UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, ~~2013~~2014

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

For the transition period from to

Commission file number 1-10670

HANGER, INC.

(Exact name of registrant as specified in its charter)

Delaware		84-0904275
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

10910 Domain Drive, Suite 300, Austin, TX		78758
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (512) 777-3800

Former name, former address and former fiscal year, if changed since last report.

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

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

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

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o

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

As of May ~~3, 2013 34,667,638~~2, 2014 35,212,424 shares of common stock, $.01 par value per share, were outstanding.

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~~HANGER, INC.~~

INDEX~~INDEX~~

		Page No.
Hanger, Inc.

Part I.	FINANCIAL INFORMATION (unaudited)

Item 1.	Consolidated Financial Statements ~~(unaudited)~~

	Consolidated Balance Sheets — March 31, ~~2013~~2014 and December 31, ~~2012~~2013	1

	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013	3

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2623

Item 4.	Controls and Procedures	2624

Part II.	OTHER INFORMATION

Item 1A.	Risk Factors	2724

Item 6.	Exhibits	2926

SIGNATURES	30	27

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HANGER, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	March 31,		December 31,		March 31,		December 31,
	2013		2012		2014		2013

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	15,033	$	19,211	$	55,624	$	9,860
Restricted cash	3,120		3,120
Accounts receivable, less allowance for doubtful accounts of $21,295 and $21,379 in 2013 and 2012, respectively	156,813		165,668
Net accounts receivable, less allowance for doubtful accounts of $10,313 and $10,022 in 2014 and 2013, respectively					183,548		185,769
Inventories	132,492		127,295		153,952		141,518
Prepaid expenses, other assets, and income taxes receivable	19,791		15,673		27,678		15,519
Deferred income taxes	28,043		27,685		30,366		30,298
Total current assets	355,292		358,652		451,168		382,964

PROPERTY, PLANT AND EQUIPMENT
Land	794		794		794		794
Buildings	8,896		8,896		16,517		15,397
Furniture and fixtures	19,789		19,582		16,581		15,855
Machinery and equipment	60,887		60,364		63,379		61,707
Equipment leased to third parties under operating leases	34,869		34,827		34,198		34,142
Leasehold improvements	76,141		74,615		88,576		85,176
Computer and software	100,712		98,186		94,561		88,950
Total property, plant and equipment, gross	302,088		297,264		314,606		302,021
Less accumulated depreciation	190,187		182,803
Less accumulated depreciation and amortization					183,187		175,223
Total property, plant and equipment, net	111,901		114,461		131,419		126,798

INTANGIBLE ASSETS
Goodwill	674,416		674,774		702,455		681,547
Patents and other intangible assets, less accumulated amortization of $22,312 and $20,643 in 2013 and 2012, respectively	62,661		64,281
Other intangible assets, less accumulated amortization of $29,267 and $27,375 in 2014 and 2013, respectively					61,367		58,021
Total intangible assets, net	737,077		739,055		763,822		739,568

OTHER ASSETS
Debt issuance costs, net	13,169		14,033		8,134		8,564
Other assets	11,482		11,126		15,142		13,766
Total other assets	24,651		25,159		23,276		22,330

TOTAL ASSETS	$	1,228,921	$	1,237,327	$	1,369,685	$	1,271,660

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

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HANGER, INC.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	March 31,			December 31,			March 31,			December 31,
	2013			2012			2014			2013

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	11,528		$	11,082		$	20,869		$	15,998
Accounts payable	26,345			28,923			41,789			36,729
Accrued expenses	23,089			22,357
Accrued expenses and other current liabilities							22,734			24,923
Accrued interest payable	6,516			3,041			5,534			1,898
Accrued compensation related costs	22,134			41,784			21,605			36,331
Total current liabilities	89,612			107,187			112,531			115,879

LONG-TERM LIABILITIES
Long-term debt, less current portion	506,958			509,564			541,066			452,261
Deferred income taxes	77,730			77,730			76,971			76,545
Other liabilities	38,989			39,752			48,615			46,755
Total liabilities	713,289			734,233			779,183			691,440

COMMITMENTS AND CONTINGENCIES (Note H)
COMMITMENTS AND CONTINGENCIES (Note G)

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized, 35,937,455 and 35,617,884 shares issued and outstanding at 2013 and 2012, respectively	359			356
Common stock, $.01 par value; 60,000,000 shares authorized, 36,346,814 and 36,113,202 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively							363			361
Additional paid-in capital	283,130			280,084			297,006			292,722
Accumulated other comprehensive loss	(1,919		)	(1,919		)	(1,020		)	(1,020		)
Retained earnings	234,718			225,229			294,809			288,813
	516,288			503,750			591,158			580,876
Treasury stock at cost (141,154 shares)	(656		)	(656		)	(656		)	(656		)
Total shareholders’ equity	515,632			503,094			590,502			580,220

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,228,921		$	1,237,327		$	1,369,685		$	1,271,660

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

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HANGER, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

For the Three Months Ended March 31,

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

(Unaudited)

	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2013		2012		2014		2013

Net sales	$	233,535	$	218,091	$	235,605	$	229,350
Material costs	67,739		66,697		67,345		67,739
Personnel costs	89,953		81,153		96,431		89,953
Other operating expenses	43,769		40,144		45,600		39,657
Acquisition expenses	73		75
Depreciation and amortization	9,285		8,285		10,199		9,285
Income from operations	22,716		21,737		16,030		22,716

Interest expense	7,777		7,777		6,098		7,777
Income before taxes	14,939		13,960		9,932		14,939

Provision for income taxes	5,449		5,324		3,935		5,449
Net income	$	9,490	$	8,636	$	5,997	$	9,490

Other comprehensive income	—		—		—		—
Comprehensive income	$	9,490	$	8,636	$	5,997	$	9,490

Basic Per Common Share Data
Net income	$	0.27	$	0.25	$	0.17	$	0.27
Shares used to compute basic per common share amounts	34,598,494		34,036,539		35,076,828		34,598,494

Diluted Per Common Share Data
Net income	$	0.27	$	0.25	$	0.17	$	0.27
Shares used to compute diluted per common share amounts	35,066,032		34,639,660		35,415,018		35,066,032

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

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HANGER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31,

(Dollars in thousands)

(Unaudited)

	2013			2012			2014			2013

Cash flows from operating activities:
Net income	$	9,490		$	8,636		$	5,997		$	9,490
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of assets	52			—
Reduction of seller notes and earnouts	—			(177		)
Loss/(gain) on disposal of assets							(547		)	52
Provision for doubtful accounts	5,229			4,723			3,754			1,657
Provision for deferred income taxes							358			—
Depreciation and amortization	9,285			8,285			10,199			9,285
Amortization of debt issuance costs	864			863			430			864
Compensation expense on stock options and restricted stock units	1,667			1,971
Compensation expense restricted stock units							2,418			1,667
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable	3,644			851			1,537			7,216
Inventories	(5,197		)	(7,868		)	(10,589		)	(5,197		)
Prepaid expenses, other current assets, and income taxes	(3,860		)	(2,443		)	(12,736		)	(3,860		)
Accounts payable	(2,006		)	(522		)	2,126			(2,006		)
Accrued expenses and accrued interest payable	3,883			4,294
Accrued expenses, accrued interest payable							2,384			3,883
Accrued compensation related costs	(19,544		)	(17,504		)	(15,040		)	(19,544		)
Other	(1,314		)	183			(253		)	(1,314		)
Net cash provided by operating activities	2,193			1,292
Net cash provided by/(used in) operating activities							(9,962		)	2,193

Cash flows from investing activities:
Purchase of property, plant and equipment (net of acquisitions)	(5,110		)	(4,777		)	(8,297		)	(5,110		)
Purchase of equipment leased to third parties under operating leases	(288		)	(539		)	(564		)	(288		)
Acquisitions and contingent considerations (net of cash acquired)	—			(2,402		)
Restricted cash	—			(3,120		)
Acquisitions (net of cash acquired)							(19,167		)	—
Purchase of company-owned life insurance investment							(2,294		)	—
Proceeds from sale of property, plant and equipment	91			—			522			91
Net cash used in investing activities	(5,307		)	(10,838		)	(29,800		)	(5,307		)

Cash flows from financing activities:
Borrowings under revolving credit agreement							125,000			—
Repayments under revolving credit agreement							(38,000		)	—
Repayment of term loan	(750		)	(1,450		)	(1,406		)	(750		)
Scheduled repayment of seller’s notes	(1,410		)	(488		)
Repayment of seller’s notes and other contingent considerations							(1,594		)	(1,410		)
Repayment of capital lease obligations	(180		)	—			(340		)	(180		)
Excess tax benefit from stock-based compensation	1,214			209
Excess tax benefit from stock based compensation							1,780			1,214
Proceeds from issuance of common stock	62			627			86			62
Purchase and retirement of treasury stock	—			—
Net cash used in financing activities	(1,064		)	(1,102		)
Net cash provided by/(used in) financing activities							85,526			(1,064		)

Decrease in cash and cash equivalents	(4,178		)	(10,648		)
Increase/(decrease) in cash and cash equivalents							45,764			(4,178		)
Cash and cash equivalents, at beginning of period	19,211			42,896			9,860			19,211
Cash and cash equivalents, at end of period	$	15,033		$	32,248		$	55,624		$	15,033

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Cash paid during the period for:
Interest							1,629			3,290
Income taxes (net of refunds)							11,159			5,591

Non-cash financing and investing activities:
Issuance of restricted stock units							8,691			9,617
Issuance of notes in connections with acquistisions							9,300			—

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

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HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A — BASIS OF PRESENTATION

The unaudited interim consolidated financial statements as of March 31, ~~2013~~2014 and December 31, ~~2012~~2013 and for the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 have been prepared by Hanger, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for such periods. The year-end consolidated data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the three months ended March 31, ~~2013~~2014 are not necessarily indicative of the results to be expected for the full fiscal year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2012,~~2013, filed by the Company with the SEC.

NOTE B — SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

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

~~Restricted Cash~~

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

Credit Risk

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

~~Table of Contents~~

Inventories

Patient Care—Inventories at Hanger Clinic, Dosteon and Cares, which consist of raw materials, work-in-process and finished goods, amounted to $120.1 million and $109.2 million at March 31, 2014 and December 31, 2013, respectively. Inventories in ~~the Patient Care segment consisting~~Hanger’s Clinics, which amounted to $110.0 million and $99.0 million at March 31, 2014 and December 31, 2013, respectively, consist principally of raw materials and work-in-process ~~which amounted to $102.3 million and $96.6 million as of March 31, 2013 and December 31, 2012, respectively, are~~inventory valued based on the gross profit method, which approximates lower of cost or market using the first-in first-out method. ~~The Company applies~~Inventories in the Dosteon business amounted to $8.8 million and $8.9 million at March 31, 2014 and December 31, 2013, respectively, and consist principally of raw materials. As of March 31, 2014, the Dosteon inventories were valued based on the gross profit method, ~~on a patient care clinic basis~~which approximates lower of cost or market using the first-in first-out method.

Table of Contents

Inventories in ~~this segment’s inventory~~the Cares business amounted to ~~determine ending inventory~~$1.2 million and $1.3 million as of March 31, 2014 and December 31, 2013, respectively, consisted principally of finished goods and are valued at the ~~end~~lower of cost or market using the first-in first-out method based on perpetual records.

