Quarterly Report (10-q)

Date : 11/07/2019 @ 9:20PM
Source : Edgar (US Regulatory)
Stock : Hanger Inc (HNGR)
Quote : 26.71  -0.17 (-0.63%) @ 11:46PM
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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 September 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 October 29, 2019 the registrant had 37,337,840 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 September 30,

 

As of December 31,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

49,947

 

$

95,114

 

Accounts receivable, net

 

145,378

 

143,986

 

Inventories

 

75,693

 

67,690

 

Income taxes receivable

 

 

379

 

Other current assets

 

14,615

 

18,731

 

Total current assets

 

285,633

 

325,900

 

Non-current assets:

 

 

 

 

 

Property, plant and equipment, net

 

84,490

 

89,489

 

Goodwill

 

226,348

 

198,742

 

Other intangible assets, net

 

17,985

 

15,478

 

Deferred income taxes

 

68,581

 

65,635

 

Operating lease right-of-use assets

 

109,838

 

 

Other assets

 

8,537

 

7,766

 

Total assets

 

$

801,412

 

$

703,010

 

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

8,619

 

$

8,583

 

Accounts payable

 

53,831

 

55,797

 

Accrued expenses and other current liabilities

 

55,908

 

51,783

 

Accrued compensation related costs

 

39,633

 

55,111

 

Current portion of operating lease liabilities

 

32,437

 

 

Total current liabilities

 

190,428

 

171,274

 

Long-term liabilities:

 

 

 

 

 

Long-term debt, less current portion

 

488,620

 

502,090

 

Operating lease liabilities

 

88,719

 

 

Other liabilities

 

47,851

 

51,570

 

Total liabilities

 

815,618

 

724,934

 

Commitments and contingencies (Note R)

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

Common stock, $0.01 par value; 60,000,000 shares authorized; 37,504,755 shares issued and 37,361,934 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018

 

375

 

371

 

Additional paid-in capital

 

350,579

 

343,955

 

Accumulated other comprehensive loss

 

(13,777

)

(4,531

)

Accumulated deficit

 

(350,687

)

(361,023

)

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

 

(696

)

(696

)

Total shareholders’ deficit

 

(14,206

)

(21,924

)

Total liabilities and shareholders’ deficit

 

$

801,412

 

$

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
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net revenues

 

$

279,638

 

$

262,946

 

$

797,155

 

$

763,907

 

Material costs

 

92,034

 

84,805

 

261,810

 

247,677

 

Personnel costs

 

94,594

 

90,853

 

272,795

 

266,515

 

Other operating costs

 

32,771

 

30,999

 

100,067

 

92,631

 

General and administrative expenses

 

29,834

 

28,308

 

87,474

 

80,467

 

Professional accounting and legal fees

 

3,629

 

3,107

 

9,576

 

12,189

 

Depreciation and amortization

 

9,373

 

8,950

 

26,906

 

27,552

 

Income from operations

 

17,403

 

15,924

 

38,527

 

36,876

 

Interest expense, net

 

8,954

 

8,939

 

25,973

 

28,519

 

Loss on extinguishment of debt

 

 

 

 

16,998

 

Non-service defined benefit plan expense

 

173

 

176

 

519

 

528

 

Income (loss) before income taxes

 

8,276

 

6,809

 

12,035

 

(9,169

)

Provision (benefit) for income taxes

 

2,585

 

2,440

 

3,260

 

(3,848

)

Net income (loss)

 

$

5,691

 

$

4,369

 

$

8,775

 

$

(5,321

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Per Common Share Data:

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.15

 

$

0.12

 

$

0.24

 

$

(0.14

)

Weighted average shares used to compute basic earnings per common share

 

37,349,144

 

36,856,881

 

37,218,234

 

36,716,568

 

Diluted income (loss) per share

 

$

0.15

 

$

0.12

 

$

0.23

 

$

(0.14

)

Weighted average shares used to compute diluted earnings per common share

 

37,986,860

 

37,556,594

 

37,921,767

 

36,716,568

 

 

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
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net income (loss)

 

$

5,691

 

$

4,369

 

$

8,775

 

$

(5,321

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on cash flow hedges, net of tax (benefit) provision of ($516), $533, ($2,916), and $541, respectively

 

$

(1,641

)

$

1,738

 

$

(9,265

)

$

1,762

 

Unrealized gain (loss) on defined benefit plan, net of tax provision (benefit) of $2, $0, $6, and ($105), respectively

 

7

 

26

 

19

 

(240

)

Total other comprehensive (loss) income

 

