UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~Washington,~~WASHINGTON, D.C. 20549

FORM 10-Q

~~(Mark One)~~

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

For the ~~quarterly period ended September 30, 2013~~Quarterly Period Ended March 31, 2018

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

For the transition period from

Commission ~~file number~~File Number 1-10670

HANGER, INC.

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

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


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

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

Securities registered pursuant to Section 12(b) of the Act:

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

Title of class		Name of exchange on which registered
Common Stock, par value $0.01 per share		OTC Pink (operated by OTC Markets Group Inc.)

Securities registered pursuant to Section 12(g) of the Act: None.

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:~~days. Yes xo No ox

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~~(§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.)~~files). Yes xo No ox

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

Large accelerated filer xo	Accelerated filer ox

Non-accelerated filer o	Smaller reporting company o	Emerging growth company o

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

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

As of ~~November~~June 1, ~~2013 34,767,882~~2018 the registrant had 36,797,063 shares of ~~common stock, $.01 par value per share, were~~its Common Stock outstanding.

Table of Contents

~~HANGER, INC.~~

TABLE OF CONTENTS~~INDEX~~

			~~Page No.~~Hanger, Inc.

~~Part I.~~	~~FINANCIAL INFORMATION (unaudited)~~
Explanatory Note			ii
~~Item 1.~~	~~Consolidated~~Part I Financial ~~Statements~~

	~~Consolidated Balance Sheets — September 30, 2013 and December 31, 2012~~Information		1

	~~Consolidated Statements of Income and Comprehensive Income for the Three and Nine Month periods ended September 30, 2013 and 2012~~		3

	~~Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012~~		4

	~~Notes to Consolidated Financial Statements~~		5

Item 2.1. Condensed Consolidated Financial Statements (unaudited)	1
~~Management’s~~Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations		17
			26
Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk		26
			39
Item 4.	Controls and Procedures		2640

Part ~~II.~~II Other Information	~~OTHER INFORMATION~~

Item 1.	Legal Proceedings		27
			41
Item 1A.	Risk Factors		2743
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6.	Exhibits		2943
Signatures			44
~~SIGNATURES~~Exhibits Index			3045

Table of Contents

~~HANGER, INC.~~

~~CONSOLIDATED BALANCE SHEETS~~EXPLANATORY NOTE

~~(Dollars in thousands)~~

~~(Unaudited)~~

September 30,

December 31,

2013

2012

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$
7,216

$
19,211

Restricted cash

—

3,120

Accounts receivable, less allowance for doubtful accounts of $8,358 and $7,526 in 2013 and 2012, respectively

176,663

165,668

Inventories

144,374

127,295

Prepaid expenses, other assets, and income taxes receivable

14,560

15,673

Deferred income taxes

31,115

27,685

Total current assets

373,928

358,652

PROPERTY, PLANT AND EQUIPMENT

Land

794

794

Buildings

8,896

8,896

Furniture and fixtures

20,382

19,582

Machinery and equipment

61,178

60,364

Equipment leased to third parties under operating leases

33,224

34,827

Leasehold improvements

81,708

74,615

Computer and software

99,974

98,186

Total property, plant and equipment, gross

306,156

297,264

Less accumulated depreciation

190,193

182,803

Total property, plant and equipment, net

115,963

114,461

INTANGIBLE ASSETS

Goodwill

678,215

674,774

Customer list and other intangible assets, less accumulated amortization of $25,607 and $20,643 in 2013 and 2012, respectively

58,638

64,281

Total intangible assets, net

736,853

739,055

OTHER ASSETS

Debt issuance costs, net

8,994

14,033

Other assets

12,261

11,126

Total other assets

21,255

25,159

TOTAL ASSETS

$
1,247,999

$
1,237,327

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

1We filed our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) on May 14, 2018. The 2017 Form 10-K contained our consolidated financial statements and related footnotes for the year ended December 31, 2017, as well as consolidated financial statements and related disclosures for each of the 2017 quarterly and year-to-date periods. The filing of this Quarterly Report on Form 10-Q for the three months ended March 31, 2018 was delayed due to the late filing of our 2017 Form 10-K, as well as the necessity of our undertaking additional procedures as a result of the material weaknesses in our internal controls over financial reporting. See “Item 9A. Controls and Procedures” in the 2017 Form 10-K and “Item 4. Controls and Procedures” in this Quarterly Report on Form 10-Q for information regarding these material weaknesses.

Table of Contents

PART 1.FINANCIAL INFORMATION

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	March 31,			December 31,
	2018			2017

ASSETS
Current assets:
Cash and cash equivalents	$	32,913		$	1,508
Accounts receivable, net	127,010			146,346
Inventories	70,051			69,138
Income taxes receivable	824			13,079
Other current assets	20,004			20,888
Total current assets	250,802			250,959

Non-current assets:
Property, plant and equipment, net	91,302			93,615
Goodwill	196,343			196,343
Other intangible assets, net	19,971			21,940
Deferred income taxes	75,449			68,126
Other assets	10,416			9,440
Total assets	$	644,283		$	640,423

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt	$	10,312		$	4,336
Accounts payable	50,722			48,269
Accrued expenses and other current liabilities	64,695			66,683
Accrued compensation related costs	17,216			53,005
Total current liabilities	142,945			172,293

Long-term liabilities:
Long-term debt, less current portion	505,235			445,928
Other liabilities	49,678			50,253
Total liabilities	697,858			668,474

Commitments and contingent liabilities (Note O)

Shareholders’ deficit:
Common stock, $.01 par value; 60,000,000 shares authorized; 36,887,364 shares issued and 36,744,543 shares outstanding in 2018, and 36,515,232 shares issued and 36,372,411 shares outstanding in 2017	369			365
Additional paid-in capital	334,169			333,738
Accumulated other comprehensive loss	(4,268		)	(1,686		)
Accumulated deficit	(383,149		)	(359,772		)
Treasury stock, at cost; 142,821 shares at 2018 and 2017, respectively	(696		)	(696		)
Total shareholders’ deficit	(53,575		)	(28,051		)
Total liabilities and shareholders’ deficit	$	644,283		$	640,423

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

HANGER, INC.

CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

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

(Unaudited)

September 30,

December 31,

2013

2012

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Current portion of long-term debt

$
13,673

$
11,082

Accounts payable

32,339

28,923

Accrued expenses

30,391

22,357

Accrued interest payable

5,772

3,041

Accrued compensation related costs

33,991

41,784

Total current liabilities

116,166

107,187

LONG-TERM LIABILITIES

Long-term debt, less current portion

457,384

509,564

Deferred income taxes

76,480

77,730

Other liabilities

40,869

39,752

Total liabilities

690,899

734,233

COMMITMENTS AND CONTINGENCIES (Note H)

SHAREHOLDERS’ EQUITY

Common stock, $.01 par value; 60,000,000 shares authorized, 36,032,368 and 35,617,884 shares issued and outstanding at 2013 and 2012, respectively

360

356

Additional paid-in capital

288,860

280,084

Accumulated other comprehensive loss

(1,919
)
(1,919
)
Retained earnings

270,455

225,229

557,756

503,750

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

(656
)
(656
)
Total shareholders’ equity

557,100

503,094

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,247,999

$
1,237,327

	Three Months Ended March 31,
	2018			2017
Net revenue	$	233,995		$	233,681
Material costs	76,356			74,405
Personnel costs	86,108			87,955
Other operating costs	31,096			32,689
General and administrative expenses	25,636			25,386
Professional accounting and legal fees	4,846			12,650
Depreciation and amortization	9,330			10,137
Income (loss) from operations	623			(9,541		)
Interest expense, net	12,263			14,009
Loss on extinguishment of debt	16,998			—
Non-service defined benefit plan expense	176			184
Loss before income taxes	(28,814		)	(23,734		)
Benefit for income taxes	(6,196		)	(6,000		)
Net loss	$	(22,618	)	$	(17,734	)

Other comprehensive loss:
Unrealized loss on cash flow hedges (net of tax benefit of $702 for the three months ended March 31, 2018)	$	(2,290	)	$	—
Unrealized loss on defined benefit plan (net of tax benefit of $105 and $0 for the three months ended March 31, 2018 and 2017, respectively)	(292		)	(17		)
Total other comprehensive loss	(2,582		)	(17		)
Comprehensive loss	$	(25,200	)	$	(17,751	)

Basic and Diluted Per Common Share Data:
Basic and diluted loss per common share	$	(0.62	)	$	(0.49	)
Weighted average shares used to compute basic and diluted earnings per common share	36,498,482			36,084,630

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

~~Table of Contents~~

HANGER, INC.

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~INCOME~~

~~AND COMPREHENSIVE INCOME~~CHANGES IN SHAREHOLDERS’ DEFICIT

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018

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

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2013

2012

Net sales

$
271,053

$
242,536

$
768,201

$
704,794

Material costs

79,401

73,109

226,585

212,706

Personnel costs

94,768

84,135

277,897

248,723

Other operating expenses

47,754

41,210

136,434

125,099

Depreciation and amortization

9,224

8,709

28,019

25,432

Income from operations

39,906

35,373

99,266

92,834

Interest expense

6,017

7,751

21,502

23,212

Extinguishment of debt

—

—

6,645

—

Income before taxes

33,889

27,622

71,119

69,622

Provision for income taxes

12,230

10,278

25,891

26,257

Net income

$
21,659

$
17,344

$
45,228

$
43,365

Other comprehensive income

—

—

—

—

Comprehensive income

$
21,659

$
17,344

$
45,228

$
43,365

Basic Per Common Share Data

Net income

$
0.62

$
0.50

$
1.30

$
1.27

Shares used to compute basic per common share amounts

34,902,103

34,362,757

34,783,419

34,224,756

Diluted Per Common Share Data

Net income

$
0.61

$
0.50

$
1.28

$
1.25

Shares used to compute diluted per common share amounts

35,401,273

35,002,351

35,315,897

34,817,680

	Common Shares	Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, December 31, 2017	36,372	$	365	$	333,738		$	(1,686	)	$	(359,772	)	$	(696	)	$	(28,051	)
Net loss	—	—		—			—			(22,618		)	—			(22,618		)
Issuance of common stock upon vesting of restricted stock units	372	4		(4		)	—			—			—			—
Stock-based compensation expense	—	—		2,585			—			—			—			2,585
Cumulative effect of a change in accounting for revenue recognition (Note A)	—	—		—			—			(759		)	—			(759		)
Effect of shares withheld to cover taxes	—	—		(2,150		)	—			—			—			(2,150		)
Total other comprehensive loss	—	—		—			(2,582		)	—			—			(2,582		)
Balance, March 31, 2018	36,744	$	369	$	334,169		$	(4,268	)	$	(383,149	)	$	(696	)	$	(53,575	)

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

~~Table of Contents~~

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~For the Nine Months Ended September 30,~~

(~~Dollars~~dollars in thousands)

(Unaudited)

2013

2012

Cash flows from operating activities:

Net income

$
45,228

$
43,365

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

(Gain)/Loss on disposal of assets

(5,570
)
5

Reduction of seller notes and earnouts

(363
)
(971
)
Provision for doubtful accounts

8,545

6,580

Provision for deferred income taxes

(2,564
)
(1,031
)
Depreciation and amortization

28,019

25,432

Amortization of debt issuance costs

8,703

2,589

Compensation expense on stock options and restricted stock units

6,398

6,100

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

Accounts receivable

(14,586
)
(10,266
)
Inventories

(14,676
)
(13,995
)
Prepaid expenses, other current assets, and income taxes

5,028

(337
)
Accounts payable

4,581

670

Accrued expenses and accrued interest payable

5,421

4,192

Accrued compensation related costs

(9,584
)
(5,970
)
Other

3,946

2,642

Net cash provided by operating activities

68,526

59,005

Cash flows from investing activities:

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

(24,429
)
(23,439
)
Purchase of equipment leased to third parties under operating leases

(3,041
)
(1,438
)
Acquisitions (net of cash acquired)

(5,695
)
(14,266
)
Restricted cash

3,120

(3,120
)
Proceeds from sale of property, plant and equipment

4,595

—

Net cash used in investing activities

(25,450
)
(42,263
)

Cash flows from financing activities:

Borrowings under term loan

225,000

—

Repayment of term loan

(294,706
)
—

Borrowings under revolving credit agreement

163,000

(2,950
)
Repayments under revolving credit agreement

(137,000
)
—

Repayment of seller’s notes and other contingent considerations

(9,168
)
(3,416
)
Repayment of capital lease obligations

(808
)
(545
)
Deferred financing costs

(3,665
)
—

Excess tax benefit from stock-based compensation

2,214

685

Proceeds from issuance of common stock

1,628

2,206

Purchase and retirement of treasury stock

(1,566
)
—

Net cash used in financing activities

(55,071
)
(4,020
)

Decrease in cash and cash equivalents

(11,995
)
12,722

Cash and cash equivalents, at beginning of period

19,211

42,896

Cash and cash equivalents, at end of period

$
7,216

$
55,618

	Three Months Ended March 31,
	2018			2017

Cash flows from operating activities:
Net loss	$	(22,618	)	$	(17,734	)

Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization	9,330			10,137
Provision for doubtful accounts	(94		)	2,360
Stock-based compensation expense	2,585			2,164
Benefit for deferred income taxes	(6,355		)	(6,050		)
Amortization of debt issuance costs	1,701			1,952
Loss on extinguishment of debt	16,998			—
Gain on sale and disposal of fixed assets	(594		)	(672		)

Changes in operating assets and liabilities:
Accounts receivable, net	19,425			15,367
Inventories	1,085			(4,653		)
Other current assets	650			39
Income taxes	12,255			849
Accounts payable	552			6,333
Accrued expenses and other current liabilities	(5,067		)	(683		)
Accrued compensation related costs	(35,789		)	(19,171		)
Other liabilities	(2,537		)	(1,901		)
Net cash used in operating activities	(8,473		)	(11,663		)

Cash flows from investing activities:
Purchase of property, plant and equipment	(4,388		)	(2,348		)
Purchase of therapeutic program equipment leased to third parties under operating leases	(2,034		)	(629		)
Purchase of company-owned life insurance investment	(598		)	(555		)
Proceeds from sale of property, plant and equipment	840			2,179
Net cash used in investing activities	(6,180		)	(1,353		)

Cash flows from financing activities:
Borrowings under term loan, net of discount	501,467			—
Repayment of term loan	(431,875		)	(5,625		)
Borrowings under revolving credit agreement	3,000			49,500
Repayments under revolving credit agreement	(8,000		)	(31,500		)
Payment of employee taxes on stock-based compensation	(2,150		)	(1,338		)
Payment on seller note and other contingent consideration	(1,749		)	(3,498		)
Payment of capital lease obligations	(364		)	(278		)
Payment of debt issuance costs	(6,757		)	—
Payment of debt extinguishment costs	(8,436		)	—
Net cash provided by financing activities	45,136			7,261