Hanger Clinic and Dosteon do not maintain a perpetual inventory system. On October 31st of each ~~interim period except on October 31~~st~~, which is~~year the ~~date of our Physical inventory. The~~company performs an annual physical inventory ~~for this segment~~of all inventories in Hanger Clinics. Dosteon counted its inventories on December 31, 2013 and October 31, 2012. The Company values the raw materials and work-in-process inventory counted at October 31 at lower of cost or market using the first-in first-out ~~method and includes~~method. Hanger Clinic work-in-process ~~consisting~~inventory consists of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Material, labor and overhead costs are determined at the individual clinic or groups of clinics level. Adjustments to reconcile the Hanger Clinic and Dosteon physical inventory ~~to our books~~ are treated as changes in accounting estimates and are recorded in the fourth quarter. The Company recorded a fourth quarter adjustment of a decrease to inventory of $2.3 million in 2013.

For Hanger Clinics, the October 31stinventory is subsequently adjusted ~~during interim periods~~at each quarterly and annual reporting period end by applying the gross profit method. As it relates to ~~apply~~materials, the Company generally applies the gross profit method ~~described above.~~to individual clinics or groups of clinics for material costs. Labor and overhead and other aspects of the gross profit method are completed on a Hanger Clinic-wide basis. A similar approach is applied to Dosteon inventory, as applicable.

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

Fair Value Measurements

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

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

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

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

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

Financial Instruments

Assets measured at fair value on a recurring basis as of March 31, ~~2013~~2014 and December 31, ~~2012,~~2013, are ~~$7.0~~$51.6 million and ~~$11.0~~$7.7 million, respectively, and are ~~comprised~~composed of cash equivalent money market investments. The money market investments are based on Level 1 observable market prices and are equivalent to one dollar. The carrying value of the Company’s short-term financial instruments, such as receivables and payables, approximate their fair values based on the short-term maturities of these instruments. During the second quarter of 2013, the Company refinanced its credit facilities by replacing its $300.0 million Term Loan and $100.0 million Revolving Credit Facility with a $225.0 million Term Loan Facility and a $200.0 million Revolving Credit Facility. See Note F for further information.

·The carrying ~~value~~values of the Company’s outstanding Term ~~Loan~~Loans as of March 31, ~~2013~~2014 and December 31, ~~2012, $292.6~~2013, were $220.8 million and ~~$293.3~~$222.2 million, ~~respectively,~~respectively. The Company has determined the carrying value on these loans approximates fair value for debt with similar terms and remaining maturities based on interest rates currently available ~~to the Company~~ and has therefore concluded these are ~~considered~~ Level 2 measurements.

·The carrying values of the Company’s outstanding Revolving Credit Facilities as of March 31, 2014 and December 31, 2013, were $112.0 million and $25.0 million, respectively. The Company has determined the carrying value on these loans approximates fair value for debt with similar terms and remaining maturities based on interest rates currently available and has therefore concluded these are Level 2 measurements.

·The carrying value of the Senior Notes was $200.0 million as of March 31, 2014 and ~~$200.0~~December 31, 2013. The fair value of the Senior Notes, was $213.0 million and $213.3 million as of March 31, ~~2013~~2014 and December 31, ~~2012, respectively.~~2013. The Company has determined the fair value of the Senior Notes based on amarket observable inputs and has therefore concluded these are Level ~~1 quoted market price, was $216.0 million and $211.5 million as~~2 measurements.

Table of ~~March 31, 2013 and December 31, 2012.~~ Contents

·Seller Notes are recorded at contractual carrying values of ~~$25.9~~$29.1 million and ~~$27.3~~$21.1 million as of March 31, ~~2013~~2014 and December 31, ~~2012,~~2013, respectively, and carrying value approximates fair value for similar debt in all material respects. The Company estimates fair value of the seller notes with a discounted cash flow model using unobservable rates and ~~that they therefore~~has determined these represent Level 3 measurements.

~~Table of Contents~~

Revenue Recognition

Revenues in the Company’s ~~patient care clinics~~Patient Care segment are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided. Revenues from the sale of devices are recorded when the patient has accepted and received the device and recorded net of known and estimated future contractual adjustments and discounts. Contractual adjustments and discounts are recorded as contra-revenue within net sales on the Consolidated Statement of Income and Comprehensive Income. Medicare and Medicaid regulations and the various agreements we have with other third-party payors under which these contractual adjustments and discounts are calculated are complex and are subject to interpretation. Therefore, the devices and related services authorized and provided, and the related reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and pay schedules, and contract renegotiations, occur frequently, necessitating regular review and assessment of the estimation process by management.

Reserves for future contractual adjustments are estimated utilizing historical trends for such adjustments and are monitored monthly. As of March 31, 2014 and December 31, 2013, the Company estimated the reserve for future contractual adjustments and discounts to be $22.7 million and $20.6 million, respectively. The increase in the estimate is primarily related to both revenue growth resulting from both same clinic sales growth and clinic acquisitions, and from changes in collection trends. Individual patients are generally responsible for deductible and/or co-payments. The reserve for future contractual adjustments and discounts is reflected as a reduction of accounts receivable on the Company’s Consolidated Balance Sheet.

Revenues onin the Company’s Products & Services segment are derived from the distribution of O&P devices ~~to customers~~and the leasing of rehabilitation technology combined with clinical therapy programs, education and training. Distribution revenues are recorded upon the shipment of products, in accordance with the terms of the invoice, net of ~~merchandise returns received and the amount established for anticipated~~estimated returns. Discounted sales are recorded at net realizable value. ~~Revenues derived from leasing rehabilitation technology combined with clinical therapy programs and education and training~~Leasing revenues are ~~recorded on a monthly basis according to~~recognized based upon the contractual terms of the ~~contracts~~agreements, which contain negotiated pricing and service levels with ~~our customers.~~terms ranging from one to five years, and are generally billed to the Company’s customers monthly.

Net Accounts Receivable

~~Certain~~The Company reports accounts receivable ~~may be uncollectible, even if properly pre-authorized~~at estimated net realizable amounts generated for products delivered and ~~billed. Regardless~~services rendered from federal, state, managed care health plans, commercial insurance companies and patients. Collections of ~~the balance,~~these accounts receivable ~~amounts~~ are ~~periodically evaluated to assess collectability. In addition~~the Company’s primary source of cash and are critical to the ~~actual bad~~Company’s operating performance. The Company estimates uncollectible patient accounts primarily based upon its experience in historical collections from individual patients. Bad debt expense ~~recognized during collection activities,~~is reported within Other operating expenses within the ~~Company estimates the amount~~Consolidated Statement of ~~potential bad debt expense that may occur in the future. This estimate is based upon historical experience as well as a review of the receivable balances.~~

~~On a quarterly basis, the Company evaluates cash collections,~~Income and Comprehensive Income. At March 31, 2014 and December 31, 2013, net accounts receivable ~~balances and write-off activity to assess the adequacy of the~~reflected allowance for doubtful accounts. Additionally, a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balanceaccounts, $10.3 million and the outstanding balance, and a specific reserve is recorded if needed. From time to time, the Company may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In the cases when valid accounts receivable cannot be collected, the uncollectible account is written off.$10.0 million respectively.

Property, Plant and Equipment

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

Included within the Buildings line item were $12.0 million and $10.9 million of buildings recorded under capital leases, as of March 31, 2014 and December 31, 2013, respectively. Accumulated depreciation on these capital leases were $1.4 million and $0.9 million, as of March 31, 2014 and December 31, 2013, respectively. The annual future minimum lease payments as of March 31, 2014 under the lease agreements are $1.4 million, $2.0 million, $2.1 million, $2.1 million, $2.2 million, $9.5 million for the years ending 2014, 2015, 2016, 2017, 2018 and thereafter. These future minimum lease payments include $6.0 million of interest.

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Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. The Company assesses goodwill for impairment annually during the fourth quarter, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches. Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset. There were no impairment indicators since the last annual impairment test on October 1, 2013.

Debt Issuance Costs

Debt issuance costs incurred in connection with the Company’s long-term debt are amortized, on a straight-line basis, which is not materially different from the effective interest method, through the maturity of the related debt instrument. Amortization of these costs is included in Interest Expense in the Consolidated Statements of Income and Comprehensive Income.

Long-Lived Asset Impairment

The Company evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. The carrying value of a long-lived asset group is not recoverable and is considered impaired if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The Company measures impairment as the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. There were no long-lived asset impairments or indicators of impairment for the periods ended March 31, 2014 and December 31, 2013.

Supplemental Executive Retirement Plan (SERP)

Effective January 2004, the Company implemented an unfunded noncontributory defined benefit plan (the “Plan”) for certain senior executives. Benefit costs and liabilities balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors. The Company engages an actuary to calculate the benefit obligation and net benefit costs. The Plan, which is administered by the Company, calls for annual payments upon retirement based on years of service and final average salary. The Company believes the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods. For further information, including the significant assumptions used in the estimate, see Note I of the accompanying financial statements.

Income Taxes

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

7Stock-Based Compensation

The Company issues under one active stock-based compensation plan restricted stock units that settle in shares common stock. Shares of common stock issued under the stock-based compensation plan are issued from the Company’s authorized and unissued shares. Restricted stock units are granted at the fair market value of the Company’s common stock on the grant date. Restricted stock units vest over a period of time determined in accordance with the terms of the compensation plan, which permits vesting periods ranging from one to four years. All restricted stock units issued under the plan have vested in four years, in the case of employees, and three years in the case of directors.

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The Company applies the fair value recognition provisions of the authoritative guidance for stock compensation, which require companies to measure and recognize compensation expense for all stock-based payments at fair value.

Stock compensation expense relates to restricted stock units, as all previously granted stock options are now fully vested and all associated compensation expense has been recognized in prior years. The total value of the restricted stock units is expensed ratably over the requisite service period of the employees receiving the awards and is included within Other operating expenses on the Company’s Consolidated Statements of Income and Comprehensive Income.

Segment Information

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

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangibles for Impairment”. This ASU amended guidance that simplifies how entities test indefinite-lived intangible assets other than goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test. Otherwise, the quantitative test becomes optional. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted this new guidance in the first quarter of 2013, and the adoption did not impact the Company’s Condensed Consolidated Financial Statements.

~~In February~~ 2013, the FASB issued ASU ~~2013-2, “Other Comprehensive Income.” This ASU amends ASC 220, “Comprehensive Income,” and supersedes ASU 2011-05 “Presentation~~2013-11, “Income Taxes” that requires unrecognized tax benefits be classified as an offset to deferred tax assets to the extent of ~~Comprehensive Income” and ASU 2011-12 “Comprehensive Income,” to require reclassification adjustments from other comprehensive income to be presented either~~any net operating loss carryforwards, similar tax loss carryforwards, or tax credit carryforwards available at the reporting date in the ~~financial statements or in~~applicable tax jurisdiction to settle any additional income taxes that would result from the ~~notes to~~disallowance of a tax position. An exception would apply if the ~~financial statements. The standard~~tax law of the tax jurisdiction does not ~~change~~require the ~~current requirements~~Company to use, and it does not intend to use, the deferred tax asset for ~~reporting net income or other comprehensive income in financial statements. However, the~~such purpose. This guidance ~~requires an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The amendments in this ASU are~~is effective ~~prospectively~~ for reporting periods beginning after December 15, ~~2012.~~2013. The Company ~~has~~ adopted this guidance and its implementation did not have a material impact on ~~its consolidated financial statements.~~the Company’s Condensed Consolidated Financial Statements.