(1,634

)

1,764

 

(9,246

)

1,522

 

Comprehensive income (loss)

 

$

4,057

 

$

6,133

 

$

(471

)

$

(3,799

)

 

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

For the Nine Months Ended September 30, 2019

(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

)

Net income

 

 

 

 

 

5,691

 

 

5,691

 

Shares based compensation expense

 

 

 

3,374

 

 

 

 

3,374

 

Issuance in connection with the exercise of stock options

 

20

 

 

249

 

 

 

 

249

 

Issuance of common stock upon vesting of restricted stock units

 

7

 

 

 

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(56

)

 

 

 

(56

)

Total other comprehensive loss

 

 

 

 

(1,634

)

 

 

(1,634

)

Balance, September 30, 2019

 

37,362

 

$

375

 

$

350,579

 

$

(13,777

)

$

(350,687

)

$

(696

)

$

(14,206

)

 

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

 

4


Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

For the Nine Months Ended September 30, 2018

(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, 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

)

Net income

 

 

 

 

 

4,369

 

 

4,369

 

Shares based compensation expense

 

 

 

3,668

 

 

 

 

3,668

 

Issuance of common stock upon vesting of restricted stock units

 

18

 

 

 

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(105

)

 

 

 

(105

)

Total other comprehensive income

 

 

 

 

1,764

 

 

 

1,764

 

Balance, September 30, 2018

 

36,868

 

$

370

 

$

340,738

 

$

(164

)

$

(365,852

)

$

(696

)

$

(25,604

)

 

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

 

5


Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

 

For the Nine Months Ended
September 30,

 

 

 

2019

 

2018

 

Cash flows provided by operating activities:

 

 

 

 

 

Net income (loss)

 

$

8,775

 

$

(5,321

)

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

 

 

 

 

 

Depreciation and amortization

 

26,906

 

27,552

 

Amortization of right-of-use assets

 

27,657

 

 

Provision (benefit) for doubtful accounts

 

284

 

(578

)

Stock-based compensation expense

 

10,089

 

9,573

 

Deferred income taxes

 

(723

)

(4,114

)

Amortization of debt discounts and issuance costs

 

1,202

 

2,453

 

Loss on extinguishment of debt

 

 

16,998

 

Gain on sale and disposal of fixed assets

 

(1,200

)

(2,537

)

Changes in operating assets and liabilities (Note T)

 

(53,045

)

(6,867

)

Net cash provided by operating activities

 

19,945

 

37,159

 

Cash flows used in investing activities

 

 

 

 

 

Purchase of property, plant, and equipment

 

(20,262

)

(16,435

)

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

 

(5,165

)

(6,390

)

Acquisitions, net of cash acquired

 

(31,585

)

 

Purchase of company-owned life insurance investment

 

 

(598

)

Proceeds from sale of property, plant and equipment

 

2,181

 

3,583

 

Net cash used in investing activities

 

(54,831

)

(19,840

)

Cash flows (used in) provided by financing activities

 

 

 

 

 

Borrowings under term loan, net of discount

 

 

501,467

 

Repayment of term loan

 

(3,788

)

(434,400

)

Borrowings under revolving credit agreement

 

 

3,000

 

Repayments under revolving credit agreement

 

 

(8,000

)

Payment of employee taxes on stock-based compensation

 

(3,710

)

(2,568

)

Payment on seller notes

 

(2,688

)

(2,116

)

Payment of financing lease obligations

 

(344

)

(942

)

Payment of debt issuance costs

 

 

(6,757

)

Payment of debt extinguishment costs

 

 

(8,436

)

Proceeds from exercise of options

 

249

 

 

Net cash (used in) provided by financing activities

 

(10,281

)

41,248

 

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

 

(45,167

)

58,567

 

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

 

95,114

 

4,779

 

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

 

$

49,947

 

$

63,346

 

 

 

 

 

 

 

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

 

$

49,947

 

$

61,035

 

Restricted cash, at end of period

 

 

2,311

 

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

 

$

49,947

 

$

63,346

 

 

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

 

6


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 Pronouncements

 

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.

 

7


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 was to the balance sheet, where values were added for real estate operating leases, which increased 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.

 

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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

 

 

Cloud Computing Arrangements

 

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.  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).  Effective July 1, 2019, we elected to early adopt the requirements of the standard on a prospective basis.  As of September 30, 2019, we capitalized $0.3 million of implementation costs for cloud computing arrangements, net of accumulated amortization, which is recorded in other current assets and other assets in the condensed consolidated balance sheet.