Increase (decrease) in cash, cash equivalents and restricted cash	30,483			(5,755		)
Cash, cash equivalents and restricted cash, at beginning of period	4,779			9,412
Cash, cash equivalents and restricted cash, at end of period	$	35,262		$	3,657

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

(dollars in thousands)

(Unaudited)

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Cash paid during the period for:

Interest

16,299

16,902

Income taxes (net of refunds)

21,033

22,106

Non-cash financing and investing activities:

Issuance of restricted stock units

10,990

5,452

Issuance of notes in connections with acquistisions

675

7,625

	Three Months Ended March 31,
Reconciliation of Cash, Cash Equivalents and Restricted Cash	2018		2017
Cash and cash equivalents, at beginning of period	$	1,508	$	7,157
Restricted cash, at beginning of period	3,271		2,255
Cash, cash equivalents, and restricted cash, at beginning of period	$	4,779	$	9,412

Cash and cash equivalents, at end of period	$	32,913	$	1,414
Restricted cash, at end of period	2,349		2,243
Cash, cash equivalents, and restricted cash, at end of period	$	35,262	$	3,657

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

~~Table of Contents~~

HANGER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A — ~~BASIS~~ORGANIZATION AND SUMMARY OF ~~PRESENTATION~~SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements ~~as of September 30, 2013, and for the three and nine month periods ended September 30, 2013 and 2012~~ 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 byaccordance with accounting principles generally accepted in the United States of America (“GAAP”)~~. Certain~~ for interim financial information and ~~footnote disclosures normally included in financial statements prepared in accordance~~ with ~~GAAP have been condensed or omitted. The results~~the instructions to Form 10-Q and Article 10 of ~~operations for the three~~Regulation S-X, and, ~~nine month periods ended September 30, 2013 are~~therefore, do not ~~necessarily indicative~~include all of the ~~results to be expected~~information and footnotes required by GAAP for ~~the full fiscal year.~~

complete financial statements. These ~~unaudited consolidated~~ financial statements should be read in conjunction with the audited consolidated financial statements ~~of the Company and notes thereto included~~ in ~~the~~our Annual Report on Form 10-K for the year ended December 31, ~~2012,~~2017 (the “2017 Form 10-K”), as previously filed ~~by the Company~~ with the ~~SEC.~~Securities and Exchange Commission (“SEC”).

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

A detailed description of our significant accounting policies and management judgments is contained in our 2017 Form 10-K.

~~NOTE B — SIGNIFICANT ACCOUNTING POLICIES~~Reclassifications

~~Principles~~We have reclassified certain amounts in the prior year consolidated financial statements to be consistent with the current year presentation. These relate to classifications within both the condensed consolidated statements of ~~Consolidation~~operations and cash flows - see “Adoption of New Accounting Standards” for additional information.

Recent Accounting Pronouncements

Adoption of New Accounting Standards

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related clarifying standards (“ASC 606”) on revenue recognition using the modified retrospective method for all contracts in place at January 1, 2018. This new accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition requirements. The core principle of the revenue recognition standard is to require an entity to recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services as it transfers control to its customers.

The ~~consolidated financial statements include~~majority of our contracts are generally short term in nature. Revenue is recognized at the ~~accounts~~point of time when we transfer control of the ~~Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.~~

~~Revision of Previously Reported Consolidated Financial Information~~

During the third quarter 2013, the Company corrected an error in the classification of certain components of bad debt expense (the “2013 Revision”). Hanger previously classified the reserves relatedgood or service to the ~~write-off of older accounts receivable balances~~patient. Under ASC 606, estimated uncollectible amounts due from ~~commercial~~self-pay patients, as well as co-pays, co-insurance and ~~government payors~~deductibles owed to us by patients with insurance are generally considered implicit price concessions and are now presented as a reduction of net revenue. Under prior guidance, these amounts were recognized as bad debt expense ~~which was reported~~and were included in other operating costs. When estimating the variable consideration, we use historical collection experience to estimate amounts not expected to be collected. Conversely, subsequent changes in collectability due to a change in financial condition (i.e. bankruptcy) continues to be recognized as ~~Other Operating Expense in its financial statements, instead~~bad debt expense.

The adoption of asthis standard did not have a ~~reduction of sales. Management has assessed the materiality of the errors on previously reported periods and concluded the impact was not~~ material ~~to any of the prior annual or quarterly consolidated financial statements. The errors had no~~ impact on ~~previously reported net income,~~our results of operations. The cumulative effect of implementing this guidance resulted in an increase of $0.8 million to the opening balance ~~sheet totals or the operating cash flows~~of accumulated deficit from establishing a contract liability of $1.0 million for ~~any of the periods. The impact of the adjustment lowers sales~~certain performance obligations that must be recognized over time and ~~reduces Other Operating Expenses by equal and offsetting amounts~~an increase in deferred tax assets in the ~~Consolidated Statements~~amount of Income and Comprehensive Income and the Provision for doubtful accounts and Change in accounts receivable by equal and offsetting amounts in the Consolidated Statements of Cash Flows. Further, the Company has historically included the reserve for contra revenue in its$0.3 million.

On January 1, 2018, we adopted two new accounting standards that clarify presentation ~~of the Allowance for doubtful accounts on the Consolidated Balance Sheets and the net change in the reserve for contra revenue in the Provision for doubtful accounts on the Consolidated Statements~~(ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash) and ~~the Schedule II Valuation~~classification (ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and ~~Qualifying Accounts included~~Cash Payments) in the ~~Company’s Annual Report~~statement of cash flows on ~~Form 10-K. The Company has revised that presentation~~a retrospective basis. As a result of adoption:

· Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

· We added a reconciliation of cash, cash equivalents, and restricted cash to ~~only include~~ the ~~reserve for doubtful accounts and the related activity in the reserve for doubtful accounts in those respective balances. The impacts~~condensed consolidated statements of ~~the revisions on Net sales~~cash flows. Restricted cash balances are included in “Other Current Assets” in our condensed consolidated balance sheets - see Note G - “Other Current Assets and Other Assets.”

On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the ~~results~~recognition of the ~~Patient Care Services segment in Note K.~~income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. It was applied on a modified retrospective basis through a cumulative-effect adjustment directly to accumulated deficit as of the beginning of the period of adoption. As a result of adoption, there was no material impact to our condensed consolidated financial statements.

~~During~~On January 1, 2018, we adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the ~~fourth quarter~~Definition of ~~2012,~~a Business, which clarifies the ~~Company identified adjustments necessary~~definition of a business with the objective of adding guidance to ~~correct prior periods~~assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the ~~overstatement~~guidance to any future acquisitions should they occur.

On January 1, 2018, we adopted ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of the ~~value~~share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. As a result of ~~work-in-process inventory at December 31, 2011~~adoption, there was no material impact on our condensed consolidated financial statements and ~~2010. The Company assessed~~we will apply the ~~materiality of the errors on previously reported periods and concluded the impact was not material~~guidance to any ~~prior annual consolidated financial statements. Management, however, deemed~~future changes to the ~~impact~~terms or conditions of stock-based payment awards should they occur.

On January 1, 2018, we adopted ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC Topic 715. The amendments in this ~~error~~update require that an employer disaggregate the service cost component from the other components of net benefit cost for an entity’s defined benefit pension and other postretirement plans. The amendments also provide explicit guidance on how to present the ~~consolidated financial statements~~service cost component and the other components of net benefit cost in the income statement. The amendments in this update require that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside of income from operations. Accordingly, we have made certain reclassifications from “General and administrative expenses” to “Non-service pension expense” of $0.2 million and $0.2 million for the three months ended March 31, ~~2012~~2018 and ~~2011~~March 31, 2017, respectively. Such reclassifications did not have a material effect on our consolidated statement of operations.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of this new guidance is to improve the financial reporting of hedging relationships by, among other things, eliminating the requirement to separately measure and record hedge ineffectiveness. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. We adopted this guidance effective January 1, 2018. The adoption did not have a material impact on our condensed consolidated financial statements or disclosures.

New Accounting Standards Issued, Not Yet Adopted

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017, from accumulated other comprehensive income to retained earnings. This new standard is effective for us beginning January 1, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our condensed consolidated financial statements and the related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU, and related clarifying standards, revise the accounting for leases. Under the new guidance, lessees will be ~~material~~required to recognize a lease liability and ~~restated~~a right-of-use asset for all leases that extend beyond 12 months. The asset and liability will initially be measured at the ~~first quarter 2012~~present value of the lease payments. The new lease guidance also simplified the accounting for sale and ~~2011 financial results (“2012 Restatement”)~~leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for fiscal year 2019 and will be applied through a modified retrospective transition approach which includes a number of practical expedients for leases existing at, or entered into after, the ~~restated Quarterly Report on Form 10-Q/A, filed with~~beginning of the ~~SEC on March 22, 2013 (the “Amended Filing”) and revised~~earliest comparative period presented in the consolidated financial ~~statements~~statements. Early adoption is permitted. We have not yet concluded how the new standard will impact our condensed consolidated financial statements. Nonetheless, we anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide retail locations that are not already included on our consolidated balance sheet.

Revenue Recognition

Effect of Adoption of ASC 606

On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to all contracts which were not completed as of January 1, 2018. As a practical expedient, we adopted a portfolio approach in evaluating our sources of revenue for implications of adoption. In accordance with the modified retrospective method, results of operations for the ~~three~~reporting periods after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and ~~six month periods ended June 30, 2012~~continue to be reported in accordance with ASC 605, Revenue Recognition (“ASC 605”).

We recognized the ~~Second Quarter 2013 Report on Form 10Q. These errors had no impact on operating cash flows for any~~cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Upon adoption of ASC 606, the cumulative effect of the ~~periods. The~~changes made to our condensed consolidated balance sheet as of January 1, 2018 was as follows:

	December 31, 2017			Effects of			January 1, 2018
(in thousands)	As reported			Adoption			After adoption
Assets
Deferred income taxes	$	68,126		$	268		$	68,394
Liabilities
Accrued expenses and other current liabilities	$	66,683		$	1,027		$	67,710
Shareholders’ Deficit
Accumulated deficit	$	(359,772	)	$	(759	)	$	(360,531	)

In accordance with the new revenue standard requirements, the disclosure of the impact of ~~the errors~~adoption on our condensed consolidated statement of operations and condensed consolidated balance sheet is ~~included in the results of the Patient Care Services segment in Note K. The 2012 Restatement did not have an impact on the Consolidated Balance Sheets~~ as ~~of September 30, 2012 or the Consolidated Statement of Income and Comprehensive Income or the Consolidated Statement of Cash Flows for the three month period ended September 30, 2012.~~follows:

	As of and for the three months ended March 31, 2018
(in thousands)	As Reported			Effects of Adoption			Proforma balance without the adoption of ASC 606
Condensed Consolidated Statement of Operations
Net revenue	$	233,995		$	898		$	234,893
Other operating costs	31,096			868			31,964
Income from operations	623			30			653
Loss before income taxes	(28,814		)	30			(28,784		)
Net loss	(22,618		)	30			(22,588		)
Comprehensive loss	(25,200		)	30			(25,170		)

Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	75,449		$	(276	)	$	75,173
Total assets	644,283			(276		)	644,007
Liabilities
Accrued expenses and other current liabilities	64,695			(1,057		)	63,638
Total current liabilities	142,945			(1,057		)	141,888
Total liabilities	697,858			(1,057		)	696,801
Shareholders’ Deficit
Accumulated deficit	(383,149		)	781			(382,368		)
Total shareholders’ deficit	(53,575		)	781			(52,794		)

The ~~impact~~adoption of ASC 606 resulted in deferring $1.1 million of net revenue from our Patient Care segment as of March 31, 2018 and recognizing net revenue for $1.0 million from satisfying performance obligations from the ~~2013 Revision on the Consolidated Statements of Income and Comprehensive Income and the Consolidated Statements of Cash Flows~~previous period. Estimated uncollectible amounts due from self-pay patients for the three months ended March 31, ~~2013, the three~~2018 were $0.9 million and ~~six months ended June 30, 2013, the three months ended March 31, 2012, the three~~are considered implicit price concessions under ASC 606 and ~~six months ended June 30, 2012, the three and nine months ended September 30, 2012, the annual periods ended 2010, 2011 and 2012, and Schedule II Valuation and Qualifying Accounts~~are recorded as a reduction to net revenue.

Patient Care Segment

Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the ~~annual periods 2010, 2011~~provision of O&P devices and ~~2012~~is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs and private or patient pay (“Private Pay”) individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are ~~shown below. The impact~~net of estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances. As such, these adjustments do not relate to an inability to pay, but to contractual allowances, our failure to ensure that a patient was currently eligible under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, that we filed or appealed the payor’s determination timely, on the basis of our coding, failure by certain classes of patients to pay their portion of a claim or other administrative issues which are considered as part of the ~~2012 Restatement resulted~~transaction price and recorded as a reduction of revenues.

Our products and services are sold with a 90-day labor and 180-day warranty for fabricated components. Warranties are not considered a separate performance obligation. We estimate warranties based on historical trends and include them in ~~a revision~~accrued expenses and other current liabilities in the condensed consolidated balance sheet.

A portion of our O&P revenue comes from the provision of cranial devices. In addition to delivering the ~~Consolidated Statements~~cranial device, there are patient follow up visits where we assist in treating the patient’s condition by adjusting or modifying the cranial device. We conclude that, for these devices, there are two performance obligations and use the expected cost plus margin approach to estimate for the standalone selling price of ~~Income and Comprehensive Income~~each performance obligation. The allocated portion associated with the patient’s receipt of the cranial device is recognized when the patient receives the device while the portion of revenue associated with the follow up visits is initially recorded as deferred revenue. On average, the cranial device follow up visits occur within 90 days after the patient receives the device and the ~~Consolidated Statement~~deferred revenue is recognized on a straight line basis over this period.

Medicare and Medicaid regulations and the various agreements we have with other third party payors, including commercial healthcare payors under which these contractual adjustments and disallowed revenue are calculated, are complex and are subject to interpretation and adjustment and may include multiple reimbursement mechanisms for different types of ~~Cash Flows for~~services. Therefore, the ~~nine month period ended September 30, 2012 which~~particular O&P devices and related services authorized and provided, and the related reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and reimbursement schedules, and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. As a result, there is ~~included within the respective table below.~~a reasonable possibility that recorded estimates could change and any related adjustments will be recorded as adjustments to net revenue when they become known.