NOTE C ~~- SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION~~

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

Three Months Ended

March 31,

(In thousands)

2013

2012

Cash paid during the period for:

Interest

$
3,290

$
3,278

Income taxes (net of refunds)

5,591

1,566

Non-cash financing and investing activities:

Purchase of property, plant and equipment in accounts payable

1,308

1,028

Capital lease obligations

65

—

Issuance of restricted stock units of common stock

9,617

8,419

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~~NOTE D~~ — GOODWILL AND OTHER INTANGIBLE ASSETS

The Company completes its annual goodwill and indefinite lived intangible impairment analysis in the fourth quarter of each year. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches. ~~In conjunction with the Company’s evaluation of operating segments disclosed in Note L, the Company assessed its reporting unit structure and determined~~There were no ~~changes were necessary. As such, the Company concluded there was not a triggering event to re-evaluate whether a potential~~ impairment ~~of goodwill had occurred. No triggering events have transpired~~indicators since ~~December 31, 2012.~~our last annual impairment test on October 1, 2013.

Goodwill allocated to the Company’s operating segments for the three months ended March 31, 2014 and for the year ended 2013 ~~and 2012 is~~are as follows:

(In thousands)	Patient Care			Products & Services		Total			Patient Care		Products & Services		Total
Balance at December 31, 2012	$	538,492		$	136,282	$	674,774
Balance at December 31, 2013									$	545,265	$	136,282	$	681,547
Additions due to acquisitions	—			—		—			17,130		3,778		20,908
Contingent considerations (1)	—			—		—
Adjustments	(358		)	—		(358		)	—		—		—
Balance at March 31, 2013 (unaudited)	$	538,134		$	136,282	$	674,416
Balance at March 31, 2014									$	562,395	$	140,060	$	702,455

Patient Care

Products &
Services

Total

Balance at December 31, 2011

$
474,166

$
135,318

$
609,484

Additions due to acquisitions

1,372

—

1,372

Contingent considerations (1)

127

—

127

Adjustments

163

—

163

Balance at March 31, 2012 (unaudited)

$
475,828

$
135,318

$
611,146

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

	Patient Care			Products & Services		Total
Balance at December 31, 2012	$	538,492		$	136,282	$	674,774
Additions due to acquisitions	7,317			—		7,317
Adjustments	(544		)	—		(544		)
Balance at December 31, 2013	$	545,265		$	136,282	$	681,547

The balances related to intangible assets ~~for the three months ended~~as of March 31, 2014 and December 31, 2013 ~~and 2012 is~~are as follows:

31-Mar-13

31-Dec-12

Gross

Net

Gross

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

(In thousands)

Amount

Amortization

Amount

Amount

Amortization

Amount

Customer Lists

$
48,044

$
(8,872
)
$
39,172

$
48,044

$
(7,846
)
$
40,198

Trade Name

9,070

—

9,070

9,070

—

9,070

Patents and Other Intangibles

27,859

(13,440
)
14,419

27,810

(12,797
)
15,013

84,973

(22,312
)
62,661

84,924

(20,643
)
64,281

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	March 31, 2014							December 31, 2013
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer Lists	$	50,263	$	(12,715	)	$	37,548	$	46,932	$	(11,627	)	$	35,305
Trade Name	11,825		(380		)	11,445		10,023		(264		)	9,759
Patents and Other Intangibles	28,546		(16,172		)	12,374		28,441		(15,484		)	12,957
	$	90,634	$	(29,267	)	$	61,367	$	85,396	$	(27,375	)	$	58,021

Customer lists are amortized over their estimated period of benefit, generally 10 to 14 years. The majority of value associated to trade names is identified as an indefinite lived intangible asset, which is assessed for impairment on an annual basis as discussed in Note B. Trade names not identified as an indefinite lived intangible asset are amortized over their estimated period of benefit of approximately 1 to 3 years. Patents are amortized using the straight-line method over 5 years. Total intangible amortization expenses were ~~$1.7~~$1.8 million and ~~$2.8~~$1.7 million for the three months ended March 31, ~~2013~~2014 and March 31, ~~2012,~~2013, respectively.

~~Table~~ The weighted average life of ~~Contents~~the additions to customer lists, patents and other intangibles is 6 years.

NOTE ED — INVENTORIES

Inventories recorded using the gross profit method primarily consisted of raw materials and work-in-process held by the Patient Care segment. Inventories using the perpetual method primarily consisted of finished goods held by the Products ~~and~~& Services segment. A description of the Company’s inventory valuation methodologies are presented in Note B.

(In thousands)	31-Mar-13		31-Dec-12		March 31, 2014		December 31, 2013

Raw materials	$	39,478	$	39,478	$	43,143	$	40,970
Work in process	62,774		57,143		75,661		66,832
Finished goods	30,240		30,674		35,148		33,716
	$	132,492	$	127,295	$	153,952	$	141,518

NOTE FE — ACQUISITIONS

During the three months ended March 31, 2014, the Company acquired seven companies, operating a total of 22 patient care clinics. The aggregate purchase price for these O&P businesses was $28.9 million. Of this aggregate purchase price, $9.3 million consisted of promissory notes, $0.4 million was made up of contingent consideration payable within the next two years and $19.1 million was paid in cash. The excess of purchase price over the aggregate fair value was recorded as goodwill. The Company preliminarily allocated the purchase price to the individual assets acquired and liabilities assumed, consisting of $2.6 million accounts receivable, $1.8 million inventory, $20.9 million of goodwill, $4.5 million of definite lived intangibles, $1.5 of indefinite lived intangibles, fixed assets and other assets of $1.4 million, and accounts payable and other liabilities of $3.8 million. The Company’s valuations are subject to adjustment as additional information is obtained. The value of the goodwill from these acquisitions can be attributed to a number of business factors including, but not limited to expected revenue and cash flow growth in future years. Contingent consideration is reported as other liabilities on the Company’s Consolidated Balance Sheet. The Company elected to treat all of these acquisitions as asset acquisitions for tax purposes resulting in all of the Q1 2014 recorded Goodwill as being amortizable for tax purposes. The expenses incurred related to these acquisitions were insignificant and were included in Other operating expenses on the Company’s Consolidated Statements of Income and Comprehensive Income.

During the three months ended March 31, 2013, the Company did not acquire any new ~~patient care centers.~~

~~During the three months ended March 31, 2012, the Company acquired one~~ O&P company, operating a total of two patient care clinics. The aggregate purchase price for these O&P businesses was $2.0 million. The Company recorded approximately $1.4 million of goodwill related to these acquisitions and the expenses incurred related to these acquisitions were insignificant and were included in other operating expenses.companies.

The results of operations for ~~this acquisition~~the acquisitions are included in the Company’s results of operations from the ~~date~~dates of acquisition. Pro forma results would not be materially different.

In connection with contingent consideration agreements, with acquisitions completed prior to adoption of the revised authoritative guidance effective for business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the Company made payments of $0 million and $0.1 million during the three months ended March 31, 2013 and 2012, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in goodwill. In connection with contingent consideration agreements with acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments of $0.7$0.4 million in the first three months of ~~2013~~2014 and ~~$0.4~~$0.7 million in the same period ~~2012.~~2013. As of March 31, ~~2013~~2014 the Company has accrued a total of ~~$5.7~~$2.6 million related to contingent consideration provisions related to acquisitions made in prior periods.

NOTE GF — LONG TERM DEBT

Long-term debt consists of the following:

March 31,

December 31,

(In thousands)

2013

2012

Revolving Credit Facility

$
—

$
—

Term Loan

292,550

293,300

7 1/8% Senior Notes due 2018

200,000

200,000

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

25,936

27,346

Total Debt

518,486

520,646

Less current portion

(11,528
)
(11,082
)
Long Term Debt

$
506,958

$
509,564

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	March 31,			December 31,
(In thousands)	2014			2013

Revolving Credit Facility	$	112,000		$	25,000
Term Loan	220,781			222,188
7 1/8% Senior Notes due 2018	200,000			200,000
Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 2.00% to 4.00%, maturing through November 2018	29,154			21,071
Total Debt	561,935			468,259
Less current portion	(20,869		)	(15,998		)
Long Term Debt	$	541,066		$	452,261

Revolving Credit Facility

The ~~$100.0~~$200.0 million Revolving Credit Facility matures on ~~December 1, 2015~~June 17, 2018 and bears interest at LIBOR plus ~~3.25%~~1.75%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.50:1.00 and (ii) maximum total leverage ratio of 4.00:1.00. As of March 31, ~~2012, the Company was in compliance with these covenants. As of March 31, 2013,~~2014, the Company had ~~$99.5~~$84.5 million available under this facility. ~~This availability~~The amounts outstanding under the Revolving Credit Facility as of March 31, ~~2013 was~~2014 were $115.5 million, net of standby letters of credit of approximately ~~$0.5~~$3.6 million. ~~As of March 31, 2013, the Company had no funds drawn on the Revolving Credit Facility.~~ The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in ~~the equity interests of the Company’s subsidiaries,~~ all of the Company’s assets, ~~and~~ all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

Term Loan

The ~~$300.0 million~~ Term Loan Facility, of which $220.8 million is outstanding, matures on ~~December 1, 2016~~June 17, 2018 and ~~requires quarterly~~bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the Credit Agreement). Quarterly principal payments ranging from 0.625% to 3.750% are required throughout the life of ~~$0.75 million.~~the Term Loan. From time to time, mandatory prepayments may be required as a result of ~~excess free cash flow as defined in the Credit Agreement,~~ certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. No ~~such~~ mandatory prepayments ~~were~~are required ~~during the first quarter of 2013 or 2012. The~~under our Term Loan Facility bears interest at LIBOR plus 3.0%, or applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. As of March 31, 2013, the interest rate on the Term Loan Facility was 4.0%.Agreement. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in ~~the equity interests of the Company’s subsidiaries,~~ all of the Company’s assets, ~~and~~ all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

71/8% Senior Notes

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

~~On or prior~~Prior to November 15, ~~2013,~~2014, the Company may redeem ~~up to 35% of the aggregate principal amount~~all or some of the notes at a redemption price of ~~107.125% of the principal amount thereof, plus accrued and unpaid~~103.6% all to interest ~~and additional interest to~~that would otherwise have become due from the redemption date ~~with the proceeds of a public offering of its equity securities.~~through November 15, 2014. On or after November 15, 2014, the Company may redeem all or a part of the notes with a premium, as described in further detail in the Company’s Annual Report on ~~form~~Form 10-K for the year ended December 31, ~~2012.~~2013.

Subsidiary Guarantees

The Revolving and Term Loan Facilities and the 71/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the parent company does not have independent assets or operations. The guarantees are full and unconditional and joint and several. There are no restrictions on the ability of our subsidiaries to transfer cash to the Company or to co-guarantors.