 

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Recent Accounting Pronouncements, Not Yet Adopted

 

In June 2016, the 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.

 

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.

 

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 diluted earnings per share were 10 and zero for the three and nine months ended September 30, 2019, and zero and 48,502 for the three and nine months ended September 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.

 

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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
September 30,

 

For the Nine Months Ended
September 30,

 

(in thousands except per share data)

 

2019

 

2018

 

2019

 

2018

 

Net income (loss)

 

$

5,691

 

$

4,369

 

$

8,775

 

$

(5,321

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

37,349

 

36,857

 

37,218

 

36,717

 

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

 

638

 

700

 

704

 

 

Weighted average shares outstanding - diluted

 

37,987

 

37,557

 

37,922

 

36,717

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.15

 

$

0.12

 

$

0.24

 

$

(0.14

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share

 

$

0.15

 

$

0.12

 

$

0.23

 

$

(0.14

)

 

(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 nine months ended September 30, 2018, potentially dilutive shares of 680,444 were excluded.

 

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 nine months ended September 30, 2019 and 2018:

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2019

 

2018

 

2019

 

2018

 

Patient Care Segment

 

 

 

 

 

 

 

 

 

Medicare

 

$

72,879

 

$

69,724

 

$

206,295

 

$

197,461

 

Medicaid

 

36,140

 

33,597

 

103,631

 

96,993

 

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

 

83,384

 

78,333

 

232,410

 

226,761

 

Veterans Administration

 

23,816

 

19,317

 

64,635

 

56,873

 

Private Pay

 

14,712

 

13,109

 

45,729

 

42,657

 

Total

 

$

230,931

 

$

214,080

 

$

652,700

 

$

620,745

 

 

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The impact to revenue related to prior period performance obligations was not material for the three and nine months ended September 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 nine months ended September 30, 2019 and 2018:

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2019

 

2018

 

2019

 

2018

 

Products & Services Segment

 

 

 

 

 

 

 

 

 

Distribution services, net of intersegment revenue eliminations

 

$

36,653

 

$

34,666

 

$

107,510

 

$

100,700

 

Therapeutic solutions

 

12,054

 

14,200

 

36,945

 

42,462

 

Total

 

$

48,707

 

$

48,866

 

$

144,455

 

$

143,162

 

 

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 September 30, 2019 and December 31, 2018 is comprised of the following:

 

 

 

As of September 30, 2019

 

As of December 31, 2018

 

(in thousands)

 

Patient Care

 

Products &
Services

 

Consolidated

 

Patient Care

 

Products &
Services

 

Consolidated

 

Accounts receivable, before allowances

 

$

185,659

 

$

27,381

 

$

213,040

 

$

182,338

 

$

24,542

 

$

206,880

 

Allowances for estimated implicit price concessions arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Payor disallowances

 

(56,564

)

 

(56,564

)

(53,378

)

 

(53,378

)

Patient non-payments

 

(8,820

)

 

(8,820

)

(7,244

)

 

(7,244

)

Accounts receivable, gross

 

120,275

 

27,381

 

147,656

 

121,716

 

24,542

 

146,258

 

Allowance for doubtful accounts

 

 

(2,278

)

(2,278

)

 

(2,272

)

(2,272

)

Accounts receivable, net

 

$

120,275

 

$

25,103

 

$

145,378

 

$

121,716

 

$

22,270

 

$

143,986

 

 

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Note E — Inventories

 

Our inventories are comprised of the following:

 

 

 

As of September 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Raw materials

 

$

20,908

 

$

19,632

 

Work in process

 

14,287

 

9,278

 

Finished goods

 

40,498

 

38,780

 

Total inventories

 

$

75,693

 

$

67,690

 

 

Note F — Property, Plant and Equipment, Net

 

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

 

 

 

As of September 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Land

 

$

634

 

$

644

 

Buildings (1)

 

4,046

 

24,558

 

Furniture and fixtures

 

13,332

 

13,121

 

Machinery and equipment

 

26,603

 

27,452

 

Equipment leased to third parties under operating leases

 

29,943

 

30,093

 

Leasehold improvements

 

129,029

 

111,247

 

Computers and software

 

74,897

 

69,173

 

Total property, plant and equipment, gross

 

278,484

 

276,288

 

Less: accumulated depreciation

 

(193,994

)

(186,799

)

Total property, plant and equipment, net

 

$

84,490

 

$

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 $7.8 million and $23.0 million for the three and nine months ended September 30, 2019 and $7.5 million and $22.3 million for the three and nine months ended September 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 in additional consideration.