~~Table of Contents~~

~~Impact of 2013 Revision to previously reported 2013 consolidated interim results~~

Three Months Ended
March 31, 2013

Three Months Ended
June 30, 2013

Six Months Ended
June 30, 2013

As Previously

As Previously

As Previously

(in thousands)

Reported

As Revised

Reported

As Revised

Reported

As Revised

Consolidated Statements of Income and Comprehensive Income

Net sales

$
233,535

$
229,350

$
273,735

$
267,798

$
507,270

$
497,148

Other operating expenses*

$
43,843

$
39,658

$
54,959

$
49,022

$
98,802

$
88,680

Consolidated Statements of Cash Flows

Provision for doubtful accounts

$
5,229

$
1,657

$
14,905

$
4,591

Change in accounts receivable

$
3,644

$
7,216

$
(18,026
)
$
(7,712
)

* The ~~Other operating expense balance~~following table disaggregates our Patient Care segment’s revenue from contracts with customers for the three months ended March 31, ~~2013 includes $0.1 million of acquisition expenses previously reported as a separate caption in the presentation of the Consolidated Statements of Income~~2018 and ~~Comprehensive Income.~~2017:

For the Three Months Ended March 31,

(in thousands)

2018

2017

Patient Care Segment

Medicare

$
57,531

$
55,245

Medicaid

29,711

28,292

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

70,582

74,166

Veterans Administration

16,731

15,572

Private Pay

13,952

14,362

Total

$
188,507

$
187,637

Products & Services Segment

~~Impact~~The adoption of ~~2013 Revision to previously reported 2012 consolidated interim results~~ASC 606 did not have a material impact on our Product & Services segment.

Three Months Ended
March 31, 2012

Three Months Ended
June 30, 2012

Six Months Ended
June 30, 2012

Three Months Ended
September 30, 2012

As Previously

As Previously

As Previously

As Previously

(in thousands)

Reported

As Revised

Reported

As Revised

Reported

As Revised

Reported

As Revised

Consolidated Statements of Income and Comprehensive Income

Net sales

$
218,091

$
214,355

$
251,754

$
247,902

$
469,845

$
462,257

$
243,503

$
242,536

Other operating expenses*

$
40,219

$
36,483

$
51,256

$
47,404

$
91,475

$
83,887

$
42,177

$
41,210

Consolidated Statement of Cash Flows

Provision for doubtful accounts

$
4,723

$
907

$
12,925

$
4,462

Change in accounts receivable

$
851

$
4,667

$
(16,190
)
$
(7,727
)

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

* The OtherDistribution services revenues are recognized when obligations under the terms of a contract with our customers are satisfied, which occurs with the transfer of control of our products. This occurs either upon shipment or delivery of goods, depending on whether the terms are FOB Origin or FOB Destination. Payment terms are typically between 30 to 90 days. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products to a customer (“transaction price”).
To the extent that the transaction price includes variable consideration, such as prompt payment discounts, list price discounts, rebates, and volume discounts, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available.
We reduce revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized. We make estimates of the amount of sales returns and allowances that will eventually be incurred. Management analyzes sales programs that are in effect, contractual arrangements, market acceptance and historical trends when evaluating the adequacy of sales returns and allowance accounts.
Therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided. Equipment sales revenue is recognized upon delivery, with any related services revenue deferred and recognized as the services are performed. Sales of consumables are recognized upon delivery.
In addition, we estimate amounts recorded to bad debt expense using historical trends and these are presented as a bad debt expense under the operating expense ~~balance~~section of our condensed consolidated financial statements.
The following table disaggregates our Product & Services segment’s revenue from contracts with customers for the three months ended March 31, ~~2012 includes $0.1 million~~2018 and 2017:

For the Three Months Ended March 31,

(in thousands)

2018

2017

Products & Services Segment

Distribution services, net of intersegment revenue eliminations

$
31,351

$
30,624

Therapeutic solutions

14,137

15,420

Total

$
45,488

$
46,044

NOTE B — EARNINGS PER SHARE
Basic earnings per common share is computed using the weighted average number of ~~acquisition expenses previously reported~~common shares outstanding during the period. Diluted earnings per common share is computed using the weighted average number of common shares outstanding during the period plus any potentially dilutive common shares, such as stock options, restricted stock units and performance-based units calculated using the treasury stock method. Total anti-dilutive shares excluded from the diluted earnings per share were 208,510 of as March 31, 2018 and 368,796 as of March 31, 2017.
Our credit agreement restricts the payment of dividends or other distributions to our shareholders with respect to Hanger, Inc., the parent company, or any of its subsidiaries.
The reconciliation of the numerators and denominators used to calculate basic and diluted net loss per share are as follows:

Three Months Ended March 31,

(in thousands, except share and per share data)

2018

2017

Net loss

$
(22,618
)
$
(17,734
)

Weighted average shares used to compute basic earnings per common share

36,498,482

36,084,630

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

—

—

Weighted average shares used to compute diluted earnings per common share

36,498,482

36,084,630

Basic and diluted loss per common share

$
(0.62
)
$
(0.49
)
(1) As we are recognizing a loss for the periods presented, shares used to compute diluted per common share amounts excludes 537,497 shares for 2018 and 401,204 shares for 2017 of potentially dilutive shares related to unvested restricted stock units and unexercised options in accordance with ASC 260 - Earnings Per Share.
NOTE C — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net represent outstanding amounts we expect to collect from the transfer of our products and services. Principally, these amounts are comprised of receivables from Medicare, Medicaid and commercial insurance plans. Under ASC 606, our accounts receivables represent amounts outstanding from our gross billings, net of contractual discounts and other implicit price concessions including estimates for payor disallowances, sales returns and patient non-payments.
Under both ASC 606 and ASC 605, disallowed revenue is considered an adjustment to the transaction price. However, upon adoption of ASC 606, estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are now presented as a ~~separate caption~~reduction of net revenue. Under prior guidance, these amounts were recognized as bad debt expense in ~~the presentation of the Consolidated Statements of Income and Comprehensive Income.~~other operating expenses.

6

~~Table of Contents~~
~~Impact of 2013 Revision and 2012 Restatement to previously reported 2012 consolidated interim results~~

Nine Months Ended
September 30, 2012

(in thousands, except per share amounts)

As Previously
Reported

As Revised

Consolidated Statements of Income and Comprehensive Income

Net sales

$
713,349

$
704,794

Material costs

$
210,107

$
212,706

Personnel costs

$
251,189

$
248,723

Other operating expenses

$
135,566

$
125,099

Income from operations

$
91,055

$
92,834

Income before taxes

$
67,843

$
69,622

Provision for income taxes

$
25,558

$
26,257

Net income

$
42,285

$
43,365

Basic earnings per share

$
1.24

$
1.27

Diluted earnings per share

$
1.21

$
1.25

Consolidated Statement of Cash Flows

Provision for doubtful accounts

$
15,926

$
6,580

Change in accounts receivable

$
(19,612
)
$
(10,266
)
~~Impact of 2013 Revision to previously reported consolidated annual results~~

Year Ended
December 31, 2010

Year Ended
December 31, 2011

Year Ended
December 31, 2012

(in thousands)

As Previously
Reported

As Revised

As Previously
Reported

As Revised

As Previously
Reported

As Revised

Consolidated Statements of Income and Comprehensive Income

Net Sales

$
817,379

$
808,766

$
918,539

$
907,794

$
985,550

$
974,429

Other operating expenses

$
165,158

$
156,545

$
177,910

$
167,165

$
188,868

$
177,747

Consolidated Statements of Cash Flows

Provision for doubtful accounts

$
20,276

$
7,252

$
24,837

$
9,396

$
19,773

$
9,589

Change in accounts receivable

$
(31,041
)
$
(18,017
)
$
(42,024
)
$
(26,583
)
$
(40,443
)
$
(30,259
)
~~Impact of 2013 Revision to previously reported Schedule II Allowance~~An allowance for doubtful accounts ~~table~~
Year
(In thousands)

Classification

Balance at
beginning of year

Additions
Charged to Costs
and Expenses

Write-offs

Balance at
end of year

2012

Allowance for doubtful accounts

Previously reported

$
22,028

$
19,773

$
20,422

$
21,379

Revised

$
7,236

$
9,589

$
9,299

$
7,526

2011

Allowance for doubtful accounts

Previously reported

$
16,686

$
22,101

$
16,759

$
22,028

Revised

$
5,153

$
9,396

$
7,313

$
7,236

2010

Allowance for doubtful accounts

Previously reported

$
10,526

$
20,276

$
14,116

$
16,686

Revised

$
4,286

$
7,252

$
6,385

$
5,153

~~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. The Company maintains cash balances in excess of Federal Deposit Insurance Corporation limits at certain financial institutions.
~~Restricted Cash~~
Restricted cash has statutory or contractual restrictions that prevent it from being used in the Company’s operations. As of December 31, 2012, the Company agreed to restrict $3.1 million of cash to serve as collateralis also recorded for its Workers’ Compensation program. In August of 2013, the Company substituted a letter of credit for the restricted cash to serve as collateral for its Worker’s Compensation program, and the cash balances used as collateral were transferred to the Company’s operating accounts.
~~Credit Risk~~
The Company primarily provides O&P (orthotics and prosthetics) devices and services and products throughout the United States of America and is reimbursed by the patients, third-party insurers, governmentally funded health insurance programs, and, for those products distributed through the Products & Services business, by independent O&P providers. The Company also provides advanced rehabilitation technology and clinical programs to skilled nursing facilities in the United States primarily through operating leases. The Company performs ongoing credit evaluations of itsour Products & Services segment ~~customers.~~which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” Accounts receivable, ~~are not collateralized. The ability~~net as of March 31, 2018, and December 31, 2017 is comprised of the ~~Company’s debtors~~following:

As of March 31, 2018

As of December 31, 2017

(in thousands)

Patient Care

Products &
Services

Consolidated

Patient Care

Products &
Services

Consolidated

Accounts receivable, before allowances

$
170,274

$
23,179

$
193,453

$
193,150

$
23,494

$
216,644

Allowances for estimated implicit price concessions arising from:

Allowance for estimated payor disallowances

(53,370
)
—

(53,370
)
(56,233
)
—

(56,233
)
Allowance for estimated patient non-payments

(8,848
)
—

(8,848
)
—

—

—

Accounts receivable, gross

108,056

23,179

131,235

136,917

23,494

160,411

Allowance for doubtful accounts

—

(4,225
)
(4,225
)
(9,894
)
(4,171
)
(14,065
)
Accounts receivable, net

$
108,056

$
18,954

$
127,010

$
127,023

$
19,323

$
146,346

NOTE D — INVENTORIES
Our inventories are comprised of the following:
(in thousands)

March 31, 2018

December 31, 2017

Raw materials

$
20,161

$
19,929

Work in process

11,543

8,996

Finished goods

38,347

40,213

Total inventories

$
70,051

$
69,138

NOTE E — PROPERTY PLANT AND EQUIPMENT, NET
Property, plant and equipment, net were comprised of the following:
(in thousands)

March 31, 2018

December 31, 2017

Land

$
644

$
644

Buildings

26,458

28,180

Furniture and fixtures

13,448

12,968

Machinery and equipment

26,963

26,838

Therapeutic program equipment leased to third parties under operating leases

30,317

31,100

Leasehold improvements

103,136

100,999

Computers and software

65,847

65,455

Total property, plant, and equipment, gross

266,813

266,184

Less: accumulated depreciation

(175,511
)
(172,569
)
Total property, plant, and equipment, net

$
91,302

$
93,615

Total depreciation expense was approximately $7.4 million and $7.7 million for the three months ended March 31, 2018 and 2017, respectively.
NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS
We assess goodwill and indefinite lived intangible assets for impairment annually on October 1st, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The carrying value of goodwill at March 31, 2018 and December 31, 2017 was $196.3 million.
The balances related to ~~meet their obligations is dependent upon their financial stability which could be affected by future legislation~~intangible assets as of March 31, 2018 and ~~regulatory actions. Additionally,~~December 31, 2017 are as follows:

March 31, 2018

December 31, 2017

(in thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Accumulated
Impairment

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Accumulated
Impairment

Net
Carrying
Amount

Customer lists

$
36,250

$
(25,705
)
$
—

$
10,545

$
36,439

$
(24,267
)
$
—

$
12,172

Other intangible assets

15,553

(10,427
)
—

5,126

15,820

(10,352
)
—

5,468

Definite-lived intangible assets

51,803

(36,132
)
—

15,671

52,259

(34,619
)
—

17,640

Indefinite life - trade name

9,070

—

(4,770
)
4,300

9,070

—

(4,770
)
4,300

Total other intangible assets

$
60,873

$
(36,132
)
$
(4,770
)
$
19,971

$
61,329

$
(34,619
)
$
(4,770
)
$
21,940

Total intangible amortization expense was approximately $2.0 million and $2.4 million for the ~~Company maintains reserves for potential losses from these receivables that historically have been within management’s expectations.~~three months ended March 31, 2018 and 2017, respectively.

