(in thousands)

 

Finance
Leases

 

Operating
Leases

 

Total Leases

 

2019 (remainder of year)

 

$

150

 

$

15,873

 

$

16,023

 

2020

 

244

 

38,090

 

38,334

 

2021

 

172

 

28,788

 

28,960

 

2022

 

86

 

20,890

 

20,976

 

2023

 

14

 

13,711

 

13,725

 

2024

 

 

7,287

 

7,287

 

Thereafter

 

 

6,210

 

6,210

 

Total future minimum lease payments

 

666

 

130,849

 

131,515

 

Imputed interest

 

(39

)

(15,211

)

(15,250

)

Total

 

$

627

 

$

115,638

 

$

116,265

 

 

18


Table of Contents

 

The lease term and discount rates are as follows:

 

 

 

For the Six Months Ended
June 30, 2019

 

Weighted average remaining lease term (years)

 

 

 

Operating leases

 

3.94

 

Finance leases

 

2.72

 

Weighted average discount rate

 

 

 

Operating leases

 

5.69

%

Finance leases

 

4.25

%

 

Supplemental cash flow information related to leases is as follows:

 

(in thousands)

 

For the Six Months Ended
June 30, 2019

 

Cash flows for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

$

22,704

 

Operating cash flows from finance leases

 

12

 

Financing cash flows from finance leases

 

156

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating leases

 

19,699

 

Finance leases

 

209

 

 

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at December 31, 2018 are as follows:

 

(in thousands)

 

Operating
Leases

 

Capital
Leases

 

2019

 

$

39,378

 

$

249

 

2020

 

29,641

 

175

 

2021

 

21,303

 

109

 

2022

 

14,479

 

28

 

2023

 

9,193

 

 

Thereafter

 

10,008

 

 

 

 

$

124,002

 

$

561

 

 

19


Table of Contents

 

Note M — Debt and Other Obligations

 

Debt consists of the following:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Debt:

 

 

 

 

 

Term Loan B

 

$

498,688

 

$

501,213

 

Seller notes

 

7,264

 

4,506

 

Financing leases and other

 

1,231

 

14,361

 

Total debt before unamortized discount and debt issuance costs

 

507,183

 

520,080

 

Unamortized discount and debt issuance costs, net

 

(8,873

)

(9,407

)

Total debt

 

$

498,310

 

$

510,673

 

 

 

 

 

 

 

Current portion of long-term debt:

 

 

 

 

 

Term Loan B

 

$

5,050

 

$

5,050

 

Seller notes

 

3,186

 

2,513

 

Financing leases and other

 

412

 

1,020

 

Total current portion of long-term debt

 

8,648

 

8,583

 

Long-term debt:

 

$

489,662

 

$

502,090

 

 

Refinancing of Credit Agreement and Term B Borrowings

 

On March 6, 2018, we entered into a $605.0 million Senior Credit Facility (the “Credit Agreement”).  The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term Loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025.  Availability under the revolving credit facility is reduced by outstanding letters of credit, which were approximately $5.2 million as of June 30, 2019.  We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility.

 

Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future.  Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.

 

Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin.  For the three months ended June 30, 2019, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 6.0%.  We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note O - “ Derivative Financial Instruments .”

 

20


Table of Contents

 

We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such letter of credit.

 

The Credit Agreement contains various restrictions and covenants, including: i) requirements that we maintain certain financial ratios at prescribed levels, ii) a prohibition on payment of dividends and other distributions and iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry.  The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement: (i) a maximum consolidated first lien net leverage ratio (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) of 5.00 to 1.00 for the fiscal quarter ended March 31, 2019; 4.75 to 1.00 for the fiscal quarters ended June 30, 2019 through March 31, 2020; 4.50 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.  We were in compliance with all covenants at June 30, 2019.

 

The Credit Agreement also contains customary events of default.  If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an