 

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·                  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.

 

·                  In July 2019, we completed the acquisition of two O&P businesses for total consideration of $3.3 million, of which $3.0 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.

 

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 for the transactions completed above for the three and nine months ended September 30, 2019 were $0.3 million and $0.8 million, respectively, and 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 individually and in the aggregate.

 

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.

 

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Table of Contents

 

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

 

(in thousands)

 

 

 

Cash paid, net of cash acquired

 

$

30,926

 

Issuance of seller notes at fair value

 

5,053

 

Additional consideration

 

659

 

Aggregate purchase price

 

36,638

 

 

 

 

 

Accounts receivable, net

 

3,630

 

Inventories

 

1,693

 

Customer relationships (Weighted average useful life of 4.9 years)

 

5,791

 

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

 

349

 

Other assets

 

(2,687

)

Net assets acquired

 

8,776

 

Goodwill

 

$

27,862

 

 

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed during the three and nine month periods ending September 30, 2019 were $0.6 million and $2.0 million, respectively.

 

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

 

 

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Table of Contents

 

Note H — Goodwill and Other Intangible Assets

 

We assess goodwill and indefinite-lived intangible assets for impairment annually as of 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 Nine Months Ended September 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

 

30,112

 

 

30,112

 

 

 

 

30,112

 

 

30,112

 

Measurement period adjustments (1)

 

(2,506

)

 

(2,506

)

 

 

 

(2,506

)

 

(2,506

)

As of September 30, 2019

 

$

655,016

 

$

(428,668

)

$

226,348

 

$

139,299

 

$

(139,299

)

$

 

$

794,315

 

$

(567,967

)

$

226,348

 

 

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.2 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

 

 

 

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

 

 

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

 

 

 

As of September 30, 2019

 

(in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Accumulated
Impairment

 

Net Carrying
Amount

 

Customer lists

 

$

31,525

 

$

(21,622

)

$

 

$

9,903

 

Trade name

 

255

 

(145

)

 

110

 

Patents and other intangibles

 

9,238

 

(5,383

)

 

3,855

 

Definite-lived intangible assets

 

41,018

 

(27,150

)

 

13,868

 

Indefinite-lived trade names

 

9,070

 

 

(4,953

)

4,117

 

Total other intangible assets

 

$

50,088

 

$

(27,150

)

$

(4,953

)

$

17,985

 

 

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Table of Contents

 

 

 

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 $1.6 million and $3.9 million for the three and nine months ended September 30, 2019 and $1.5 million and $5.3 million for the three and nine months ended September 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)

 

$

1,229

 

2020

 

4,836

 

2021

 

2,252

 

2022

 

2,185

 

2023

 

2,036

 

Thereafter

 

1,330

 

Total

 

$

13,868

 

 

Note I — Other Current Assets and Other Assets

 

Other current assets consist of the following:

 

 

 

As of September 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Non-trade receivables

 

$

6,624

 

$

7,848

 

Prepaid maintenance

 

3,471

 

3,330

 

Prepaid other

 

1,509

 

1,101

 

Prepaid rent

 

840

 

4,442

 

Prepaid purchase orders

 

839

 

998

 

Prepaid insurance

 

744

 

258

 

Prepaid education and training

 

379

 

597

 

Other

 

209

 

157

 

Total other current assets

 

$

14,615

 

$

18,731

 

 

17


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Other assets consist of the following:

 

 

 

As of September 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Cash surrender value of company-owned life insurance

 

$

3,132

 

$

2,918

 

Non-trade receivables

 

2,116

 

1,904

 

Deposits

 

1,955

 

1,698

 

Finance lease right-of-use assets

 

613

 

 

Prepaid cloud implementation costs

 

314

 

 

Surety bond collateral

 

 

1,000

 

Other

 

407

 

246

 

Total other assets

 

$

8,537

 

$

7,766

 

 

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

 

Accrued expenses and other current liabilities consist of:

 

 

 

As of September 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Patient prepayments, deposits, and refunds payable

 

$

25,979

 

$

24,563

 

Accrued sales taxes and other taxes

 

8,646

 

6,810

 

Insurance and self-insurance accruals

 

8,234

 

8,886

 

Derivative liability

 

3,413

 

724

 

Accrued professional fees

 

503

 

3,751

 

Accrued interest payable

 

344

 

332

 

Other current liabilities

 

8,789

 

6,717

 

Total accrued expenses and other current liabilities

 

$

55,908

 

$

51,783

 

 

Other liabilities consist of:

 

 

 

As of September 30,

 