7Estimated aggregate amortization expense for definite lived intangible assets for each of the next five years ended December 31st and thereafter is as follows:
(in thousands)

2018 (remainder of year)

$
4,721

2019

3,714

2020

3,457

2021

879

2022

817

Thereafter

2,083

Total

$
15,671

NOTE G — OTHER CURRENT ASSETS AND OTHER ASSETS
Other current assets consist of the following:
(in thousands)

March 31, 2018

December 31, 2017

Non-trade receivables

$
6,379

$
7,668

Prepaid rent

4,442

4,248

Prepaid maintenance

2,896

3,134

Restricted cash

2,349

3,271

Prepaid other

1,160

1,436

Prepaid insurance

1,627

271

Other

1,151

860

Total other current assets

$
20,004

$
20,888

Other assets consist of the following:
(in thousands)

March 31, 2018

December 31, 2017

Cash surrender value of COLI

$
2,986

$
2,340

Non-trade receivables

2,417

2,407

Deposits

2,221

2,193

Other

2,792

2,500

Total other assets

$
10,416

$
9,440

NOTE H — ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

Accrued expenses and other current liabilities consist of:
(in thousands)

March 31, 2018

December 31, 2017

Patient prepayments, deposits and refunds payable

$
30,803

$
30,194

Accrued professional fees

6,069

11,612

Insurance and self-insurance accruals

9,050

8,901

Accrued sales taxes and other taxes

5,991

6,335

Accrued interest payable

486

845

Other current liabilities

12,296

8,796

Total

$
64,695

$
66,683

Other liabilities consist of:
(in thousands)

March 31, 2018

December 31, 2017

Supplemental executive retirement plan obligations

$
20,396

$
21,842

Long-term insurance accruals

9,531

9,531

Deferred tenant improvement allowances

7,601

7,361

Unrecognized tax benefits

5,271

5,219

Deferred rent

4,735

4,909

Other

2,144

1,391

Total

$
49,678

$
50,253

NOTE I — INCOME TAXES
We recorded a benefit from income tax of $6.2 million and $6.0 million for the three months ended March 31, 2018 and March 31, 2017, respectively. The effective tax rate was 21.5% and 25.3% for the three months ended March 31, 2018 and March 31, 2017, respectively.
We typically determine our interim income tax provision by using the estimated annual effective tax rate and applying that rate to income/loss on a current year-to-date basis. We have determined that since small changes in estimated ordinary income for 2018 would result in significant changes in the estimated annual effective tax rate, this method would not provide reliable results for the quarter ended March 31, 2018. Therefore, a discrete year-to-date method of reporting was used for the quarter ended March 31, 2018. Under the discrete method, we determined the income tax provision based upon actual results as if the interim period were an annual period.
The decrease in the effective tax rate for the three months ended March 31, 2018 compared with the three months ended March 31, 2017 is primarily attributable to the changes enacted by the Tax Act and using the discrete method for interim reporting for the three months ended March 31, 2018. Our effective tax rate for the three months ended March 31, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the shortfall from stock-based compensation recorded as a discrete item during the period. Our effective tax rate for the three months ended March 31, 2017 differed from the federal statutory tax rate of 35% primarily due to non-deductible expenses and the shortfall from stock-based compensation recorded as a discrete item during the period.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In the fourth quarter of 2017, we recorded a provisional amount of $35.0 million of tax expense related to re-measurement of our deferred tax assets and liabilities.
For the three months ended March 31, 2018, there were no significant adjustments to this amount although it remains provisional. Additional work is still necessary for a more detailed analysis of our deferred tax assets and liabilities. The future issuance of U.S. Treasury Regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimate. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
NOTE J — LONG-TERM DEBT
Long-term debt consists of the following:
(in thousands)

March 31, 2018

December 31, 2017

Credit Agreement, dated March 6, 2018

Revolving credit facility

$
—

$
—

Term loan B

505,000

—

Prior Credit Agreement, dated August 1, 2016

Term loan B

$
—

$
280,000

Prior Credit Agreement, dated June 17, 2013

Revolving credit facility

—

5,000

Term loan

—

151,875

Seller notes

4,163

5,912

Financing leases and other

16,812

18,169

Total debt before unamortized discount and debt issuance costs

$
525,975

$
460,956

Unamortized discount and debt issuance costs, net

(10,428
)
(10,692
)
Total debt

$
515,547

$
450,264

Less: Current portion of long-term debt

10,312

4,336

Long-term debt

$
505,235

$
445,928

Refinancing of Credit Agreement and Term B Borrowings
On March 6, 2018, we entered into a new $605.0 million Senior Credit Facility (the “Credit Agreement”).
The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025. Availability under the revolving credit facility is reduced by outstanding letters of credit, which were approximately $5.9 million as of March 31, 2018. We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility.
Net proceeds from the borrowings under the Credit Agreement, which totaled approximately $501.5 million, were used in part to repay in full all previously existing loans outstanding under our previous credit agreement and Term B credit agreement. Proceeds were also used to pay various transaction costs including fees paid to respective lenders and accrued and unpaid interest. The remainder of the proceeds are being used to provide ongoing working capital and capital for other general corporate purposes.
In connection with the Credit Agreement, we paid debt issuance costs of approximately $6.8 million. As part of the repayment of amounts outstanding under our prior credit agreements, we paid a call premium totaling approximately $8.4 million and expensed outstanding unamortized discount and debt issuance costs totaling approximately $8.6 million. The call
premium and unamortized debt issuance costs on the prior credit agreements are included in “Loss on Extinguishment of Debt” in the condensed consolidated statements of operations for the three months ended March 31, 2018.
Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.
~~Table~~Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of ~~Contents~~(a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. At March 31, 2018, the weighted average interest rate on outstanding borrowings under our Term loan B facility was approximately 5.4%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note L - “Derivative Financial Instruments.”

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

~~Inventories~~The Credit Agreement contains various restrictions and covenants, including requirements that we maintain certain financial ratios at prescribed levels and restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments and pay dividends and other distributions. The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement: (i) a maximum consolidated first lien net leverage ratio (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) of 5.00 to 1.00 for the fiscal quarters ended June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019; 4.75 to 1.00 for the fiscal quarters ended June 30, 2019 through March 31, 2020; 4.50 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in ~~the Patient Care segment consisting principally~~cash) of ~~raw materials and work-in-process, which amounted~~2.75 to ~~$113.7 million and $96.6 million~~1.00 as of ~~September 30, 2013~~the last day of any fiscal quarter.
The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and ~~December 31, 2012, respectively, are valued based on~~is continuing, then the ~~gross profit method, which approximates lower~~lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of ~~cost~~an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or ~~market using~~event of default with respect to any term facility under the ~~first-in first-out method. The Company applies~~Credit Agreement unless and until the ~~gross profit method on~~required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a ~~patient care clinic basis~~rate of 2.00% per annum in ~~this segment’s inventory to determine ending inventory at the end of each interim period. On October 31, which is the date~~excess of the ~~Company’s annual physical inventory,~~otherwise applicable rate (i) upon acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the ~~Company values~~lenders’ request, during the ~~inventory at lower~~continuance of ~~cost or market using the first-in first-out method and includes work-in-process consisting~~any other event of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to the Company’s books are treated as changes in accounting estimates and are recorded in the fourth quarter. The October 31 inventory is subsequently adjusted during interim periods to apply the gross profit method described above.default.

~~Inventories in the Products & Services segments consist principally~~Scheduled maturities of ~~finished goods which are stated~~debt 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.~~March 31, 2018 were as follows (in thousands):
2018 (remainder of year)

$
7,320

2019

8,095

2020

7,011

2021

5,619

2022

5,720

Thereafter

492,210

Total debt before unamortized discount and debt issuance costs, net

525,975

Unamortized discount and debt issuance costs, net

(10,428
)
Total debt

$
515,547

NOTE K — FAIR VALUE MEASUREMENTS

Fair Value Measurements

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

Level 1~~unadjusted~~ consists of securities for which there are quoted prices in active markets for identical securities;
Level 2 consists of securities for which observable inputs other than Level 1 inputs are used, such as quoted prices for similar securities in active markets or quoted prices for identical ~~assets or liabilities~~securities in less active markets ~~accessible~~and model-derived valuations for which the variables are derived from, or corroborated by, observable market data; and
Level 3 consists of securities for which there are no observable inputs to the ~~Company~~
~~Level 2~~~~inputs~~valuation methodology 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~~measurement of the fair value.

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

Financial Instruments

~~Assets~~We hold investments in money market funds which are measured at fair value on a recurring ~~basis as~~basis. As of ~~September 30, 2013~~March 31, 2018 and December 31, ~~2012, are $2.5~~2017, $2.3 million and ~~$11.0~~$3.3 million, respectively, ~~and are comprised~~ of ~~cash equivalent~~ money market ~~investments.~~funds which are restricted from general use are presented within “Other current assets.” The fair values of our money market ~~investments~~funds are based on Level 1 observable market prices and are equivalent to one ~~dollar.~~dollar per share. The carrying value of ~~the Company’s short-term financial instruments, such as receivables~~accounts receivable and ~~payables,~~accounts payable approximate their fair values based on the short-term ~~maturities~~nature of these instruments. ~~During the second quarter of 2013, the Company~~
In March 2018, we refinanced ~~its~~our credit facilities ~~by replacing~~with the Credit Agreement. The carrying value of our outstanding term loan as of March 31, 2018 was $505.0 million which approximates its ~~$300.0~~fair value. The carrying value of our outstanding term loan as of December 31, 2017 was $151.9 million compared to its fair value of $149.4 million. The carrying value of our outstanding Term Loan B as of December 31, 2017 was $280.0 million compared to its fair value of $283.5 million. Our estimates of fair value are based on a discounted cash flow model and ~~$100.0 million Revolving Credit Facility with~~indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a ~~$225.0 million Term Loan Facility and a $200.0 million Revolving Credit Facility. See Note F for further information.~~Level 3 measurement.

·~~The carrying values~~As of ~~the Company’s~~March 31, 2018, we had no amounts outstanding ~~Term Loans as of September 30, 2013 and December 31, 2012, were $223.6 million and $293.3 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 values of the Company’s outstanding Revolving Credit Facilities as of September 30, 2013 and December 31, 2012, were $26.0 million and $0 million, respectively. The Company has determined the carrying value on these loans approximates fair value for debt with similar terms and remaining maturities based on interest rates currently available and has therefore concluded these are Level 2 measurements.
·our revolving credit facility. The carrying value of the ~~Senior Notes was $200.0 million~~amount outstanding on our revolving credit facilities as of ~~September 30, 2013 and~~ December 31, ~~2012. The~~2017 was $5.0 million compared to the fair value $4.9 million. Our estimates of ~~the Senior Notes,~~fair value are based on ~~a Level 1 quoted market price, was $213.0 million and $211.5 million as of September 30, 2013 and December 31, 2012.~~
·Seller Notes are recorded at contractual carrying values of $21.5 million and $27.3 million as of September 30, 2013 and December 31, 2012, respectively, and carrying value approximates fair value for similar debt in all material respects. The Company estimates fair value of the seller notes with a discounted cash flow model using unobservable ~~rates and has determined these represent~~inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 ~~measurements.~~measurement.

~~Revenue Recognition~~
~~Revenues in~~In March 2018, we entered into interest rate swap agreements with notional values of $325 million, at inception, which reduces $12.5 million annually until the ~~Company’s Patient Care segment~~swaps mature on March 6, 2024. The interest rate swap agreements are ~~derived from the sale of O&P devices~~designated as cash flow hedges and ~~the maintenance~~are measured at fair value based on inputs other than quoted market prices that are observable, which
represents a Level 2 measurement. See Note J - “Long-Term Debt” and repair of existing devices. Revenues are recorded based upon contracts with commercial insurance companies and government agencies, net of contractual adjustments and discounts. Individual patients are generally responsibleNote L - “Derivative Financial Instruments” for ~~deductible and/or co-payments. Revenues are recorded when the patient has accepted and received the device. Revenues from maintenance and repairs are recognized when the service is provided.~~further information.

The Company estimates an allowance for disallowed sales primarily for commercial & governmental contractual adjustments and discounts not identified at the time of sale. The allowance is estimated based upon historical experience. Additions to the allowance are reported as a reduction of Net sales.
The Company estimates an allowance for doubtful accounts to estimate uncollectible accounts due primarily from individual patients. The allowance is estimated based upon historical experience. Bad debt expense is reported within Other operating expenses.
Revenues in the Company’s Products & Services segment are derived from the distribution of O&P devices to customers and leasing 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. Discounted sales are recorded at net realizable value. Leasing revenues are recognized based upon the contractual terms of the agreements, which contain negotiated pricing and service levels with terms ranging from one to five years, and are generally billed to the Company’s customers monthly.
8

~~Table of Contents~~
~~Property, Plant and Equipment~~
Property, plant and equipment are recorded at cost less accumulated depreciation, with the exception of assets acquired through acquisitions, which are initially recorded at fair value. Equipment acquired under capital leases is recorded at the lower of fair market value or the presentcarrying value of ~~the future minimum lease payments. The cost~~our outstanding subordinated promissory notes issued in connection with acquisitions (“Seller Notes”) as of March 31, 2018 and ~~related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts,~~December 31, 2017 was $4.2 million and ~~any resulting gains or losses are included in the Consolidated Statements of Income and Comprehensive Income.~~
~~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$5.9 million, respectively. We believe that the carrying value of the ~~reporting units may~~Seller Notes approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement.
NOTE L — DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to certain risks arising from both our business operations and economic conditions. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counter-party in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
During the three months ended March 31, 2018, such derivatives were used to hedge certain variable cash flows associated with existing variable-rate debt. As of March 31, 2018, our swaps had a notional value outstanding of $325.0 million. We had no swaps outstanding as of December 31, 2017.
Changes in Net Gain or Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss (“AOCI”) as of December 31, 2017 and March 31, 2018:
(in thousands)

Cash Flow Hedges

Balance at December 31, 2017

$
—

Unrealized loss recognized in other comprehensive loss, net of tax

2,538

Reclassification of loss to interest expense, net

(248
)
Balance at March 31, 2018

$
2,290

The following table presents the fair value of derivative liabilities within the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017:

March 31, 2018

December 31, 2017

(in thousands)

Assets

Liabilities

Assets

Liabilities

Derivatives designated as cash flow hedging instruments:

Accrued expenses and other current liabilities

$
—

$
2,053

$
—

$
—

Other liabilities

—

939

—

—

NOTE M — STOCK-BASED COMPENSATION
The Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) as originally adopted by our Board of Directors (the “Board”) in April 2016 authorized 2,250,000 shares of Common Stock, plus (1) the number of shares available for issuance under our prior equity incentive plan, the Hanger, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”) that had not been made subject to outstanding awards as of the effective date of the 2016 Plan and (2) any shares that would have become available again for new grants under the terms of the 2010 Plan if such plan were still in effect.
We have estimated that the shares available for issuance under the 2016 Plan would not be ~~recoverable.~~ sufficient to cover the equity award grants expected to be made to our directors, officers and employees through the remainder of 2018 and in connection with our annual equity award grants in March 2019. Therefore, on May 9, 2018, the Board adopted an amendment to the 2016 Plan that authorized the issuance of up to an additional 375,000 shares of our common stock.
For the three months ended March 31, 2018 and 2017, we recognized a total of approximately $2.6 million and $2.2 million, respectively, of stock-based compensation expense. Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.
The ~~Company has~~summary of restricted stock units, performance-based restricted stock units, and weighted average grant date fair values are as follows:

Employee Service-Based
Awards

Employee Performance-Based Awards

Director Awards

Units

Weighted
Average
Grant Date
Fair Value

Units

Weighted
Average
Grant Date
Fair Value

Units

Weighted
Average
Grant Date
Fair Value

Nonvested at December 31, 2017

1,183,039

$
14.30

632,636

$
18.87

98,406

$
12.66

Granted

560,657

15.68

267,522

17.93

—

—

Vested

(352,106
)
16.14

(135,200
)
25.95

(21,928
)
12.77

Forfeited

(47,808
)
12.58

(26,479
)
18.38

—

—

Nonvested at March 31, 2018

1,343,782

$
14.45

738,479

$
17.25

76,478

$
12.63

There was no option activity during the ~~option~~three months ended March 31, 2018.
NOTE N — SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
Defined Benefit Supplemental Executive Retirement Plan
Our unfunded noncontributory defined benefit plan (“DB SERP”) covers certain senior executives, is administered by us and calls for annual payments upon retirement based on years of service and final average salary. Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.
We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The DB SERP’s change in net benefit cost and obligation at March 31, 2018 and 2017 is as follows:
Change in Benefit Obligation
(in thousands)