Debt Covenants

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility limit the Company’s ability to, among other things, purchase capital assets, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities, and engage in mergers, consolidations and certain sales of assets. AtThe credit agreement requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.50:1.00 and (ii) maximum total leverage ratio of 4.00:1.00. As of March 31, ~~2013,~~2014, the Company was in compliance with all covenants under these debt agreements.

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NOTE HG — COMMITMENTS AND CONTINGENT LIABILITIES

Contingencies

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

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

On May 20, 2013, the Staff of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) informed the Company that it was conducting an investigation of the Company and made a request for a voluntary production of documents and information concerning the Company’s calculations of bad debt expense and allowance for doubtful accounts. The Company cooperated in the investigation. By letter dated April 14, 2014 the Staff informed the Company that it had concluded its investigation, and that based on the information the Staff had as of that date, the Staff did not intend to recommend an enforcement action by the SEC against the Company. The information in the Staff’s letter was provided under the guidelines set out in the final paragraph of Securities Act Release No. 5310.

Guarantees and Indemnifications

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

NOTE IH — NET INCOME PER COMMON SHARE

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

Net income per share is computed as follows:

	Three Months Ended				Three Months Ended
	March 31,				March 31,
(In thousands, except share and per share data)	2013		2012		2014		2013

Net income	$	9,490	$	8,636	$	5,997	$	9,490

Shares of common stock outstanding used to compute basic per common share amounts	34,598,494		34,036,539		35,076,828		34,598,494
Effect of dilutive restricted stock and options (1)	467,538		603,121		338,190		467,538
Shares used to compute dilutive per common share amounts	35,066,032		34,639,660		35,415,018		35,066,032

Basic income per share	$	0.27	$	0.25	$	0.17	$	0.27
Diluted income per share	$	0.27	$	0.25	$	0.17	$	0.27

~~(1) There were no anti-dilutive options for the three months ended March 31, 2013 and 2012.~~
(1) There were no anti-dilutive options for the three months ended March 31, 2014 and 2013.

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NOTE JI — SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP)

The Company’s unfunded noncontributory defined benefit plan (the “Plan”) covers certain senior executives, is administered by the Company and calls for annual payments upon retirement based on years of service and final average salary. Benefit costs and liabilities balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.

The following assumptions were used in the calculation of the net benefit cost and obligation at March 31, ~~2013~~2014 and ~~2012:~~2013:

	2013		2012		2014		2013
Discount rate	3.25	%	3.90	%	4.03	%	3.25	%
Average rate of increase in compensation	3.00	%	3.00	%	3.00	%	3.00	%

The Company believes the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The change in the Plan’s net benefit obligation for the three months ended March 31, 2014 and 2013 ~~and 2012:~~is as follows:

	(in thousands)			(in thousands)
Net benefit cost accrued at December 31, 2012	$	22,377
Net benefit cost accrued at December 31, 2013				$	20,952
Service cost	169			129
Interest cost	173			199
Payments	(705		)	(1,247		)
Net benefit cost accrued at March 31, 2013 (unaudited)	$	22,014
Net benefit cost accrued at March 31, 2014				$	20,033

	(in thousands)			(in thousands)
Net benefit cost accrued at December 31, 2011	$	20,230
Net benefit cost accrued at December 31, 2012				$	22,377
Service cost	230			169
Interest cost	190			173
Payments	(525		)	(705		)
Net benefit cost accrued at March 31, 2012 (unaudited)	$	20,125
Net benefit cost accrued at March 31, 2013				$	22,014

NOTE KJ - STOCK-BASED COMPENSATION

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

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

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

~~Table of Contents~~

As of March 31, ~~2013,~~2014, of the 2.5 million shares of common stock authorized for issuance under the Company’s 2010 Plan, approximately ~~1.5~~1.8 million shares have been issued. During the first three months of ~~2013,~~2014, the Company issued approximately ~~0.4~~0.3 million shares of restricted stock units under the 2010 Plan. The total fair value of these grants is ~~$10.7~~$9.3 million. Total unrecognized share-based compensation cost related to unvested restricted stock units was approximately ~~$18.9~~$18.3 million as of March 31, ~~2013~~2014 and is expected to be expensed as compensation expense over approximately four ~~years.~~years as the units vest.

For the three months ended March 31, ~~2013~~2014 and ~~2012,~~2013, the Company has included approximately ~~$1.7~~$2.4 million and ~~$2.0~~$1.7 million, respectively, for share-based compensation cost in the accompanying condensed consolidated statements of income for the ~~2002, 2003 and~~ 2010 ~~Plans.~~Plan. Compensation expense relates to restricted stock ~~units grants.~~unit grants under that plan.

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NOTE LK — SEGMENT AND RELATED INFORMATION

~~During the quarter, management changed its internal structure to align with their end-market customers. Due to the change, the~~The Company ~~assessed its operating segment structure and determined it~~ has identified two operating ~~segments: (i) Patient Care~~segments and ~~(ii) Products & Services~~both performance evaluation and ~~that its reportable segments~~resource allocation decisions are the same as its operating segments. Because management had previously identified three operating segments; all prior periods have been retroactively adjusted to reflect this change. The Company evaluates segment performance and allocates resourcesdetermined based on each operating segment’s income from operations. The operating segments are described further below:

Patient Care —This segment consists of (i) the Company’s owned and operated patient care clinics and (ii) its contracting and network management business. The patient care clinics provide services to design and fit O&P devices to patients. These clinics also instruct patients in the use, care and maintenance of the devices. The principal reimbursement sources for the Company’s services are:

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

· Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules ~~for~~(with 10 regional ~~service areas;~~pricing areas for prosthetics & orthotics and by state for DME);

· Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

· U.S. Department of Veterans Affairs.

The Company estimates that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately ~~40.2%~~38.7% and ~~41.2%~~40.2%, of the Company’s net sales for the three months ended March 31, ~~2013~~2014 and ~~2012,~~2013, respectively.

OThe Company’sur contract and network management business is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies. ~~We partner~~It partners with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers. ~~Our~~The network now includes approximately ~~1,130~~1,170 O&P provider locations, including over 400 independent providers. As of March 31, ~~2013, we~~2014, it had 5658 contracts with national and regional providers.

Products & Services—This segment consists of ~~its~~the Company’s distribution ~~business,~~subsidiary, which distributes and fabricates O&P products and components for both the O&P industry and the Company’s own patient care clinics, and its rehabilitation solutions business. Rehabilitation solutions leases rehabilitation equipment and provides evidence-based clinical programs to post-acute rehabilitation service providers. This segment also develops emerging neuromuscular technologies for the O&P and rehabilitation markets.

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Other — This consists of corporate overhead and includes unallocated expense such as personnel costs, professional fees and corporate offices expenses.

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

Summarized financial information concerning the Company’s operating segments is shown in the following table. Intersegment sales mainly include sales of O&P components from the Products & Services segment to the Patient Care segment and were made at prices which approximate market values.

Products and

Consolidating

(In thousands)

Patient Care

Services

Other

Adjustments

Total

Three Months Ended March 31, 2013

Net sales

Customers

$
193,212

$
40,323

$
—

$
—

$
233,535

Intersegments

—

51,083

—

(51,083
)
—

Depreciation and amortization

4,066

3,203

2,016

—

9,285

Income (loss) from operations

25,389

9,475

(11,885
)
(263
)
22,716

Interest (income) expense

7,750

3,335

(3,308
)
—

7,777

Income (loss) before taxes

17,639

6,140

(8,577
)
(263
)
14,939

Capital expenditures

2,903

107

2,388

—

5,398

Three Months Ended March 31, 2012

Net sales

Customers

$
176,518

$
41,573

$
—

$
—

$
218,091

Intersegments

—

48,413

—

(48,413
)
—

Depreciation and amortization

3,427

2,997

1,861

—

8,285

Income (loss) from operations

25,279

8,810

(12,075
)
(277
)
21,737

Interest (income) expense

7,582

2,272

(2,077
)
—

7,777

Income (loss) before taxes

17,697

6,538

(9,998
)
(277
)
13,960

Capital expenditures

2,543

714

2,059

—

5,316

Total Assets

March 31, 2013

1,398,550

341,005

—

(510,634
)
1,228,921

December 31, 2012

1,389,223

336,318

—

(488,214
)
1,237,327

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(In thousands)	Patient Care		Products & Services		Other			Consolidating Adjustments			Total
Three Months Ended March 31, 2014
Net sales								��
Customers	$	195,630	$	39,975	$	—		$	—		$	235,605
Intersegments	—		49,555		—			(49,555		)	—
Depreciation and amortization	4,879		2,955		2,365			—			10,199
Income (loss) from operations	22,275		10,668		(16,695		)	(218		)	16,030
Interest (income) expense	7,956		3,691		(5,549		)	—			6,098
Income (loss) before taxes	14,319		6,977		(11,146		)	(218		)	9,932

Capital expenditures	4,568		266		4,027			—			8,861

Three Months Ended March 31, 2013
Net sales
Customers	$	189,027	$	40,323	$	—		$	—		$	229,350
Intersegments	—		51,083		—			(51,083		)	—
Depreciation and amortization	4,066		3,203		2,016			—			9,285
Income (loss) from operations	25,389		9,475		(11,885		)	(263		)	22,716
Interest (income) expense	7,750		3,335		(3,308		)	—			7,777
Income (loss) before taxes	17,639		6,140		(8,577		)	(263		)	14,939

Capital expenditures	2,903		107		2,388			—			5,398

Total Assets
March 31, 2014	1,523,088		416,084		—			(569,487		)	1,369,685
December 31, 2013	1,502,721		408,628		—			(639,689		)	1,271,660

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

Overview

The following is a discussion of our results of operations and financial condition for the periods described below. This discussion should be read in conjunction with the Consolidated Financial Statements included in this report. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on our current expectations, which are inherently subject to risks and uncertainties. Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 for further discussion of risks and uncertainties. Our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements.

~~Table of Contents~~

Business Overview

General

The goal of Hanger, Inc. (the “Company”) is to be the world’s premier provider of services and products that enhance human physical capabilities. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, Hanger is steeped in 150 years of clinical excellence and innovation. We provide orthotic and prosthetic (O&P) patient care services, distribute O&P ~~(orthotics and prosthetics)~~ devices and components, manage O&P networks and provide ~~rehabilitative~~therapeutic solutions to the broader post-acute market. For the three months ended March 31, 2013, our net sales were $233.5 million and we recorded net income of $9.5 million. For the three months ended March 31, 2012, our net sales were $218.1 million and we recorded net income of $8.6 million.

We have two ~~segments—~~operating segments — Patient Care and Products & Services.

Our Patient Care segment is comprised of ~~our patient care clinics~~Hanger Clinic, Cares, Dosteon, other related O&P businesses and our contracting network management business. Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic patient care clinics in the United States and (ii) manage an O&P provider network of approximately 1,170 clinics that coordinates all aspects of O&P patient care for insurance companies. We operate in excess of ~~730~~760 O&P patient care clinics located in 45 states and the District of Columbia and six strategically located distribution facilities. For the three months ended March 31, ~~2013,~~2014, net sales to customers attributable to our Patient Care segment were ~~$193.2 million~~$195.6 million.