As of December 31,

 

(in thousands)

 

2019

 

2018

 

Supplemental executive retirement plan obligations

 

$

19,370

 

$

20,195

 

Derivative liability

 

12,627

 

3,134

 

Long-term insurance accruals

 

8,058

 

8,713

 

Unrecognized tax benefits, and related interest and penalties

 

5,457

 

5,458

 

Deferred tenant improvement allowances

 

 

8,570

 

Deferred rent

 

 

4,455

 

Other

 

2,339

 

1,045

 

Total other liabilities

 

$

47,851

 

$

51,570

 

 

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Note K — Income Taxes

 

We recorded a provision for income taxes of $2.6 million and $3.3 million for the three and nine months ended September 30, 2019.  The effective tax rate was 31.2% and 27.1% for the three and nine months ended September 30, 2019.  We recorded a provision for income tax of $2.4 million and a benefit from income tax of $3.8 million for the three and nine months ended September 30, 2018.  The effective rate was 35.8% and 42.0% for the three and nine months ended September 30, 2018.

 

The decrease in the effective tax rate for the three months ended September 30, 2019 compared with the three months ended September 30, 2018 is primarily attributable to an increased estimated annual income and an increase in pre-tax book income for the three months ended September 30, 2019.  Our effective tax rate for the three months ended September 30, 2019 and September 30, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses.

 

The decrease in the effective tax rate for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 is primarily attributable to an increased estimated annual income, an increase in pre-tax book income for the nine months ended September 30, 2019, and the windfall from stock-based compensation during the period.  Our effective tax rate for the nine months ended September 30, 2019 and September 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.

 

Note L — Leases

 

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

 

(in thousands)

 

Classification

 

As of September 30, 2019

 

Assets

 

 

 

 

 

Operating lease right-of-use assets

 

Operating lease right-of-use assets

 

$

109,838

 

Finance lease right-of-use assets

 

Other assets

 

613

 

Total lease assets

 

 

 

$

110,451

 

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Operating

 

Current portion of operating lease liabilities

 

$

32,437

 

Finance

 

Current portion of long-term debt

 

261

 

Noncurrent

 

 

 

 

 

Operating

 

Operating lease liabilities

 

88,719

 

Finance

 

Long-term debt, less current portion

 

365

 

Total lease liabilities

 

 

 

$

121,782

 

 

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

 

(in thousands)

 

For the Three Months Ended
September 30, 2019

 

For the Nine Months Ended
September 30, 2019

 

Operating lease cost

 

$

11,238

 

$

32,868

 

Finance lease cost

 

 

 

 

 

Amortization of right-of-use assets

 

75

 

225

 

Interest on lease liabilities

 

6

 

18

 

Sublease income

 

(117

)

(196

)

Short-term lease cost

 

46

 

460

 

Variable lease cost

 

1,551

 

4,581

 

Total lease cost

 

$

12,799

 

$

37,956

 

 

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

 

(in thousands)

 

Finance
Leases

 

Operating
Leases

 

Total Leases

 

2019 (remainder of year)

 

$

77

 

$

5,900

 

$

5,977

 

2020

 

263

 

41,500

 

41,763

 

2021

 

191

 

32,093

 

32,284

 

2022

 

106

 

24,128

 

24,234

 

2023

 

26

 

16,181

 

16,207

 

2024

 

 

8,963

 

8,963

 

Thereafter

 

 

7,271

 

7,271

 

Total future minimum lease payments

 

663

 

136,036

 

136,699

 

Imputed interest

 

(37

)

(14,880

)

(14,917

)

Total

 

$

626

 

$

121,156

 

$

121,782

 

 

The lease term and discount rates are as follows:

 

 

 

September 30, 2019

 

Weighted average remaining lease term (years)

 

 

 

Operating leases

 

4.01

 

Finance leases

 

2.70

 

Weighted average discount rate

 

 

 

Operating leases

 

5.45

%

Finance leases

 

4.22

%

 

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Supplemental cash flow information related to leases is as follows:

 

(in thousands)

 

For the Nine Months Ended
September 30, 2019

 

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

 

 

 

Operating cash flows from operating leases

 

$

33,523

 

Operating cash flows from finance leases

 

18

 

Financing cash flows from finance leases

 

233

 

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

 

 

 

Operating leases

 

34,355

 

Finance leases

 

282

 

 

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations as of December 31, 2018 are as follows:

 

(in thousands)

 

Operating
Leases

 

Capital
Leases

 

2019

 

$

39,378

 

$

249

 

2020

 

29,641

 

175