Benefit obligation at December 31, 2017

$
20,793

Service cost

92

Interest cost

150

Payments

(1,877
)
Benefit obligation at March 31, 2018

$
19,158

Benefit obligation at December 31, 2016

$
21,304

Service cost

85

Interest cost

167

Payments

(1,811
)
Benefit obligation at March 31, 2017

$
19,745

Amounts Recognized in the Condensed Consolidated Balance Sheets:

March 31,

December 31,

(in thousands)

2018

2017

Accrued expenses and other current liabilities

$
1,913

$
1,913

Other liabilities

17,245

18,880

Total accrued liabilities

$
19,158

$
20,793

Defined Contribution Supplemental Executive Retirement Plan
We have a defined contribution plan (“DC SERP”) that covers certain of our senior executives. Each participant is given a notional account to ~~first assess qualitative factors~~manage his or her annual distributions and allocate the funds among various investment options (e.g. mutual funds). These accounts are tracking accounts only for the purpose of calculating the participant’s benefit. The participant does not have ownership of the underlying mutual funds. When a participant initiates or changes the allocation of his or her notional account, we will generally make an allocation of our investments, to match those chosen by the participant. While the allocation of our sub accounts is generally intended to mirror the participant’s account records (i.e. the distributions and gains or losses on those funds), the employee does not have legal ownership of any funds until payout upon retirement. The underlying investments are owned by the insurance company (and we own an insurance policy).
As of March 31, 2018 and 2017, the estimated accumulated obligation benefit is $3.2 million and $2.3 million, respectively, of which $2.9 million and $2.0 million is funded and $0.3 million and $0.3 million is unfunded at March 31, 2018 and 2017, respectively.
In connection with the DC SERP benefit obligation, we maintain a company owned life insurance (“COLI”) policy which is measured at its cash surrender value and is presented within “Other assets” in our consolidated balance sheets. See Note G - “Other Current Assets and Other Assets” for additional information.
NOTE O — COMMITMENTS AND CONTINGENCIES
Commitments
In April 2014, in connection with the settlement of a patent infringement dispute, our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), entered into a non-cancellable agreement to purchase a total of $4.5 million of prosthetic gel liners in five installments. We determined that a portion of the prosthetic gel liners should be reserved as excess and slow-moving inventory, and we accrued a liability and expensed $3.4 million in 2014. As of March 31, 2018, $1.5 million of the non-cancellable purchase commitment was outstanding with $1.0 million and $0.5 million of purchases due by April of 2018 and 2019, respectively. As of March 31, 2018, our reserve associated with the non-cancellable purchase commitment was $2.7 million.
Legal Proceedings
Securities and Derivative Litigation
In November 2014, a securities class action complaint, City of Pontiac General Employees’ Retirement System v. Hanger, et al., C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.
On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint. On July 1, 2016, plaintiffs filed an amended complaint. On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit. On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim. On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. Appellate briefing was completed on August 18, 2017 and the appeal remains pending. The Court of Appeals held oral argument for the appeal on March 5, 2018. We are now awaiting a ruling from the Court of Appeals.
In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated into Judy v. Asar, et. al., Cause No. D-1-GN-15-000625. On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 345 Judicial District Court of Travis County, Texas.
The amended complaint in the consolidated derivative action names us and certain of our current and former officers and directors as defendants. It alleges claims for breach of fiduciary duty based, inter alia, on the defendants’ alleged failure to exercise good faith to ensure that we had in place adequate accounting and financial controls and that disclosures regarding our business, financial performance and internal controls were truthful and accurate. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief.
As disclosed in our Current Report on Form 8-K filed with the SEC on June��6, 2016, the Board of Directors appointed a Special Litigation Committee of the Board (the “Special Committee”). The Board delegated to the Special Committee the authority to (1) determine whether it is ~~more likely than not that~~in our best interests to pursue any of the ~~fair value of a reporting unit is less than its carrying amount as a basis for determining~~allegations made in the derivative cases filed in Texas state court (which cases were consolidated into the Judy case discussed above), (2) determine whether it is ~~necessary~~in our best interests to ~~perform the two-step goodwill impairment test. If the Company determines that~~pursue any remedies against any of our current or former employees, officers or directors as a ~~two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value~~result of the ~~Company’s reporting units using~~conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation. The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests. In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue any of the claims in the Judy derivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.
On April 14, 2017, we filed a ~~combination of income, market~~motion to dismiss the consolidated derivative action based on the resolution by the Special Committee that it is not in our best interest to pursue the derivative claims. Counsel for the derivative plaintiffs opposed that motion and ~~cost approaches. Any impairment~~moved to compel discovery. In a hearing held on June 12, 2017, the Travis County court denied plaintiffs’ motion to compel, and held that the motion to dismiss would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset. There were no impairment indicators since the last annual impairment test on October 1, 2012.
~~Income Taxes~~considered only after appropriate discovery was concluded.

The ~~Company recognizes deferred income tax liabilities and assets~~plaintiffs have since subpoenaed counsel for the ~~expected future tax consequences~~Special Committee, seeking a copy of ~~events~~the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, take the position that ~~have been included~~the full report is not discoverable under Texas law. Plaintiffs’ counsel has filed a motion to compel the Special Committee’s counsel to produce the report. The hearing on the motion to compel is scheduled for June 28, 2018. We intend to vigorously oppose the motion to compel. Upon resolution of the discovery dispute and completion of discovery, we intend to file a motion to dismiss the consolidated derivative action.
Management intends to continue to vigorously defend against the shareholder derivative action and the appeal in the ~~financial statements or tax returns. Deferred income tax liabilities and assets are determined based~~securities class action. At this time, we cannot predict how the Courts will rule on the difference between the financial 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.
9

~~Table of Contents~~
~~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 basismerits of the ~~Company’s operating segments. During~~claims and/or 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 descriptionscope of the ~~Company’s segments and~~potential loss in the ~~disclosure~~event of ~~segment information are presented in Note K.~~an adverse outcome. Should we ultimately be found liable, the resulting damages could have a material adverse effect on our consolidated financial position, liquidity or results of our operations.
~~Recent Accounting Pronouncements~~Other Matters

In May 2015, one of our clinics received a civil investigative demand for records relating to a sample of claims submitted to Medicare and Medicaid for reimbursement, and we provided records in response to the subpoena. In May 2017, we were informed by an Assistant United States Attorney that it was investigating whether we properly provided and claimed reimbursement for prosthesis skins and covers from July ~~2012,~~2013 (after an industry announcement) to the ~~FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangibles for Impairment”.~~present. We have reviewed the claims, and have cooperated with the government’s investigation. 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 guidancematter was ~~effective for annual~~resolved in March 2018 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 have a material impact on the ~~Company’s condensed consolidated financial statements.~~first quarter of 2018.

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 of Comprehensive Income” and ASU 2011-12 “Comprehensive Income,” to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The standard does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the guidance requires an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The amendments in this ASU were effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted this guidance and its implementation did not have a material impact on its consolidated financial statements.
In July 2013, the FASB issued new accounting guidance that requires that unrecognized tax benefits be classified as an offset to deferred tax assets to the extent of any net operating loss carryforwards, similar tax loss carryforwards, or tax credit carryforwards available at the reporting date in the applicable tax jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. An exception would apply if the tax law of the tax jurisdiction does not require the Company to use, and it does not intend to use, the deferred tax asset for such purpose. This guidance is effective for reporting periods beginning after December 15, 2013. The Company does not expect the adoption of these provisions to have a material effect on the consolidated financial statements.
~~NOTE C — 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. No triggering events have transpired since December 31, 2012. Goodwill allocated to the Company’s operating segments for the nine months ended September 30, 2013 and for the year ended 2012 are as follows:
(In thousands)

Patient Care

Products &
Services

Total

Balance at December 31, 2012

$
538,492

$
136,282

$
674,774

Additions due to acquisitions

3,562

—

3,562

Adjustments

(121
)
—

(121
)
Balance at September 30, 2013

$
541,933

$
136,282

$
678,215

Patient Care

Products &
Services

Total

Balance at December 31, 2011

$
474,166

$
135,318

$
609,484

Additions due to acquisitions

63,849

964

64,813

Contingent considerations (1)

477

—

477

Balance at December 31, 2012

$
538,492

$
136,282

$
674,774

~~(1) Contingent considerations relates to acquisitions completed prior to the adoption of ASC 805.~~
~~The balances related to intangible assets as of September 30, 2013 and December 31, 2012 are as follows:~~
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~~Table of Contents~~

September 30, 2013

December 31, 2012

(In thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Customer Lists

$
46,072

$
(10,628
)
$
35,444

$
48,044

$
(7,846
)
$
40,198

Trade Name

9,932

(197
)
9,735

9,070

—

9,070

Patents and Other Intangibles

28,241

(14,782
)
13,459

27,810

(12,797
)
15,013

$
84,245

$
(25,607
)
$
58,638

$
84,924

$
(20,643
)
$
64,281

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 year. Patents are amortized using the straight-line method over 5 years. Total intangible amortization expenses were $5.0 million and $3.8 million for the nine months ended September 30, 2013 and September 30, 2012, respectively. The weighted average life of the additions to customer lists, patents and other intangibles is 7.7 years.
~~NOTE D~~ — ~~INVENTORIES~~
Inventories recorded using the gross profit method primarily consists of raw materials and work-in-process held by the Patient Care segment. Inventories using the perpetual method primarily consists of finished goods held by the Products and Services segment. A description of the Company’s inventory valuation methodologies are presented in Note B.
(In thousands)

September 30, 2013

December 31, 2012

Raw materials

$
45,150

$
41,372

Work in process

70,053

56,931

Finished goods

29,171

28,992

$
144,374

$
127,295

~~NOTE E — ACQUISITIONS~~
During the nine months ended September 30, 2013, the Company acquired five O&P companies, operating a total of 12 patient care clinics. The aggregate purchase price for these O&P businesses was $8.0 million. Of this aggregate purchase price, $0.7 million consisted of promissory notes, $1.2 million is made up of contingent consideration payable within the next two years and $5.6 million was paid in cash. Contingent consideration is reported as other liabilities on the Company’s consolidated balance sheet. The Company recorded approximately $3.6 million of goodwill related to these acquisitions, and the expenses incurred related to these acquisitions were insignificant and were included in other operating expenses.
During the nine months ended September 30, 2012, the Company acquired 14 O&P companies, operating a total of 21 patient care clinics. The aggregate purchase price for these O&P businesses was $21.8 million. Of this aggregate purchase price, $7.6 million consisted of promissory notes, $1.6 million was made up of contingent consideration payable within the next five years, and $12.6 million was paid in cash. Contingent consideration is reported as other liabilities on the Company’s consolidated balance sheet. The Company recorded approximately $13.6 million of goodwill related to these acquisitions, and the expenses incurred related to this acquisition were insignificant and were included in other operating expenses.
~~The results of operations for these acquisitions are included in the Company’s results of operations from the date 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 and $0.5 million during the nine months ended September 30, 2013 and 2012, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in goodwill. For acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments in connection with contingent consideration agreements of $1.9 million in the first nine months of 2013 and $1.3 million in the same period of 2012. As of September 30, 2013 the Company has accrued a total of $4.1 million related to contingent consideration.
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~~Table of Contents~~
~~NOTE F — LONG TERM DEBT~~
~~Long-term debt consists of the following:~~

September 30,

December 31,

(In thousands)

2013

2012

Revolving Credit Facility

$
26,000

$
—

Term Loan

223,594

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

21,463

27,346

Total Debt

471,057

520,646

Less current portion

(13,673
)
(11,082
)
Long Term Debt

$
457,384

$
509,564

~~Refinancing~~
During the second quarter of 2013 the Company refinanced its bank credit facilities through a new 5 year credit agreement that increased its senior secured facilities to an aggregate principal amount of up to $425.0 million from $400.0 million previously. The new credit agreement includes a $200.0 million revolving credit facility and a $225.0 million term loan facility. Each new facility matures on June 17, 2018 and is subject to a leveraged-based pricing grid, with initial pricing of LIBOR plus 1.75%. In conjunction with the refinancing, the Company incurred a pre-tax non-cash charge of approximately $6.6 million during the second quarter of 2013 related to the write-off of existing debt issuance costs associated with its previous credit agreement. No prepayment penalties were incurred.
~~Revolving Credit Facility~~
The $200.0 million Revolving Credit Facility matures on June 17, 2018 and bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the Credit Agreement). As of September 30, 2013, the Company had $170.4 million available under this facility. The amounts outstanding under the Revolving Credit Facility as of September 30, 2013 were $26.0 million, net of standby letters of credit of approximately $3.6 million. 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 all of the Company’s assets, all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.
~~Term Loan~~
The Term Loan Facility, of which $223.6 million is outstanding, matures on June 17, 2018 and 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 the Term Loan, commencing September 30, 2013. From time to time mandatory prepayments may be required as a result of certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. No such mandatory prepayments were required during the third quarter of 2013. The obligations under the Term Loan Facilitywe are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in all of the Company’s assets, all the assets of the Company’s subsidiaries and the equity interests 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 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 additional interest to the redemption date with the proceeds of a public offering of its equity securities. Also, prior to November 15, 2014, the Company may redeem all or some of the notes at a redemption price of 103.6% all to interest that would have become due from the redemption date 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 10-K for the year ended December 31, 2012.
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~~Table of Contents~~
~~Subsidiary Guarantees~~
~~The Revolving Credit Facility, 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 the Company’s 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. The 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 September 30, 2013, the Company was in compliance with all covenants under these debt agreements.
~~NOTE G~~ — ~~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~~our 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~~our consolidated financial position, liquidity or results of ~~operations of the Company.~~our operations.

~~The Company is~~We are in a highly regulated industry and ~~receives~~receive regulatory agency inquiries from time to time in the ordinary course of ~~its~~our business, including inquiries relating to ~~the Company’s~~our billing activities. ~~To date these inquiries have not resulted in material liabilities, but no~~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~~our consolidated financial statements.

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

In the ordinary course of ~~its~~our business, ~~the Company~~we may enter into service agreements with service providers in which ~~it agrees~~we agree 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~~We have reviewed ~~its~~our existing contracts containing indemnification or clauses of guarantees and ~~does~~do not believe that ~~its~~our liability under such agreements is ~~material to the Company’s operations.~~material.