Our Products & Services segment is comprised of our distribution business, one of the largest distributors of O&P products in the United States, and our rehabilitative solutions business. Our distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania and Texas allow us to deliver products to the vast majority of our distribution customers in the United States within two business days.

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Our rehabilitative solutions business develops specialized rehabilitation technologies and is a leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than ~~4,600~~5,000 long-term care facilities and other sub-acute rehabilitation providers throughout the ~~U.S.~~United States. This segment also develops neuromuscular technologies through independent research. For the three months ended March 31, ~~2013,~~2014, net sales to customers attributed to Products & Services segment were ~~$40.3~~$40.0 million. See Note LK for our consolidated financial statements contained herein for further information related to our segments.

For the three months ended March 31, 2014, our net sales were $235.6 million and we recorded net income of $6.0 million. For the three months ended March 31, 2013, our net sales were $229.4 million and we recorded net income of $9.5 million.

Industry Overview

We estimate that approximately ~~$4.3~~$4.4 billion is spent in the United States each year for orthotic and prosthetic products and services. ~~Our~~We estimate that our Patient Care segment currently accounts for approximately 20% market share, ~~provides~~providing a comprehensive portfolio of orthotic, prosthetic and post-operative solutions to patients in the acute, post-acute, and patient care clinic settings.

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

The industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of O&P devices. We believe, the average replacement time for orthotic devices is one to three years, while the average replacement time for prosthetic devices is three to five years. We expect the demand for O&P services to continue to grow as a result of several key trends, including the aging of the U.S. population, resulting in an increase in the prevalence of disease associated disability, and the demand for new and advanced replacement devices.

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

We estimate the market for rehabilitation technologies, integrated clinical programs and therapist training in skilled nursing facilities (SNF) to be approximately $240 million annually. We estimate that we currently provide these products and services to approximately 30% of the estimated 15,700 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs and training within the broader post-acute rehabilitation markets to be approximately $600 million. Currently, our goods and services are only provided to a small segment of this larger category; however, we believe significant demand exists for future expansion.

~~Table of Contents~~

Business Description

Patient Care

Our Patient Care segment ~~which~~ is ~~now~~ comprised of Hanger Clinic, Cares, Dosteon, other related O&P businesses and our contracting network management business. Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic patient care clinics in the United States and ~~our contracting and~~(ii) manage an O&P provider network ~~management business, provides~~of approximately 1,170 clinics that coordinates all aspects of O&P patient care for insurance companies. As of March 31, 2014, Hanger Clinic provided O&P patient care services through over ~~730~~760 patient care clinics and over ~~1,250~~1,333 clinicians in 45 states and the District of Columbia. Substantially all of our clinicians are certified, or are candidates for formal certification, by the O&P industry certifying boards. Our patient care clinics also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

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

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

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The fitting process often involves several stages ~~in order~~ to successfully achieve desired functional and cosmetic results. ~~These custom~~Custom devices are fabricated and fitted by our skilled technicians using plaster castings, measurements and designs made by our clinicians. Frequently, our proprietary Insignia scanning system is used to measure and design devices. The Insignia system scans the patient and produces a very accurate computer generated image of the ~~patient which results~~patient’s residual limb, resulting in a faster turnaround for the patient’s device and a more professional overall experience.

In order to provide timely service to our patients, we employ technical personnel and maintain laboratories at many of our patient care clinics. We have earned a strong reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability and can significantly enhance the rehabilitation process.

The quality of our services and the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians. A listings of our principal reimbursement sources for our services ~~is described~~are:

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

·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in ~~Note L.~~published fee schedules with 10 regional pricing areas for prosthetics and orthotics and by state for DME;

·Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons based upon financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

·U.S. Department of Veterans Affairs.

Government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately ~~40.2%~~38.7% and ~~41.2%~~40.2% of our net sales for the three months ended March 31, ~~2013~~2014 and ~~2012,~~2013, respectively. These payors have set maximum reimbursement levels for O&P services and ~~products using a series of codes which designate the type of product and service being delivered.~~products. Medicare prices are adjusted each year based on the Consumer Price Index-Urban (“CPIU”) unless Congress acts to change or eliminate the adjustment. The CPIU is adjusted further by an efficiency factor (“the Productivity Adjustment” or “the MFP adjustment”) in order to determine the final rate adjustment each year. The Medicare price increases/(decreases)~~/ increases~~ for 2014, 2013 and 2012 were 1.0%, 0.8% and ~~2011were 0.8%,~~ 2.4%~~, and (0.1%)~~, respectively. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

~~Table of Contents~~

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

Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market for national and regional insurance companies. We partner with healthcare insurance companies either as a preferred provider or to manage their O&P network of providers. Our network now includes approximately ~~1,130~~1,170 O&P provider locations, including over 400 independent providers. As of March 31, ~~2013,~~2014, we had 5658 contracts with national and regional providers.

Products & Services

Our Products & Services segment iswas created in the first quarter of 2013 through the combination of our previously reported Distribution segment and Therapeutic Solutions segment. Through our ~~distribution business,~~wholly-owned subsidiary, Southern Prosthetic Supply (SPS), we distribute O&P components both to independent customers and to our own patient care clinics. WeThis business maintains over 26,000 individual SKUs in inventory which are manufactured by more than 375 different suppliers. SPS is also ~~provide rehabilitative solutions to the O&P market and the post-acute rehabilitation market while being~~ a leading ~~manufacturer~~fabricator and distributor of therapeutic footwear for diabetic patients in the podiatric ~~market. Our distribution business maintains approximately 30,000 individual SKUs in inventory which are manufactured by more than 390 different companies.~~market and fabricates O&P devices both for our O&P clinics and those of our competitors. Our distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania, and Texas allow us to deliver products ~~via ground shipment anywhere~~to the vast majority of our distribution customers in the ~~contiguous~~ United States within two business days.

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Our distribution business enables us to:

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

· ~~reduce~~manage our patient care clinic inventory levels and improve inventory turns;

· manage inventory ~~quality;~~quality control;

· encourage our patient care clinics to use the most clinically appropriate products; and

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

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

~~Our~~Through our wholly-owned subsidiary, Accelerated Care Plus (“ACP”), we believe our rehabilitative solutions business is the nation’s leading provider of rehabilitation technologies and integrated clinical programs to rehabilitation providers. Our unique value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology; ~~evidence based~~evidence-based clinical programs, and continuous onsite therapist education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We serve more than ~~4,600~~5,000 skilled nursing facilities nationwide, including 2122 of the 25 largest national providers. Our contracts contain negotiated pricing and service levels with terms ranging from one to five years, generally billed to our customers monthly, and revenue is recognized based upon the contractual terms of the agreements.

We also have a product development business specializing in the commercialization of emerging products in the O&P and ~~Rehabilitation~~rehabilitation markets. Working with inventors under licensing and consulting agreements, we commercialize the design, obtain regulatory approvals, develop clinical protocols for the technology, and then introduce the devices to the marketplace through a variety of distribution channels. We currently have two commercial products: the ~~WalkAide System which benefits patients with a condition referred to as drop foot, and the~~ V-Hold, which is active vacuum technology used in lower extremity prosthetic ~~devices.~~

~~Table~~devices, and the WalkAide system, which benefits patients with a condition referred to as foot drop. The V-Hold is primarily sold through our patient care clinics. Research and development expenses, which were reported in Other operating expenses on our Consolidated Statements of ~~Contents~~Income and Comprehensive Income for the three months ended March 31, 2014 and for the year ended December 31, 2013 were $0.1 million and $0.5 million, respectively.

Critical Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note B to the Consolidated Financial Statements included elsewhere in this report. We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

· Revenue Recognition: Revenues in ~~our~~the Company’s Patient Care segment are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided. InRevenues from the sale of devices are recorded when the patient has accepted and received the device and recorded net of known and estimated future contractual adjustments and discounts. Contractual adjustments and discounts are recorded as contra-revenue within net sales on the Consolidated Statement of Income and Comprehensive Income. Medicare and Medicaid regulations and the various agreements we have with other third-party payors under which these contractual adjustments and discounts are calculated are complex and are subject to interpretation. Therefore, the devices and related services authorized and provided, and the related reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and pay schedules, and contract renegotiations, occur frequently, necessitating regular review and assessment of the estimation process by management.

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The reserve for future contractual adjustments and discounts is reflected as a reduction of accounts receivable on the Company’s Consolidated Balance Sheet.

Revenues in the Company’s Products & Services segment ~~revenues on~~are derived from the distribution of O&P devices ~~to customers~~and the leasing of rehabilitation technology combined with clinical therapy programs, education and training. Distribution revenues are recorded upon the shipment of products, in accordance with the terms of the invoice, net of ~~merchandise returns received and the amount established for anticipated~~estimated returns. Discounted sales are recorded at net realizable value. ~~We also derive revenue from leasing rehabilitation technology combined with clinical therapy programs and education and training, which is recorded on a monthly basis according to~~Leasing revenues are recognized based upon the contractual terms of the ~~contracts~~agreements, which contain negotiated pricing and service levels with ~~our customers.~~terms ranging from one to five years, and are generally billed to customers monthly.

· Net Accounts Receivable: ~~Certain~~We report accounts receivable ~~may be~~at estimated net realizable amounts generated for products delivered and services rendered from federal, state, managed care health plans, commercial insurance companies and patients. Collections of these accounts receivable are our primary source of cash and are critical to our operating performance. We estimate uncollectible ~~even if properly pre-authorized and billed. Accounts receivable balances are periodically evaluated to assess collectability. In addition to the actual bad~~patient accounts primarily based upon its experience in historical collections from individual patients. Bad debt expense ~~recognized during collection activities, we estimate~~is reported within Other operating expenses within the ~~amount~~Consolidated Statement of ~~potential bad debt expense that may occur in the future. This estimate is based upon our historical experience as well as a review of our receivable balances.~~

~~On a monthly basis, we evaluate cash collections,~~Income and Comprehensive Income. At March 31, 2014 and December 31, 2013, net accounts receivable ~~balances and write-off activity to assess the adequacy of our~~reflected an allowance for doubtful ~~accounts. Additionally, a company-wide evaluation~~accounts of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance$10.3 million and the outstanding balance, and a specific reserve is recorded if needed. From time to time, we may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In cases where valid accounts receivable cannot be collected, the uncollectible account is written off to bad debt expense.$10.0 million, respectively.