NOTE ~~H — 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 stock units and are calculated using the treasury stock method.
~~Net income per share is computed as follows:~~
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~~Table of Contents~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except share and per share data)

2013

2012

2013

2012

Net income

$
21,659

$
17,344

$
45,228

$
43,365

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

34,902,103

34,362,757

34,783,419

34,224,756

Effect of dilutive restricted stock units and options (1)

499,170

639,594

532,478

592,924

Shares used to compute dilutive per common share amounts

35,401,273

35,002,351

35,315,897

34,817,680

Basic income per share

$
0.62

$
0.50

$
1.30

$
1.27

Diluted income per share

$
0.61

$
0.50

$
1.28

$
1.25

~~(1) There were no anti-dilutive options for the three or nine month periods ended September 30, 2013 and 2012.~~
~~NOTE I — SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN~~
The Company’s unfunded noncontributory defined benefit plan (the “Plan”) covers certain senior executives, is administered by the Company and calls for annual payments upon retirement based on years of service and final average salary. Benefit cost and liability 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:~~

2013

2012

Discount rate

3.25
%
3.90
%
Average rate of increase in compensation

3.00
%
3.00
%
The Company believes the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect the Company’s benefit obligation and future expenses. The change in the Plan’s net benefit obligation for the nine months ended September 30, 2013 and 2012:
(In thousands)

Net benefit cost accrued at December 31, 2012

$
22,377

Service cost

735

Interest cost

519

Payments

(1,246
)
Net benefit cost accrued at September 30, 2013

$
22,385

(In thousands)

Net benefit cost accrued at December 31, 2011

$
20,230

Service cost

690

Interest cost

570

Payments

(705
)
Net benefit cost accrued at September 30, 2012

$
20,785

~~NOTE J - 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”), which replaced 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. 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.
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~~Table of Contents~~
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 the effective date for the 2010 plan, namely May 13, 2020, or (ii) the date all shares reserved for issuance have been issued.
As of September 30, 2013, of the 2.5 million shares of common stock authorized for issuance under the Company’s 2010 Plan, approximately 1.5 million shares have been issued. During the first nine months of 2013, the Company issued approximately 0.4 million shares of restricted stock units under the 2010 Plan. The total fair value of these grants is $12.1 million. Total unrecognized share-based compensation cost related to unvested restricted stock units was approximately $16.1 million as of September 30, 2013 and is expected to be expensed as compensation expense over approximately four years.
For the nine months ended September 30, 2013 and 2012, the Company has included approximately $6.4 million and $6.1 million, respectively, for share-based compensation cost in the accompanying condensed consolidated statements of income for the 2002, 2003 and 2010 Plans. Compensation expense relates to restricted stock unit grants.
~~NOTE K~~P — SEGMENT AND RELATED INFORMATION

~~The Company has~~We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each operating segment’s income from operations. The operating segments are described further below:

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

·                  Commercial private payors and other, which consist of individuals, rehabilitation providers, ~~private~~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 published fee schedules ~~for~~with 10 regional ~~service areas;~~pricing areas for prosthetics and orthotics and by state for durable medical equipment;

·                  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 40.5% and 40.8%, of the Company’s net sales for the nine months ended September 30, 2013 and 2012, respectively.
~~The Company’s~~Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies. ~~The Company partners~~We partner with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers. The Company’s network now includes approximately 1,150 O&P provider locations, including over 400 independent providers. As of September 30, 2013, the Company had 57 contracts with national and regional providers.

Products & Services - —This segment consists of ~~the Company’s~~our distribution services business, which distributes and fabricates O&P products and components ~~for~~to sell to both the O&P industry and ~~the Company’s~~our own patient care clinics, and ~~the Company’s rehabilitation~~our therapeutic solutions business. ~~Rehabilitation~~The therapeutic solutions ~~leases~~business provides and sells rehabilitation equipment and ~~provides evidence-based clinical programs to post-acute rehabilitation service providers.~~ancillary consumable supplies combined with equipment maintenance, education, and training. This segment also develops emerging neuromuscular technologies for the O&P and rehabilitation markets.
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~~Table of Contents~~
Corporate & Other — - This consists of corporate overhead and includes unallocated expense such as personnel costs, professional fees and corporate offices expenses.

The accounting policies of the segments are the same as those described in ~~the summary of “Significant Accounting Policies” in~~ Note B ~~to the consolidated financial statements.~~- “Significant Accounting Policies” in our 2017 Form 10-K.

~~Summarized financial information concerning the Company’s operating segments is shown in the following table.~~ Intersegment ~~sales mainly include~~revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care ~~segment and were made~~segment. The sales are priced at ~~prices which approximate market values.~~the cost of the related materials plus overhead.

(In thousands)

Patient Care

Products &
Services

Other

Consolidating
Adjustments

Total

Three Months Ended September 30, 2013

Net sales

Customers

$
221,057

$
49,996

$
—

$
—

$
271,053

Intersegments

—

58,030

—

(58,030
)
—

Depreciation and amortization

4,090

3,029

2,105

—

9,224

Income (loss) from operations

38,189

16,723

(14,742
)
(264
)
39,906

Interest (income) expense

7,729

3,338

(5,050
)
—

6,017

Extinguishment of debt

—

—

—

—

—

Income (loss) before taxes

30,460

13,385

(9,692
)
(264
)
33,889

Three Months Ended September 30, 2012

Net sales

Customers

$
199,499

$
43,037

$
—

$
—

$
242,536

Intersegments

—

53,941

—

(53,941
)
—

Depreciation and amortization

3,492

3,173

2,044

—

8,709

Income (loss) from operations

36,221

10,051

(10,086
)
(813
)
35,373

Interest (income) expense

7,520

2,236

(2,005
)
—

7,751

Income (loss) before taxes

28,701

7,815

(8,081
)
(813
)
27,622

Nine Months Ended September 30, 2013

Net sales

Customers

$
635,237

$
132,964

$
—

$
—

$
768,201

Intersegments

—

167,963

—

(167,963
)
—

Depreciation and amortization

12,223

9,575

6,221

—

28,019

Income (loss) from operations

105,198

37,263

(42,389
)
(806
)
99,266

Interest (income) expense

23,154

10,011

(11,663
)
—

21,502

Extinguishment of debt

—

—

6,645

—

6,645

Income (loss) before taxes

82,044

27,252

(37,371
)
(806
)
71,119

Capital expenditures

11,071

2,271

14,128

—

27,470

Nine Months Ended September 30, 2012

Net sales

Customers

$
576,414

$
128,380

$
—

$
—

$
704,794

Intersegments

—

156,500

—

(156,500
)
—

Depreciation and amortization

10,306

9,207

5,919

—

25,432

Income (loss) from operations

100,551

29,275

(35,734
)
(1,258
)
92,834

Interest (income) expense

22,657

6,771

(6,216
)
—

23,212

Income (loss) before taxes

77,894

22,504

(29,518
)
(1,258
)
69,622

Capital expenditures

9,181

2,233

13,463

—

24,877

Total Assets

September 30, 2013

1,485,779

376,184

—

(613,964
)
1,247,999

December 31, 2012

1,389,223

336,318

—

(488,214
)
1,237,327

Summarized financial information concerning our reporting segments is shown in the following tables.
Total assets for each of the segments has not materially changed from December 31, 2017.
(in thousands)

Patient Care

Products &
Services

Corporate &
Other

Consolidating
Adjustments

Total

March 31, 2018

Net revenue

Third party

$
188,507

$
45,488

$
—

$
—

$
233,995

Intersegments

—

42,522

—

(42,522
)
—

Total net revenue

188,507

88,010

—

(42,522
)
233,995

Material costs

Third party suppliers

52,175

24,181

—

—

76,356

Intersegments

5,724

36,798

—

(42,522
)
—

Total material costs

57,899

60,979

—

(42,522
)
76,356

Personnel expenses

73,613

12,495

—

—

86,108

Other expenses

35,004

6,155

20,419

—

61,578

Depreciation & amortization

4,898

2,502

1,930

—

9,330

Income (loss) from operations

17,093

5,879

(22,349
)
—

623

Interest expense, net

7,989

3,265

1,009

—

12,263

Loss on extinguishment of debt

—

—

16,998

—

16,998

Non-service defined benefit plan expense

—

—

176

—

176

Income (loss) before income taxes

9,104

2,614

(40,532
)
—

(28,814
)
Benefit for income taxes

—

—

(6,196
)
—

(6,196
)
Net income (loss)

$
9,104

$
2,614

$
(34,336
)
$
—

$
(22,618
)
(in thousands)

Patient Care

Products &
Services

Corporate &
Other

Consolidating
Adjustments

Total

March 31, 2017

Net revenue

Third Party

$
187,637

$
46,044

$
—

$
—

$
233,681

Intersegments

—

41,201

—

(41,201
)
—

Total net revenue

187,637

87,245

—

(41,201
)
233,681

Material costs

Third party suppliers

50,609

23,796

—

—

74,405

Intersegments

5,824

35,377

—

(41,201
)
—

Total material costs

56,433

59,173

—

(41,201
)
74,405

Personnel expenses

75,515

12,440

—

—

87,955

Other expenses

35,717

6,893

28,115

—

70,725

Depreciation & amortization

5,429

2,670

2,038

—

10,137

Income (loss) from operations

14,543

6,069

(30,153
)
—

(9,541
)
Interest expense, net

8,163

3,332

2,514

—

14,009

Loss on extinguishment of debt

—

—

—

—

—

Non-service defined benefit plan expense

—

—

184

—

184

Income (loss) before income taxes

6,380

2,737

(32,851
)
—

(23,734
)
Benefit for income taxes

—

—

(6,000
)
—

(6,000
)
Net income (loss)

$
6,380

$
2,737

$
(26,851
)
$
—

$
(17,734
)
NOTE Q — SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental disclosure requirements for the statements of cash flows are as follows:

Three Months Ended March 31,

(in thousands)

2018

2017

Additions to property, plant and equipment acquired through financing obligations

$
1,208

$
623

Retirements of financed property, plant and equipment and related obligations

2,246

—

Purchase of property, plant and equipment in accounts payable at period end

545

1,337

NOTE R — SUBSEQUENT EVENTS
On May 15, 2018, we received a favorable net settlement of $1.7 million in connection with our long standing damage claims relating to the “Deepwater Horizon” disaster, and the prior adverse effect which it had on our clinic operations along the Gulf Coast in April 2010. We anticipate the receipt of no further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims. Given that this amount is considered a gain contingency, we did not record income associated with this settlement during the period ending March 31, 2018, or in any prior period. We intend to recognize this settlement amount as income in our condensed consolidated financial statements for the quarter ending June 30, 2018.

16On May 9, 2018, the Board adopted an amendment to the 2016 Plan, which authorized the issuance of up to an additional 375,000 shares of our common stock. See Note M - “Stock-based Compensation” for more information.

~~Table of Contents~~
ITEM 2. ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Overview~~Forward Looking Statements

~~The following is a discussion~~This report contains statements that are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, ~~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~~including descriptions of our ~~results of operations and financial condition includes various forward-looking~~business strategies. These statements ~~about our markets, the demand for our products and services and our future results.~~often include words such as “believe,” “expect,” “project,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts” or similar words. These statements are based on certain assumptions that we have made in light of our ~~current expectations, which are inherently subject to risks and uncertainties. Refer to risk factors disclosed~~experience in ~~Part II, Item 1A of this filing~~the industry as well as ~~the risk~~our perceptions of historical trends, current conditions, expected future developments and other factors ~~disclosed~~we believe are appropriate in these circumstances. We believe these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the ~~Company’s~~forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports.
These statements involve risks, estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in these statements and elsewhere in this report, and any claims, investigations or proceedings arising as a result, as well as our ability to remediate the material weaknesses in our internal control over financial reporting described in Item 4. “Controls and Procedures” contained elsewhere in this report, changes in the demand for our O&P products and services, uncertainties relating to the results of operations or our 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 investigations and legal proceedings, governmental policies affecting O&P operations and other risks and uncertainties generally affecting the health care industry.
Readers are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, ~~2012 for further discussion~~2017 (the “2017 Form 10-K”), some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained therein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in our Quarterly Report on Form 10-Q will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and ~~uncertainties. Our actual results and the timing of certain events may differ materially from those indicated~~uncertainties inherent in the ~~forward looking statements.~~forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition and results of operations may be affected by the risks set forth in Item 1A. “Risk Factors” contained in our 2017 Form 10-K or by other unknown risks and uncertainties.

Non-GAAP Measures
We refer to certain financial measures and statistics that are not in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We utilize these non-GAAP measures in order to evaluate the underlying factors that affect our business performance and trends. These non-GAAP measures should not be considered in isolation and should not be considered superior to, or as a substitute for, financial measures calculated in accordance with GAAP. We have defined and provided a reconciliation of these non-GAAP measures to their most comparable GAAP measures. The non-GAAP measures used in this Management’s Discussion and Analysis are as follows:
Adjusted Gross Revenue and Disallowed Revenue - “Adjusted gross revenue” reflects our gross billings after their adjustment to reflect estimated discounts established in our contracts with payors of health care claims. Pursuant to our contracts with payors, a portion of our adjusted gross billings may be disallowed based on factors including physician documentation, patient eligibility, plan design, prior authorization, timeliness of filings or appeal, coding selection, failure by certain patients to pay their portion of claims, computational errors associated with sequestration and other factors. We refer to these and other amounts as being “disallowed revenue” or “payor disallowances.” Our net revenue reflects adjusted gross revenue after reduction for the estimated aggregate amount of disallowed revenue for the applicable period. To facilitate analysis of the
comparability of our results, we provide these non-GAAP measures due to the significant changes that we have experienced in recent years in disallowed revenue which are further discussed below.
Same Clinic Revenues Per Day - measures the year-over-year change in revenue from clinics that have been open a full calendar year or more, examples of clinics not included in the same center population are closures and acquisitions. Day-adjusted growth normalizes sales for the number of days a clinic was open in each comparable period.
Overview
Business Overview

General

~~The goal of Hanger, Inc. (the “Company”) is to be the world’s premier~~We are a leading national provider of products and services ~~and products~~ that ~~enhance human~~assist in enhancing or restoring the physical ~~capabilities.~~capabilities of patients with disabilities or injuries. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, ~~Hanger is steeped in~~we and our predecessor companies have provided O&P services for over 150 ~~years of clinical excellence and innovation.~~years. We provide ~~orthotic and prosthetic (O&P) patient care~~O&P services, distribute O&P devices and components, manage O&P networks and provide ~~rehabilitative~~therapeutic solutions to ~~the broader~~patients and businesses in acute, post-acute ~~market. For the three~~ and nine month periods ended September 30, 2013, our net sales were $271.1 million and $768.2 million, respectively, and we recorded net income of $21.7 million and $45.2 million, respectively. For the three and nine month periods ended September 30, 2012, our net sales were $242.5 million and $704.8 million, respectively, and we recorded net income of $17.3 million and $43.4 million, respectively.
clinic settings. We ~~have~~operate through two ~~segments—~~segments - Patient Care and Products & Services.
Our Patient Care segment is primarily comprised of ~~our~~Hanger Clinic, which specializes in the design, fabrication and delivery of custom O&P devices through 683 patient care clinics ~~other 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~~108 satellite locations in ~~the United States and (ii) manage an O&P provider network that coordinates all aspects of O&P patient care for insurance companies. We operate in excess of 740 O&P patient care clinics located in 45~~44 states and the District of Columbia ~~and six strategically located distribution facilities. For the three and nine month periods ended September 30, 2013, net sales~~as of March 31, 2018. We also provide payor network contracting services to customers attributable to our Patient Care segment were $221.1 million and $635.2 million, respectively. For the three and nine month periods ended September 30, 2012, net sales to customers attributable to our Patient Care segment were $199.5 million and $576.4 million, respectively.other O&P providers through this segment.