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

~~Table of Contents~~

March 31, 2014
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care
Commercial insurance	$	40,276	$	12,870	$	18,593	$	71,739
Private pay	4,595		2,995		6,709		14,299
Medicaid	11,472		3,683		6,691		21,846
Medicare	28,740		5,902		25,860		60,502
VA	2,477		586		668		3,731
Products & Services
Trade accounts receivable	11,579		3,642		6,523		21,744
	$	99,139	$	29,678	$	65,044	$	193,861

March 31, 2013

(In thousands)

0-60 days

61-120 days

Over 120 days

Total

Patient Care

Commercial insurance

$
45,156

$
9,643

$
13,341

$
68,140

Private pay

7,172

4,766

7,371

19,309

Medicaid

12,816

3,402

4,549

20,767

Medicare

30,531

3,965

13,572

48,068

VA

1,997

611

548

3,156

Products and Services

Trade accounts receivable

11,242

2,822

4,604

18,668

$
108,914

$
25,209

$
43,985

$
178,108

December 31, 2012
December 31, 2013
(In thousands)	0-60 days		61-120 days		Over 120 days		Total		0-60 days		61-120 days		Over 120 days		Total
Patient Care
Commercial insurance	$	56,326	$	11,413	$	13,355	$	81,094	$	52,899	$	12,092	$	14,507	$	79,498
Private pay	5,928		4,955		6,655		17,538		3,991		3,413		5,751		13,155
Medicaid	12,879		3,468		3,519		19,866		11,876		4,122		5,282		21,280
Medicare	29,910		6,118		9,494		45,522		30,587		7,097		20,918		58,602
VA	2,270		608		353		3,231		2,589		565		463		3,617
Products and Services
Products & Services
Trade accounts receivable	12,556		3,149		4,091		19,796		11,541		3,370		4,728		19,639
	$	119,869	$	29,711	$	37,467	$	187,047	$	113,483	$	30,659	$	51,649	$	195,791

· ~~Inventories:~~ Inventories: Patient Care—Inventories at Hanger Clinics, Dosteon and Cares, which consist of raw materials, work-in-process and finished goods, amounted to $120.1 million and $109.2 million at March 31, 2014 and December 31, 2013, respectively. Inventories in ~~the Patient Care segment consisting~~Hanger’s Clinics, which amounted to $110.0 million and $99.0 million at March 31, 2014 and December 31, 2013, respectively, consist principally of raw materials and work-in-process ~~are~~inventory valued based on the gross profit method, which approximates lower of cost or market using the first-in first-out method. ~~The Company applies~~Inventories in the Dosteon business amounted to $8.8 million and $8.9 million at March 31, 2014 and December 31, 2013, respectively, and consist principally of raw materials. As of March 31, 2014, the Dosteon inventories were valued based on the gross profit method, ~~on a patient care clinic basis~~which approximates lower of cost or market using the first-in first-out method. Inventories in ~~this segment’s inventory~~the Cares business amounted to ~~determine ending inventory~~$1.2 million and $1.3 million as of March 31, 2014 and December 31, 2013, respectively, consists principally of finished goods and are valued at the ~~end~~lower of ~~each interim period except~~cost or market using the first-in first-out method based on perpetual records.

Hanger Clinic and Dosteon do not maintain a perpetual inventory system. On October 31st~~, which is~~ of each year the ~~date of our physical inventory. The~~company performs an annual physical inventory ~~for this segment~~of all inventories in Hanger Clinics. Dosteon counted its inventories on December 31, 2013 and October 31, 2012. The Company values the raw materials and work-in-process inventory counted at October 31 at lower of cost or market using the first-in first-out ~~method and includes~~method. Hanger Clinic work-in-process ~~consisting~~inventory consists of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Material, labor and overhead costs are determined at the individual clinic or groups of clinics level.

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Adjustments to reconcile the Hanger Clinic and Dosteon physical inventory ~~to our books~~ are treated as changes in accounting estimates and are recorded in the fourth quarter. The Company recorded a fourth quarter adjustment of a decrease to inventory of $2.3 million in 2013.

· Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. We assess goodwill for impairment annually during the fourth quarter, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches. Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset. ~~As of~~There were no impairment indicators since our last annual impairment test on October 1, ~~2012, there were no indicators~~2013.

Definite-lived trade name intangible assets are amortized over their estimated period of benefit of approximately 1 to 3 years. Approximately $10.6 million of the value of trade names is identified as an indefinite-lived intangible asset within the Products & Services segment and its fair value is annually assessed for impairment asin the Company’s fiscal fourth quarter. The Company estimates fair value utilizing a relief-from-royalty method valuation model and the 2013 assessment estimated the fair ~~values of~~value is greater than carrying value. However, the ~~reporting units were~~estimated fair value is not substantially in excess of ~~their~~the carrying ~~values.~~

~~Table of Contents~~value. A key assumption in the relief-from-royalty method is projected future revenue. If actual future revenues fall below projection, the estimated fair value could be significantly impacted and an impairment charge may be necessary.

Non-compete agreements are recorded when we enter into the agreement and are amortized, using the straight-line method, over their terms ranging from five to seven years. Other definite-lived intangible assets are recorded at ~~cost~~fair value and are amortized, using the straight-line method, over their estimated useful lives of up to 14 years. Whenever the facts and circumstances indicate that the carrying amounts of these intangibles may not be recoverable, we review and assess the future cash flows expected to be generated from the related intangible for possible impairment. Any impairment would be recognized as a charge to operating results and a reduction in the carrying value of the intangible asset.

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

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

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

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These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

Guidance and Outlook

The Company ~~expects 2013 revenues~~lowered its 2014 full-year adjusted diluted EPS guidance to a range of between ~~$1.06~~$2.01 and ~~$1.08 billion, resulting from~~$2.11, which represents growth of between 3.1% and 8.2% over the prior year. The Company expects to grow same center sales between 3% toand 5% for the remainder of 2014. Taking into account the impact of first quarter 2014 results, the Company has lowered its projected full year 2014 same center sales growth to between 2% and 4%. The reduction in ~~its~~earnings projections in part reflects lower same center sales in the Patient Care segment ~~along~~combined with additional investments the Company is making in its processes and control environment. The Company lowered 2014 full-year net sales guidance to a range of between $1.100 and $1.120 billion. The expectation of lower same center sales growth will be partially offset by accelerated timing of acquisitions which will drive incremental revenues in the remainder of the year, but will not provide significant earnings over that period due to their initial integration costs. Reflecting the lower than expected first quarter results and the reimbursement environment, the Company adjusted its expectation of 2014 cash flow from operations to a range of between $80 and $90 million. The Company continues to anticipate acquiring O&P operations in 2014 with annualized net sales of between $35 and $45 million, and plans to invest between $40 and $50 million in capital additions during the year. The Company’s previous full-year 2014 guidance issued on February 12, 2014 was to achieve revenues of $1.110 to $1.130 billion, adjusted diluted EPS of $2.10 and $2.20, patient care same center sales of 3% to 5% ~~growth in its Products & Services segment. The Company anticipates adjusted diluted earnings per share between $2.02~~, and $2.09 for 2013, excluding approximately $0.05 for training costs related to the implementation of Janus, a new clinic management system, and an increase in adjusted operating margins of between 30 to 50 basis points. The Company anticipates generating cash flow from operations of ~~between $80 million and~~$90 to $100 million in 2013 and investing a total of $40 million to $50 million in capital additions. During 2013 the Company will continue its acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues.million.

Results of Operations

The following table sets forth for the periods indicated certain items from our Consolidated Statements of Income and Comprehensive Income as a percentage of our net sales:

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	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2013		2012		2014		2013
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Material costs	29.0		30.6		28.6		29.5
Personnel costs	38.5		37.2		40.9		39.2
Other operating expenses	18.8		18.4		19.4		17.4
Acquisition expenses	0.0		0.0
Depreciation and amortization	4.0		3.8		4.3		4.0
Income from operations	9.7		10.0		6.8		9.9
Interest expense, net	3.4		3.6		2.6		3.4
Income before taxes	6.3		6.4		4.2		6.5
Provision for income taxes	2.2		2.4		1.7		2.4
Net income	4.1	%	4.0	%	2.5	%	4.1	%

Three Months Ended March 31, ~~2013~~2014 Compared to the Three Months Ended March 31, ~~2012~~2013

Net Sales. Net sales for the three months ended March 31, ~~2013~~2014 increased ~~$15.4~~$6.2 million, or ~~7.1%~~2.7%, to ~~$233.5~~$235.6 million from ~~$218.1~~$229.4 million for the three months ended March 31, ~~2012.~~2013. This increase was due to a ~~$16.7~~$6.5 million, or ~~9.5%~~3.5%, increase in the Patient Care segment, and a ~~$1.3~~$0.3 million ~~offset, or 3.0%,~~ decrease in sales in the Products & Services segment. The $6.5 million increase in Patient Care segment sales was composed of a $10.0 million increase in sales from acquisitions, offset by a $3.5 million, or 1.8%, decline in same center sales. The decline in same center sales was driven by the impact of severe weather in the eastern and central parts of the U.S. The severe weather throughout the first quarter resulted in approximately 1,000 closed clinic days in the Company’s Patient Care segment, ~~was a result~~which translates to about 5 times more weather related closures than the same period of an increase in same store sales and the impact of 2012 O&P acquisitions, including a number of former customers of the Products & Services segment. The decrease in sales in the Products & Services segment was a result of a number of its largest independent O&P customers being acquired by the Patient Care segment during 2012 and additional pressure put on independent O&P customers by the continuation of the CMS Recovery Audit Contractor (RAC) program.2013.

Material Costs. Material costs for the three months ended March 31, ~~2013 was~~2014 decreased to $67.3 million, compared to $67.7 ~~million, an increase of $1.0 million over $66.7~~ million for the three months ended March 31, ~~2012 primarily due to sales growth.~~2013. Material costs as a percentage of net sales decreased ~~160~~90 basis points primarily due to an increase in the rate of reimbursement, improved sales mix, a reduction in product cost arising from an effort to further consolidate our purchasing power and the impact of ~~2012~~2013 O&P acquisitions, which had a lower material costs rate than the consolidated ~~percentage.~~rate.

Personnel Costs. Personnel costs for the three months ended March 31, ~~2013~~2014 increased by ~~$8.8~~$6.4 million to ~~$90.0~~$96.4 million from ~~$81.2~~$90.0 million for the three months ended March 31, ~~2012.~~2013. As a percentage of net sales, personnel costs increased ~~130 basis points~~ to ~~38.5%~~40.9% in ~~2013~~2014 from ~~37.2%~~39.2% in ~~2012.~~ 2013.

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The increase was primarily due to ~~merit and staffing increases~~a $4.5 million increase related to acquisitions ~~made in 2012~~ and the balance due to increased healthcare costs.

Other Operating Expenses. Other operating expenses, which are comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased ~~$3.6~~$5.9 million to ~~$43.7~~$45.6 million, or ~~18.8%~~19.4% of net revenues, in the first quarter of ~~2013~~2014 compared to ~~$40.1~~$39.7 million, or ~~18.4%~~17.4% of net revenues, in the first quarter of ~~2012.~~2013. The increase is primarily attributable to a ~~$2.2 million increase in rent expenses and a~~ $1.2 million increase related to acquisitions with the balance due to increased occupancy and utility costs due to the severe weather, as well as an increase in ~~bonus expenses.~~bad debt expense.

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, ~~2013~~2014 increased ~~$1.0~~$0.9 million, to ~~$9.3~~$10.2 million, compared to ~~$8.3~~$9.3 million in the first quarter of ~~2012.~~2013. The increase was primarily due to software, leasehold improvements, and machinery and equipment purchased over the last 12 months.

Income from Operations. Income from operations ~~increased $1.0~~decreased $6.7 million, to $16.0 million, for the three months ended March 31, 2014 compared to $22.7 million for the three months ended March 31, 2013, ~~compared~~due principally by the weather related decline in same center sales in the Patient Care segment and costs related to ~~$21.7 million for~~ the ~~three months ended March 31, 2012 due primarily to increased sales volume.~~

~~Table~~delayed filing of ~~Contents~~the Company’s 10-K.

Interest Expense. Interest expense ~~remained consistent at $7.8~~decreased $1.7 million, to $6.1 million, for the three months ended March 31, ~~2013,~~2014, compared to $7.8 million, for the three months ended March 31, ~~2012, as variable~~2013. The decrease resulted from the interest ~~rate and outstanding levels of~~savings from the debt ~~were comparable~~refinancing that occurred in the ~~two periods.~~2nd quarter of 2013.

Provision for Income Taxes. The provision for income taxes for the three months ended March 31, ~~2013~~2014 was ~~$5.5~~$3.9 million, or ~~36.5%~~39.6% of pre-tax income, compared to ~~$5.3~~$5.5 million, or ~~38.1%~~36.5% of pre-tax income, for the three months ended March 31, ~~2012.~~2013. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences. The ~~2013~~2014 period has a ~~lower~~higher effective tax rate primarily due to the ~~reinstatement~~expiration of the ~~2012~~ federal ~~Research~~research and ~~Development Tax Credit.~~development tax credit.

Net Income. Net income ~~increased $0.9~~decreased $3.5 million, to ~~$9.5~~$6.0 million, for three months ended March 31, ~~2013,~~2014, from ~~$8.6~~$9.5 million for the three months ended March 31, ~~2012,~~2013, due to the reasons noted above.

Financial Condition, Liquidity and Capital Resources

Cash Flows

Our working capital at March 31, ~~2013 was $265.7~~2014 increased by $72.9 million to $338.6 million, compared to ~~$250.9~~$265.7 million at March 31, ~~2012.~~2013. The increase in working capital iswas primarily due to the impact of acquisitions as well as increases in cash, inventory, and ~~accounts~~income taxes receivable due to the ~~growth~~borrowing of funds under the ~~business~~revolving credit facility, the build-up of work-in-process inventory, and ~~acquisitions completed in 2012.~~prepayment of estimated 2014 income tax expense,and the payout of annual bonus plans, respectively. Days sales outstanding (“DSO”), which is the number of days between the billing date of O&P services and the date of receipt of payment thereof, for the three months ended March 31, ~~2013~~2014 increased to 5664 days from 5156 days for the same period last year. The increase in DSO is ~~primarily~~ related to an increase in ~~CMS~~Medicare audits, including Recovery Audit Contractor ~~(RAC)~~or RAC audits, ~~which~~Comprehensive/Error Rate Testing or CERT audits and Medicare Administrative Contractor (MAC) prepayments audits. These audits review claims submitted to ~~Medicare.~~ Medicare and result in payment delays while the audits are pending. The frequency of these audits significantly increased beginning in 2012, both for us and throughout the medical and healthcare industry, leading to substantial delays in the audit adjudication process, particularly in administrative law appeals. At March 31, 2014 and December 31, 2013, we had approximately $17.1 million and $15.2 million of claims subject to pending Medicare audits, respectively.

Net cash provided byby/(used in) operating activities was ~~$2.2~~($10.0) million for the three months ended March 31, ~~2013~~2014 compared to ~~$1.3~~$2.2 million for the same period in the prior year. The ~~increase~~decrease in cash provided by operating activities in the current year resulted primarily from ~~increased~~decreased net ~~income.~~income, build-up of inventory, and prepayment of estimated 2014 income tax expense.

Net cash used in investing activities was ~~$5.3~~$29.8 million for the three months ended March 31, ~~2013,~~2014, compared to ~~$10.8~~$5.3 million in the prior year. In the first three months of 2014, we acquired seven companies for $19.2 million, net of cash acquired, made property, plant and equipment purchases of a net $8.3 million, and purchased $2.3 million of company owned life insurance. During the same period in 2013, we did not acquire O&P ~~companies. During the same period in 2012, we acquired two patient care clinics for an aggregate purchase price~~companies and made property, plant and equipment purchases of ~~$2.0~~a net $5.3 million. ~~Additionally, in 2013, we invested $5.4 million in capital assets, compared to $5.3 million for the same period in 2012.~~

Net cash provided by/(used inin) financing activities was ~~$1.1~~$85.5 million and ~~$1.1~~($1.1) million for the quarters ended March 31, 2014 and 2013, respectively. During the first quarter of 2014 we: (i) borrowed $125.0 million from our revolving credit facility; (ii) repaid $38 million to our revolving credit facility; (iii) received $1.9 million of proceeds from the exercise of stock options issued under employee stock compensation plans; (iv) made $1.6 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and ~~2012, respectively.~~ (v) repaid $1.4 million related to term loan borrowings under our credit facilities.

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During the first quarter of 2013 we: (i) repaid $0.8 million related to term loan borrowings under our credit ~~facilities (“Term Loans”);~~facilities; (ii) made $1.4 million of required repayments of promissory notes issued in connection with ~~acquisitions (“Seller Notes”);~~acquisitions; and (iii) received $1.2 million of proceeds from the exercise of stock options issued under employee stock compensation plans. During the first quarter of 2012 we: (i) repaid $1.5 million related to term loan borrowings under our credit facilities (“Term Loans”); (ii) made $0.5 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (iii) received $0.6 million of proceeds from the exercise of stock options issued under employee stock compensation plans.

~~Debt~~

~~Long-term debt consisted of the following:~~

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March 31,

December 31,

(In thousands)

2013

2012

(Unaudited)

Revolving Credit Facility

$
—

$
—

Term Loan

292,550

293,300

7 1/8% Senior Notes due 2018

200,000

200,000

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

25,936

27,346

Total Debt

518,486

520,646

Less current portion

(11,528
)
(11,082
)
Long Term Debt

$
506,958

$
509,564

~~Revolving Credit Facility~~

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.25%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.50:1.00 and (ii) maximum total leverage ratio of 4.00:1.00. As of March 31, 2013, the Company was in compliance with these covenants. As of March 31, 2013, the Company had $99.5 million available under this facility. This availability as of March 31, 2012 was net of standby letters of credit of approximately $0.5 million. As of March 31, 2013, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected interest in the equity interests of the Company’s subsidiaries, all of the Company’s assets, and all the assets of the Company’s subsidiaries.

~~Term Loan~~

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments of $0.75 million. From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. No such mandatory prepayments were required during the first quarter of 2013 or 2012. The Term Loan Facility bears interest at LIBOR plus 3.0%, or the applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. As of March 31, 2013, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected interest in the equity interests of the Company’s subsidiaries, all of the Company’s assets, and all the assets of the Company’s subsidiaries.

71/8~~% Senior Notes~~

~~The 7~~1/8% Senior Notes mature November 15, 2018 and are senior indebtedness, which is guaranteed on a senior unsecured basis by all of the Company’s current and future subsidiaries. Interest is payable semi-annually on May 15 and November 15 of each year.

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or a part of the notes with a premium, as described in further detail in the Company’s Annual Report on form 10-K for the year ended December 31, 2012.

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~~Subsidiary Guarantees~~

~~The Revolving and Term Loan Facilities and the 7~~1/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the parent company does not have independent assets or operations. The guarantees are full and unconditional and joint and several. There are no restrictions on the ability of our subsidiaries to transfer cash to the Company or to co-guarantors.

~~Debt Covenants~~

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

General

As of March 31, ~~2013, $292.6~~2014, $332.8 million, or ~~56.4%~~59.2%, of our total debt of ~~$518.5~~$561.9 million was subject to variable interest ~~rates based on a LIBOR floor of 1%, plus a 3% spread.~~rates. We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources of liquidity, including borrowings available under the Revolving Credit Facility, will be sufficient for at least the next twelve months to fund anticipated capital expenditures, to fund our acquisition plans and make required payments of principal and interest on our debt, including payments due on our outstanding debt.

~~Because of the favorable interest rate environment, we are currently considering refinancing our Term Loan and Revolving Credit Facilities.~~

Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of March 31, ~~2013~~2014 (unaudited):

~~Payments Due by Period~~

															Payments Due by Period
(In thousands)	Remainder of 2013		2014		2015		2016		2017		Thereafter		Total		Remainder of 2014		2015		2016		2017		2018		Thereafter		Total

Long-term debt	$	8,952	$	10,972	$	10,474	$	287,607	$	630	$	199,851	$	518,486	$	13,503	$	24,730	$	26,058	$	31,757	$	464,960	$	927	561,935
Interest payments on long-term debt (1)	23,635		26,355		25,979		24,262		14,282		12,502		127,015		17,968		19,148		18,842		18,652		15,726		25		90,361
Operating leases	46,183		37,832		27,388		20,323		14,811		29,137		175,674		36,057		37,571		29,906		22,949		15,650		27,934		170,067
Capital leases	865		750		705		659		605		1,942		5,526		1,697		2,280		2,290		2,343		2,214		9,536		20,360
Other long-term obligations (2)	14,069		11,902		8,907		3,800		3,800		15,159		57,637		12,295		10,013		3,325		3,024		1,907		9,091		39,655
Total contractual cash obligations	$	93,704	$	87,811	$	73,453	$	336,651	$	34,128	$	258,591	$	884,338	$	81,520	$	93,742	$	80,421	$	78,725	$	500,457	$	47,513	$	882,378

(1) Interest projections were based on the assumptions that the future interest rate for the Term Loan will remain at the current rate of 4%1.9%, which is the Company’s estimate for such period based on current and projected LIBOR rates.

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

Forward Looking Statements

This report contains forward-looking statements setting forth our beliefs or expectations relating to future revenues, contracts and operations, and certain legal proceedings. Actual results may differ materially from projected or expected results due to changes in the demand for our O&P products and services, ~~uncertainties relating to the results of operations or recently acquired O&P patient care clinics,~~ our ability to enter into and derive benefits from managed-care contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health-care industry, ~~uncertainties inherent in incomplete investigations and legal proceedings,~~ governmental policies affecting O&P operations and other risks and uncertainties generally affecting the health-care industry. Readers are cautioned not to put undue reliance on forward-looking statements. Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 for discussion of risks and uncertainties. We disclaim any intent or obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

~~We have existing obligations relating~~Our future financial result is subject to ~~our 7~~1/8~~% Senior Notes, Term Loan Facility, Revolver and Subordinated Seller Notes.~~a variety of risks, including interest rate risk. As of March 31, ~~2013,~~2014, the interest expense arising from the $332.8 million of outstanding borrowings under both our Term loan facility and our Revolver are subject to variable interest rates, partially offset by interest income subject to variable interest rates generated from our $51.6 million of cash equivalents. As of March 31, 2014, we had ~~cash flow exposure to the changing interest rates on the $292.6~~$229.1 million ~~borrowed under the Term Loan Facility. The other obligations have~~of fixed ~~interest rates.~~rate debt which includes our 7 1/8 % Senior notes and Subordinated seller notes.

Presented below is an analysis of our financial instruments as of March 31, ~~2013~~2014 that are sensitive to changes in interest rates. The table demonstrates the changes in estimated annual cash flow related to the outstanding balance under the Revolving and Term Loan Facility, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. ~~The LIBOR floor and applicable rate pursuant to the Term Loans under the Credit Agreement prevents the rate from dropping below 4.0%.~~ As of March 31, ~~2013,~~2014, the ~~current LIBOR and applicable~~interest rate ~~is 4.0%; therefore, a 80 BPS increase or decrease in LIBOR would not reduce or increase estimated annual cash flows related to the outstanding balance~~ on the Revolving and Term ~~Loan Facility.~~loan facilities was 1.90% based on a LIBOR rate of 0.15% and the applicable margin of 1.75%.

Annual Interest Expense Given an Interest Rate

Annual Interest Expense Given an Interest

Cash Flow Risk

Decrease of X Basis Points

No Change in

Rate Increase of X Basis Points

(In thousands)

(150 BPS)

(100 BPS)

(50 BPS)

Interest Rates

50 BPS

100 BPS

150 BPS

Term Loan

$
11,702

$
11,702

$
11,702

$
11,702

$
11,702

$
12,287

$
13,750

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Cash Flow Risk	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points						No Change in Interest Rates		Annual Interest Expense Given an Interest Rate Increase of X Basis Points
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Interest Expense	$	6,266	$	6,561	$	6,856	$	7,546	$	8,952	$	10,358	$	11,764

ITEM 4.Controls and Procedures

Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed ~~by it~~ in its periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed in the reports filed under the Exchange Act was accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on an evaluation of the Company’s disclosure controls and procedures conducted by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded that the Company’s disclosure controls and procedures were not effective as of March 31, ~~2013~~2014 as a result of the following material ~~weakness~~weaknesses in our internal controls over financial ~~reporting relating~~reporting. Specifically, the Company did not design and/or maintain effective controls over i) raw materials to ensure items are priced using the first in first out method resulting from the identification of inaccurate prices utilized in the valuation of our inventory quantities on hand based on physical observation; ii) the accuracy of the stage of completion in valuing work-in-process inventory resulting from the identification of data input errors from our physical inventory observation used in the valuation of our work-in-process inventory; and iii) certain key assumptions used in the valuation of work-in-process ~~inventory.~~inventory resulting from the identification of inaccurate or imprecise data used in the development of these assumptions. Additional details are discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2012,~~2013, under Part II, Item ~~9A.~~9-A.

Status of Remediation of Material ~~Weakness~~Weaknesses

As of March 31, ~~2013, we have implemented procedures designed to address~~2014, the material ~~weakness~~weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2012 related~~2013, as listed above, are not remediated. These material weaknesses relate to the ~~proper valuation~~Company’s annual physical inventory, and therefore the Company will not be able to verify remediation until the fourth quarter of ~~work-in-process inventory. Management has implemented additional quarterly reviews, analysis and calculations surrounding the valuation~~2014 after completion of the ~~work-in-process~~annual physical inventory ~~to account for~~at Hanger Clinic, at the ~~changing sales volume from period~~earliest. The Company is working to ~~period. Management believes these measures will~~ remediate the material ~~weakness identified in~~weaknesses and has begun by taking steps to plan and implement additional measures to remediate the ~~Form 10-K Annual report.~~underlying causes of the material weaknesses. The additional measures are primarily the continued development and implementation of formal policies, improved processes and documentation of procedures and controls, additional training of finance and operational personnel, the hiring of additional finance personnel and the engagement of external subject matter experts. The Company’s actions are subject to ongoing senior management review, as well as audit committee oversight. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address this material ~~weakness~~weaknesses or determine to modify the remediation steps described above.

Changes in Internal Control Over Financial Reporting

In accordance with Rule 13a-15(d) under the Securities Exchange Act of 1934, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, determined that there were no changes in the Company’s internal control over financial reporting, beyond those in-process remediation ~~processes~~efforts discussed above, that occurred during the three months ended March 31, ~~2013,~~2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS.

Part I, Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2011~~2013 sets forth information relating to important risks and uncertainties that could materially adversely affect the Company’s business, financial condition or operating results. Those risk factors continue to be relevant to an understanding of the Company’s business, financial condition and operating results. Certain of those risk factors have been updated in this Form 10-Q to provide updated information, as set forth below. References to “we,” “our” and “us” in these risk factors refer to the Company.

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

We derived ~~40.2%~~38.7% and ~~41.2%~~40.2% of our net sales for the three months ended March 31, ~~2013~~2014 and ~~2012,~~2013, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Department of Veterans Affairs. Each of these programs set maximum reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to reimbursement reductions by these organizations. Reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. For example, a number of states have reduced their Medicaid reimbursement rates for O&P services and products, or have reduced Medicaid eligibility, and others are in the process of reviewing Medicaid reimbursement policies generally, including for prosthetic and orthotic devices. Additionally, Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. Medicare prices are adjusted each year based on the Consumer Price Index— Urban (“CPIU”) unless Congress acts to change or eliminate the adjustment. The Medicare price increases/(decreases)~~/increases~~ for 2014, 2013 and 2012 ~~and 2011~~ were ~~0.8%~~1.0%, ~~2.4%~~0.8%, and ~~(0.1%)~~2.4%, respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 (“PPACA”) changed the Medicare inflation factors applicable to O&P (and other) suppliers. The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-month period ending with June of the previous year. Section 3401(m) of PPACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the 12-month period ending with June of the previous year is to be adjusted by the annual economy-wide private nonfarm business multifactory productivity (“the MFP Adjustment”). The MFP Adjustment may result in that percentage increase being less than zero for a year and may result in payment rates for a year being less than such payment rates for the preceding year. CMS has not yet issued a final rule implementing these adjustments for years beyond 2011, but has indicated in a proposed rule that it will do so as part of the annual program instructions to the O&P fee schedule updates. See 75 Fed. Reg. 40040, 40122, et seq. (July 13, 2010). If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected.

The Budget Control Act of 2011 required, among other things, mandatory across-the-board reductions in Federal spending, or “sequestration.” While delayed by the American Taxpayer Relief Act of 2012, President Obama issued a sequestration order on March 1, 2013. For services provided on or after April 1, 2013, Medicare fee-for-service claim payments, including those for DMEPOS (durable medical equipment (DME), prosthetics, orthotics and supplies) as well as claims under the DME Competitive Bidding Program, are reduced by 2 percent. This is a claims payment adjustment with limited impact on the Company (approximately $0.9 million for three months ending March 31, 2014); no permanent reductions in the Medicare DMEPOS fee schedule have been made as a result of sequestration, therefore reimbursements from Medicaid, the VA and commercial payers who use the Medicare fee schedule as a basis for reimbursement have not been impacted.

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

27We face periodic reviews, audits and investigations under our contracts with federal and state government agencies, and these audits could have adverse findings that may negatively impact our business.

We contract with various federal and state governmental agencies to provide O&P services. Pursuant to these contracts, we are subject to various governmental reviews, audits and investigations to verify our compliance with the contracts and applicable laws and regulations. Any adverse review, audit or investigation could result in:

·refunding of amounts we have been paid pursuant to our government contracts;

·imposition of fines, penalties and other sanctions on us;

·loss of our right to participate in various federal programs;

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~~Our substantial indebtedness could impair~~·damage to our reputation in various markets; or

·material and/or adverse effects on our business, financial condition and ~~our ability to fulfill our obligations under our indebtedness.~~results of operations.

WeIn recent years we have seen a significant increase in Medicare audits, including Recovery Audit Contractor or RAC audits, Comprehensive/Error Rate Testing or CERT audits and Medicare Administrative Contractor (MAC) prepayment audits. Additionally, substantial ~~debt. As of~~delays have developed in the audit adjudication process, particularly in administrative law appeals. At March 31, 2014 and December 31, 2013, we had approximately ~~$518.5~~$17.1 million and $15.2 million of ~~total indebtedness and $99.5 million available under~~claims subject to pending Medicare audits, respectively. Through December 31, 2013, our ~~Revolving Credit Facility.~~

~~The level of our indebtedness~~success rate on these audits at final adjudication (the Administrative Law Judge hearing) was approximately 90%. Nevertheless, Medicare audits could have ~~important consequences to us. For example, our substantial indebtedness could:~~

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

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

·~~require us to dedicate a substantial portion of our cash flow from operations to payments~~effect on our ~~debt, thereby reducing the availability~~business financial condition and result of operations, particularly if our ~~cash flow~~success rate at final adjudication were to ~~fund working capital, capital expenditures and other general corporate requirements;~~decline.

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

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

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

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

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

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ITEM 6.Exhibits

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

Exhibit No.		Document

10.1		Letter Agreement, dated April 7, 2014, among George E. McHenry, the Company and Hanger Prosthetics & Orthotics, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on April 7, 2014).

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

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

32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended March 31, ~~2013,~~2014, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements (1)

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HANGER, INC.


Dated: May 9, ~~2013~~2014	/s/Vinit K. Asar
	Vinit K. Asar
	President and
	Chief Executive Officer
	(Principal Executive Officer)


Dated: May 9, ~~2013~~2014	/s/George E. McHenry
	George E. McHenry
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

3027

	31-Mar-13							31-Dec-12
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
(In thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Customer Lists	$	48,044	$	(8,872	)	$	39,172	$	48,044	$	(7,846	)	$	40,198
Trade Name	9,070		—			9,070		9,070		—			9,070
Patents and Other Intangibles	27,859		(13,440		)	14,419		27,810		(12,797		)	15,013
	84,973		(22,312		)	62,661		84,924		(20,643		)	64,281

			Products and					Consolidating
(In thousands)	Patient Care		Services		Other			Adjustments			Total

Three Months Ended March 31, 2013
Net sales
Customers	$	193,212	$	40,323	$	—		$	—		$	233,535
Intersegments	—		51,083		—			(51,083		)	—
Depreciation and amortization	4,066		3,203		2,016			—			9,285
Income (loss) from operations	25,389		9,475		(11,885		)	(263		)	22,716
Interest (income) expense	7,750		3,335		(3,308		)	—			7,777
Income (loss) before taxes	17,639		6,140		(8,577		)	(263		)	14,939
Capital expenditures	2,903		107		2,388			—			5,398

Three Months Ended March 31, 2012
Net sales
Customers	$	176,518	$	41,573	$	—		$	—		$	218,091
Intersegments	—		48,413		—			(48,413		)	—
Depreciation and amortization	3,427		2,997		1,861			—			8,285
Income (loss) from operations	25,279		8,810		(12,075		)	(277		)	21,737
Interest (income) expense	7,582		2,272		(2,077		)	—			7,777
Income (loss) before taxes	17,697		6,538		(9,998		)	(277		)	13,960

Capital expenditures	2,543		714		2,059				—		5,316

Total Assets
March 31, 2013	1,398,550		341,005		—			(510,634		)	1,228,921
December 31, 2012	1,389,223		336,318		—			(488,214		)	1,237,327

March 31, 2013
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care
Commercial insurance	$	45,156	$	9,643	$	13,341	$	68,140
Private pay	7,172		4,766		7,371		19,309
Medicaid	12,816		3,402		4,549		20,767
Medicare	30,531		3,965		13,572		48,068
VA	1,997		611		548		3,156
Products and Services
Trade accounts receivable	11,242		2,822		4,604		18,668
	$	108,914	$	25,209	$	43,985	$	178,108