Our Products & Services segment is comprised of our distribution ~~business, one of the largest distributors~~services and our therapeutic solutions businesses. As a leading provider of O&P products in the United States, we coordinate, through our distribution services business, the procurement and distribution of a broad catalog of O&P parts, componentry and devices to independent O&P providers nationwide. To facilitate speed and convenience, we deliver these products through our ~~rehabilitative solutions business. Our rehabilitative~~five distribution facilities that are located in Nevada, Georgia, Illinois, Pennsylvania and Texas. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and ~~is a leading provider of~~provides evidence-based clinical programs for post-acute rehabilitation ~~serving more than 4,200 long-term care facilities~~to patients at approximately 4,000 skilled nursing and ~~other sub-acute rehabilitation~~post-acute providers ~~throughout the U.S. This segment also develops neuromuscular technologies through independent research.~~ nationwide.
For the three months ended March 31, 2018 and ~~nine month periods ended September 30, 2013,~~2017, our net ~~sales to customers attributed to our Products & Services segment~~revenues were ~~$50.0~~$234.0 million and ~~$133.0~~$233.7 million, respectively. ~~For~~We recorded income from operations of $0.6 million and a loss of $9.5 million for the three months ended March 31, 2018 and ~~nine month periods ended September 30, 2012, net sales to customers attributed to Products & Services segment were $43.0 million and $128.4 million,~~2017, respectively. ~~See Note K for our consolidated financial statements contained herein for further information related to our segments.~~

Industry Overview

We estimate that approximately ~~$4.3~~$4.0 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 ~~captures~~accounts for approximately 20% ~~share of that~~ market byshare, providing a comprehensive portfolio of orthotic, prosthetic and post-operative solutions to patients in 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.~~businesses. 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 ~~existing~~ O&P devices. We anticipate that the demand for O&P services will continue to grow as the nation’s population increases, and as a result of several trends, including the aging of the U.S. population, there will be an increase in the prevalence of disease related disability and the demand for new and advanced devices. We believe the ~~average replacement time for orthotic devices is one to three years, while the average~~typical replacement time for prosthetic devices is three to five ~~years. We expect~~years, while the ~~demand~~typical replacement time for ~~O&P services to continue to grow as a result of several key trends, including~~orthotic devices varies, depending on 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.~~
17

~~Table of Contents~~device.

We estimate that approximately ~~$2.1~~$1.7 billion is spent in the United States each year ~~principally~~ by providers of O&P patient care services for the O&P products, components, devices and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P services and to our own patient care clinics. We estimate that our distribution sales account for approximately 8% of the market for O&P products, components, devices and ~~supplies. Our Products & Services segment distributes O&P products, components, devices and~~ supplies ~~to independent customers and~~(excluding sales to our ~~patient care clinics. Our distribution sales account for approximately 5% of the market outside of the Company.~~Patient Care segment).
We estimate the market for rehabilitation technologies, integrated clinical programs and ~~therapist~~clinician training in skilled nursing facilities ~~(SNF)~~(“SNFs”) to be approximately ~~$240~~$150 million annually. We currently provide these products and services to approximately ~~30%~~25% of the estimated ~~15,700~~15,000 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs and training within the broader post-acute rehabilitation markets to be approximately ~~$600 million. Currently, our goods~~$400 million annually. We do not currently provide a meaningful amount of products and services ~~are only provided~~ to ~~a small portion of~~ this ~~larger category.~~broader market.

Business Description

Patient Care

Our Patient Care segment employs approximately 1,500 clinical prosthetists, orthotists and pedorthists, which ~~is comprised~~we refer to as clinicians, substantially all of which are certified by either the American Board for Certification (“ABC”) or the Board of Certification of Orthotists and Prosthetists, which are the two boards that certify O&P clinicians. To facilitate timely service to our ~~patient care clinics~~patients, we also employ technicians, fitters and other ~~O&P operations and our contracting and network management business, provides O&P patient care services through over 740 patient care clinics and over 1,275~~ancillary providers to assist its clinicians in ~~45 states and~~ the ~~District~~performance of ~~Columbia. Substantially all~~their duties. Through this segment, we additionally provide network contracting services to independent providers 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.
Inthrough our orthotics business, we design, fabricate, fit and maintain a wide range of custom-made braces and other devices 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. 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.“Linkia” business.

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. O&P devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process and lower the cost of rehabilitation.
Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs. When fabricating a device, our clinicians ascertain the specific requirements, componentry and measurements necessary for the construction of the device. Custom devices are constructed using componentry provided by a variety of third party manufacturers who specialize in O&P, coupled with sockets and other elements that are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs. Our clinicians and technicians typically utilize castings, electronic scans and other techniques to fabricate items that are specialized for the patient. After fabricating the device, a fitting process is undertaken and adjustments are made to ensure the achievement of proper alignment, fit and patient comfort. The fitting process often involves several stages ~~in order~~ to successfully achieve desired functional and cosmetic results.
Given the differing physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic and other needs of each individual patient, each fabricated prosthesis and orthosis is customized for each particular patient. These custom devices are commonly fabricated byat one of our ~~skilled technicians using computer scans~~regional or plaster castings to measure the patient’s limb. The proprietary Insignia laser scanning system images the patient and produces a very accurate computer generated representation of the patient’s limb, which results in a faster turnaround of the orthotic or prosthetic device and a more professional overall experience.national fabrication facilities.

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. Frequently, our proprietary Insignia scanning system is used in the fabrication process. The ~~quality of~~Insignia system scans the patient and produces an accurate computer generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.
In recent years, we have established a centralized revenue cycle management organization that assists our ~~services~~clinics in pre-authorization, patient eligibility, denial management, collections, payor audit coordination and ~~the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians. A listing of our~~other accounts receivable processes.
The principal reimbursement sources for our services ~~is described in Note K of the Notes to Consolidated Financial Statements included elsewhere in this report.~~are:

~~Government reimbursement, comprised~~·                  Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators and similar sources;
·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons;
·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
·                  the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 40.5% and 40.8% of our net sales for the nine months ended September 30, 2013 and 2012, respectively. These payors set reimbursement levels for O&P services and products using a series of codes which designate the type of product and service being delivered. Medicare prices are adjusted each year based on the Consumer Price Index-Urban (“CPIU”) unless Congress acts to change or eliminate the adjustment. The Medicare price increase/(decreases) for 2013, 2012, 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.Affairs.

We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be paid under the contract with the third party payor. These contracts usually 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~~third party payor that reflects various factors, including market conditions, geographic area and number of persons covered. Many of our commercial contracts are indexed to the commensurate Medicare fee schedule that relates to the products or services being provided.

18

~~Table~~Government reimbursement is comprised of ~~Contents~~Medicare, Medicaid and the U.S. Department of Veterans Affairs. These payors set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each year based on the Consumer Price Index for All Urban Consumers (“CPI-U”) unless Congress acts to change or eliminate the adjustment. The CPI-U is adjusted further by an efficiency factor (the “Productivity Adjustment” or the “Multi-Factor Productivity Adjustment”) in order to determine the final rate adjustment each year. There can be no assurance that future adjustments will not reduce reimbursements for O&P services and products from these sources.

O~~ur contract~~We, and ~~network management business is the only network management company dedicated solely to serving~~ the O&P ~~market~~industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits and Zone Program Integrity Contractor (“ZPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT and ZPIC audits are generally post-payment audits. The recently implemented TPE audits have replaced the previous Medicare Administrative Contractor (“MAC”) audits. Adverse post-payment audit determinations generally require Hanger to reimburse Medicare for ~~national and regional insurance companies. We partner with healthcare insurance companies~~payments previously made, while adverse pre-payment audit determinations generally result in the denial of payment. In either ascase, we can request a ~~preferred provider~~redetermination or appeal, if we believe the adverse determination is unwarranted, which can take an extensive period of time to manage their O&P network of providers. Our network now includes approximately 1,150 O&P provider locations, including over 400 independent providers. As of September 30, 2013, we had 57 contracts with national and regional providers.resolve, currently up to six years or more.

Products & Services

~~Our Products & Services segment was 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, Inc. (“SPS”), we distribute O&P components to both to independent customers and to our own ~~patient care clinics. We also provide rehabilitative solutions~~clinics in the Patient Care segment. SPS purchases, warehouses and distributes over 400,000 SKUs from more than 300 different manufacturers. Through our warehousing and distribution facilities in Nevada, Georgia, Illinois, Pennsylvania and Texas, we are able to deliver products to the ~~O&P market~~vast majority of our customers in the United States within two business days. Through its SureFit subsidiary, SPS also manufactures and ~~the post-acute rehabilitation market while being a leading manufacturer and distributor of~~sells therapeutic footwear for diabetic patients in the podiatric market. Our distribution business maintains over 26,000 individual SKUs in inventory, which are manufactured by more than 375 different vendors. Our distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania,market, and ~~Texas allow us to deliver products via ground shipment to the vast majority~~through its National Labs subsidiary it is a fabricator of O&P devices both for our ~~clients in the United States within two business days.~~patient care clinics and competitor clinics.

Our distribution services business enables us to:

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

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

·                  improve inventory ~~quality;~~quality control;

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

·                  coordinate new product development efforts with key ~~vendor “partners”.~~vendors.
~~Marketing of~~Through 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 rehabilitative~~wholly-owned subsidiary, Accelerated Care Plus Corp., our therapeutic solutions business is ~~the nation’s~~a leading provider of rehabilitation technologies and integrated clinical programs to post-acute care and rehabilitation providers. Our unique value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical ~~technology;~~technology, evidence based clinical programs, and ~~continuous onsite therapist~~ongoing clinician education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We serve ~~more than 4,200~~approximately 4,000 skilled nursing ~~facilities nationwide, including 21~~and post-acute providers nationwide.
Effect of Delay in Financial Filings
As discussed in our 2017 Form 10-K, due to prior restatements and related issues, we have been delayed in the preparation and filing of our financial statements in recent years. In connection with our efforts to restate our prior financial statements, remediate our material weaknesses, regain our timely filing status and undertake related activities, we have incurred third party professional fees in excess of the ~~25 largest national providers.~~amounts we estimate that we would have otherwise incurred. The estimated professional fees associated with these efforts are as follows:
(in thousands)
For the Three Months Ended

Expensed

Paid

Balance to be Paid
in Future Periods

March 31, 2017

$
11,537

$
14,766

$
19,672

June 30, 2017

7,567

13,765

13,474

September 30, 2017

6,839

6,430

13,883

December 31, 2017

6,358

9,956

10,285

March 31, 2018

3,700

7,755

6,230

We currently estimate that during 2018, we will expend a total of $13.0 million in excess professional fees, with the primary purpose for future expenditures relating to our focus on the remediation of our continuing material weaknesses in internal controls over financial reporting. Due to the ongoing material weaknesses in our controls over financial reporting, we currently undertake additional substantive procedures to test and verify financial statement amounts in connection with the preparation of our financial statements.
With the filing of this Quarterly Report on Form 10-Q, we now have no further unfiled annual or quarterly financial statements relating to prior operating periods. It is our current intention to commence the timely filing of our financial statements with the filing of our Quarterly Report on Form 10-Q for the period ending June 30, 2018. However, in the event that we are not able to complete the procedures necessary to substantiate our financial results for that period, or any subsequent period, we would by necessity delay that financial filing and then work to further address and resolve the causes of such a delay.
Reimbursement Trends
In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid and the VA. Patient Care constitutes 80.6% and 80.3% of our net revenue for the three months ended March 31, 2018 and 2017, respectively. Our remaining net revenue is from our Products & Services segment which derives its net revenue from commercial transactions with independent O&P providers, healthcare facilities and other customers. In contrast to net revenues from our Patient Care segment, payment for these products and services are not directly subject to third party reimbursement from health care payors.
The amount of our reimbursement varies based on the nature of the O&P device we fabricate for our patients. Given the particular physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic and other needs of each individual patient, each fabricated prostheses and orthoses is customized for each particular patient. The nature of this customization and the manner by which our claims submissions are reviewed by payors makes our reimbursement process administratively difficult.
To receive reimbursement for our work, we must ensure that our clinical, administrative and billing personnel receive and verify certain medical and health plan information, record detailed documentation regarding the services we provide and accurately and timely perform a number of claims submission and related administrative tasks. Traditionally, we have
performed these tasks in a manual fashion and on a decentralized basis. In recent years, due to increases in payor pre-authorization processes, documentation requirements, pre-payment reviews and pre- and post-payment audits, our ability to successfully undertake these tasks using our traditional approach has become increasingly challenging. We believe these changes in industry trends have been brought about in part by increased nationwide efforts to reduce health care costs.
A measure of our effectiveness in securing reimbursement for our services can be found in the degree to which payors ultimately disallow payment of our claims. Payors can deny claims due to their determination that a physician who referred a patient to us did not sufficiently document that a device was medically necessary or clearly establish the ambulatory (or “activity”) level of a patient. Claims can also be denied based on our failure to ensure that a patient was currently eligible under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, that we filed or appealed the payor’s determination timely, on the basis of our coding, failure by certain classes of patients to pay their portion of a claim and for various other reasons. If any portion of, or administrative factor within, our claim is found by the payor to be lacking, then the entirety of the claim amount may be denied reimbursement. Due to the increasing demands of these processes, the level and capability of our staffing, as well as our material weaknesses and other considerations, our consolidated disallowed revenue and its relationship to consolidated adjusted gross revenue increased over historical levels to a peak level in 2014.
Commencing in late 2014 and continuing through today, we have taken a number of actions to halt and reverse these disallowed revenue trends. These initiatives included: (i) the retention of consultants and creation of a central revenue cycle management function; (ii) addressing the issues identified in our patient management and electronic health record system; and (iii) the establishment of new clinic-level procedures and training regarding the collection of supporting documentation and the importance of diligence in our claims submission processes. Through 2017, we have seen significant improvements in these rates. While we intend to continue to work towards further improvements in our procedures through the use of technology within our clinic and revenue cycle functions, we do not currently foresee that future reductions in disallowed revenue will be as achievable or substantial as the improvements realized since 2014.
Under both ASC 606 and the previous revenue recognition guidance ASC 605, Revenue Recognition, disallowed revenue is considered an adjustment to the transaction price. However, upon adoption of ASC 606, estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are now presented as a reduction of net revenue. Under prior guidance, these amounts were recognized as bad debt expense in other operating expenses.
Implicit price concessions such as payor disallowances and patient non-payments for the Patient Care segment for the three months ended March 31, 2018 and 2017 are as follows:

Three Months Ended March 31,

(dollars in thousands)

2018

2017

Net revenue

$
188,507

$
187,637

Estimated implicit price concessions arising from:

Payor disallowances

8,262

7,116

Patient non-payments

869

—

Adjusted gross revenue

$
197,638

$
194,753

Payor disallowances

$
8,262

$
7,116

Patient non-payments

869

—

Bad debt expense

—

1,802

Payor disallowances, patient non-payments and bad debt expense

$
9,131

$
8,918

Payor disallowances %

4.2
%
3.7
%
Patient non-payments %

0.4
%
—
%
Bad debt expense %

—
%
0.9
%
Percent of adjusted gross revenue

4.6
%
4.6
%
New System Implementation
As discussed in our 2017 Form 10-K, in recent years we have been undertaking the implementation of a new patient management and electronic health record system at our patient care clinics. As of March 31, 2018, we have completed the installation of this system in approximately 70% of our clinic locations. We currently estimate that we will incur approximately $4.6 million in training, travel and related implementation costs in 2018.
Acquisitions

We ~~also have a product development business specializing~~did not complete any acquisitions during the first quarter of 2018 and currently do not anticipate completing an acquisition in the ~~commercialization~~quarter ending June 30, 2018. However, we currently do believe it likely that we will commence the acquisition of ~~emerging products~~orthotics and prosthetic clinics which are similar to those that we operate through our Patient Care segment during the second half of this year.
Seasonality
We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year. The first quarter is normally our lowest relative net revenue quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another, and, due to the general fulfillment by patients of their health plan co-payments and deductible requirements towards the year’s end, our fourth quarter is normally our highest revenue producing quarter.
Our results are also affected, to a lesser extent, by our holding of an education fair in the ~~O&P~~first quarter of each year. This one week event is conducted to assist our clinicians in maintaining their training and ~~Rehabilitation markets. Working~~certification requirements and to facilitate a national meeting with ~~inventors under licensing and consulting agreements, we commercialize~~our clinical leaders. We also invite manufacturers of the ~~design, obtain regulatory approvals, develop clinical protocols~~componentry for the ~~technology,~~devices we fabricate to these annual events so they can demonstrate their products and ~~then introduce~~otherwise assist in our training process. During the ~~devices~~first quarters of 2018 and 2017, we spent approximately $2.3 million and $2.0 million, respectively, on travel and other costs associated with this one week event. In addition to the ~~marketplace through~~costs we incur associated with this annual event, we also lose the productivity of a ~~variety~~significant portion of ~~distribution channels. We currently have two commercial products:~~our clinicians during the ~~WalkAide System~~one week period in which ~~benefits patients with a condition referred~~this event occurs, which contributes to ~~as drop foot, and~~ the ~~V-Hold which is active vacuum technology used in~~ lower ~~extremity prosthetic devices.~~seasonal revenue level we experience during the first quarter of each year.
Critical Accounting Policies ~~and Estimates~~

~~Our analysis and discussion of~~We prepare 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”).~~GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, ~~and~~ disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to ~~accurately and~~ fairly ~~report~~present, in all material respects, 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.position. 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.~~
19

~~Table of Contents~~statements:

·                  Revenue ~~Recognition:~~ Revenues in the Company’s Patient Care segment are derived from the sale of O&P devices and the maintenance and repair of existing devices. Revenues are recorded based upon contracts with commercial insurance companies, government agencies, net of contractual adjustments and discounts. Individual patients are generally responsible for deductible and/or co-payments. Revenues are recorded when the patient has accepted and received the device. Revenues from maintenance and repairs are recognized when the service is provided.
Revenues in the Company’s Products & Services segment are derived from the distribution of O&P devices to customers and leasing 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. Discounted sales are recorded at net realizable value. Leasing revenues are recognized based upon the contractual terms of the agreements, which contain negotiated pricing and service levels with terms ranging from one to five years, and are generally billed to the Company’s customers monthly.recognition

·                  ~~Accounts Receivable:~~ Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed. The Company estimates an allowance for disallowed sales primarily for commercial & governmental contractual adjustments and discounts not identified at the time of sale. The allowance is estimated based upon historical experience. Additions to the allowance are reported as a reduction of Net sales. The Company estimates an allowance for doubtful accounts to estimate uncollectible accounts due primarily from individual patients. The allowance is estimated based upon historical experience. Bad debt expense is reported within Other operating expenses.
Accounts receivable, balances are periodically evaluated to assess collectability. On a quarterly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of the allowance for doubtful accounts. Additionally, an evaluation of collectability of receivable balances older than 180 days is performed at our O&P clinics at least semi-annually, the results of which are used in the next allowance analysis. From time to time, we may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted.
~~The following represents the composition of our accounts receivable balance by type of payor:~~
September 30, 2013

(In thousands)

0-60 days

61-120 days

Over 120 days

Total

Patient Care

Commercial insurance

$
44,325

$
11,157

$
13,282

$
68,764

Private pay

3,839

3,138

6,696

13,673

Medicaid

11,976

3,806

4,872

20,654

Medicare

29,479

6,069

18,195

53,742

VA

2,340

462

400

3,201

Products & Services

Trade accounts receivable

16,254

3,512

5,221

24,987

$
108,213

$
28,144

$
48,666

$
185,021

December 31, 2012

(In thousands)

0-60 days

61-120 days

Over 120 days

Total

Patient Care

Commercial insurance

$
51,658

$
10,468

$
12,249

$
74,375

Private pay

5,437

4,545

5,783

15,765

Medicaid

11,812

3,181

3,228

18,221

Medicare

27,433

5,611

9,029

42,073

VA

2,082

558

324

2,964

Products & Services

Trade accounts receivable

12,556

3,149

4,091

19,796

$
110,978

$
27,512

$
34,704

$
173,194

·~~Inventories:~~ Inventories in the Patient Care segment, consisting principally of raw materials and work-in-process, are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. The Company applies the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the end of each interim period. On October 31st, of each year a physical inventory is taken. The annual physical inventory values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth quarter. The October 31st ~~inventory is subsequently adjusted during interim periods to apply the gross profit method described above.~~
Inventories in the Products & Services segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.
20

~~Table of Contents~~net

·                  ~~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. There were no impairment indicators since our last annual impairment test on October 1, 2012.
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 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.Inventories

·                  ~~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.Business combinations

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·                  Goodwill 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.other intangible assets, net

~~Although we believe the measurement~~·                  Income taxes
The use 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~~estimates, assumptions, or ~~litigation, it~~judgments could have a material effect on ~~the income tax provision~~reported amounts of assets, liabilities, revenue, expenses, and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.
~~Guidance and Outlook~~
The Company has updated its 2013 net sales guidance to a range of between $1.045 and $1.055 billion, which represents growth of between 7% and 8% compared to 2012. This range reflects the estimated effectrelated disclosures as of the ~~previously discussed revision~~date of the financial statements and during the reporting period. These critical accounting policies are described in more detail in our Annual Report on full year 2013 net sales. The net sales guidance assumes 3% to 4% same center sales growth in the Patient Care segment for the year. The Company expects full year 2013 net sales in its Products & Services segment to increase slightlyForm 10-K for the year ~~notwithstanding the segment’s strong net sales growth~~ended December 31, 2017, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and in ~~the third quarter~~Note A - “Organization and Summary of 2013. The segment’s strong Q3 2013 net sales results included the benefit of an accelerated one-time sale that the Company had anticipated would occur across the third and fourth quarters of 2013. The Company is also narrowing its range of guidance for adjusted diluted earnings per share to between $2.08 and $2.11 for 2013, excluding certain tax benefits, costs related to the implementation of Janus of approximately $0.03, acquisition costs, and debt issuance cost associated with the June 2013 refinancing of the Company’s bank credit facilities. The Company expects that adjusted operating margin expansion for the year will be in the range of 20 to 40 basis points. The Company anticipates generating cash flow from operations of between $90 million and $100 million in 2013 and investing a total of $35 million to $40 million in capital additions. The Company continues its acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues in 2013.
21

~~Table of Contents~~Significant Accounting Policies” contained within these condensed consolidated financial statements.

Results of Operations

~~The following table sets forth~~Our results of operations for the three months ended March 31, 2018 and 2017 were as follows:

For the Three Months
Ended March 31,

Percent Change

(dollars in thousands)

2018

2017

2018 v 2017

Net revenue

$
233,995

$
233,681

0.1
%
Material costs

76,356

74,405

2.6
%
Personnel costs

86,108

87,955

(2.1
)%
Other operating costs

31,096

32,689

(4.9
)%
General and administrative expenses

25,636

25,386

1.0
%
Professional accounting and legal fees

4,846

12,650

(61.7
)%
Depreciation and amortization

9,330

10,137

(8.0
)%
Operating expenses

233,372

243,222

(4.0
)%
Income (loss) from operations

623

(9,541
)
**

Interest expense, net

12,263

14,009

(12.5
)%
Loss on extinguishment of debt

16,998

—

100.0
%
Non-service defined benefit plan expense

176

184

(4.3
)%
Loss before income taxes

(28,814
)
(23,734
)
21.4
%
Benefit for income taxes

(6,196
)
(6,000
)
3.3
%
Net loss

$
(22,618
)
$
(17,734
)
27.5
%
** Not a meaningful percentage
During these periods, ~~indicated certain items from~~ our ~~consolidated statements of income and comprehensive income~~operating expenses as a percentage of ~~our~~ net ~~sales:~~revenue were as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2013

2012

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net sales

100.0
%
100.0
%
100.0
%
100.0
%
Material costs

29.3

30.1

29.5

30.2

Personnel costs

35.0

34.7

36.2

35.3

Other operating expenses

17.6

17.0

17.7

17.7

Depreciation and amortization

3.4

3.6

3.6

3.6

Income from operations

14.7

14.6

13.0

13.2

Interest expense, net

2.2

3.2

2.8

3.3

Extinguishment of debt

—

—

0.9

—

Income before taxes

12.5

11.4

9.3

9.9

Provision for income taxes

4.5

4.2

3.4

3.7

Net income

8.0
%
7.2
%
5.9
%
6.2
%

For the Three Months
Ended March 31,

2018

2017

Material costs

32.6
%
31.8
%
Personnel costs

36.8
%
37.6
%
Other operating costs

13.2
%
14.1
%
General and administrative expenses

11.0
%
10.9
%
Professional accounting and legal fees

2.1
%
5.4
%
Depreciation and amortization

4.0
%
4.3
%
Operating expenses

99.7
%
104.1
%

Three Months Ended ~~September 30, 2013~~March 31, 2018 Compared to the Three Months Ended ~~September 30, 2012~~March 31, 2017

Net ~~Sales.~~ revenue. Net ~~sales~~revenue for the three ~~month period~~months ended ~~September 30, 2013 increased $28.6~~March 31, 2018 was $234.0 million, an increase of $0.3 million, or ~~11.8%~~0.1%, ~~to $271.1~~from $233.7 million ~~compared to $242.5~~for the three months ended March 31, 2017. Net revenue by operating segment, after elimination of intersegment activity was as follows:

For the Three Months Ended March 31,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
188,507

$
187,637

$
870

0.5
%
Products & Services

45,488

46,044

(556
)
(1.2
)%
Net revenue

$
233,995

$
233,681

$
314

0.1
%
Patient Care net revenue for the three months ended March 31, 2018 was $188.5 million, an increase of $0.9 million, or 0.5%, from $187.6 million for the same period in the prior year. Same clinic revenue increased $2.1 million for the three months ended March 31, 2018 compared to the same period in the prior year, reflecting an increase in same clinic revenue per day of ~~2012.~~1.1%. This ~~increase~~growth was offset by the effect of clinic closures which reflected decreased revenue of $0.4 million as compared with the same period in the prior year. Net revenue for the three months ended March 31, 2018 was also negatively impacted as compared to the same period in the prior year by $0.9 million from the adoption of the new revenue accounting standard on January 1, 2018.
Revenue from prosthetic patients increased by 6.0% as compared to the same period in the prior year. This growth was partially offset by revenue declines in orthotics, shoes and shoe inserts. Prosthetic revenue constituted 51% of Patient Care’s revenue in the first quarter as compared with 49% for the same period in the prior year. We believe this growth in prosthetic revenue has been due in part to an increased focus on the demonstration of patient outcomes and related marketing initiatives. Decreases in shoes and shoe inserts relate generally to our de-emphasis of this lower margin category of care.
Products & Services net revenue for the three months ended March 31, 2018 was $45.5 million, a ~~$21.6~~decrease of $0.6 million, or ~~10.8%, increase~~1.2% from $46.0 million for the same period in the prior year. This decrease was comprised of $1.3 million decrease in net revenue from therapeutic services, which related primarily to client cancellations, partially offset by $0.7 million increase from the distribution of O&P componentry to independent providers.
Material costs. Material costs for the three months ended March 31, 2018 were $76.4 million, an increase of $2.0 million, or 2.6%, from $74.4 million for the same period in the prior year. Due primarily to changes in our Patient Care segment ~~and~~product mix, total material costs as a ~~$7.0~~percentage of net revenue increased to 32.6% in 2018 from 31.8% in 2017. Material costs by operating segment, after elimination of intersegment activity, were as follows:

For the Three Months Ended March 31,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
57,899

$
56,433

$
1,466

2.6
%
Products & Services

18,457

17,972

485

2.7
%
Material costs

$
76,356

$
74,405

$
1,951

2.6
%
Patient Care material costs increased $1.5 million, or ~~16.2%~~2.6%, ~~increase~~for the three months ended March 31, 2018 compared to the same period in the prior year, and increased slightly as a percent of net revenue to 30.7% in 2018 from 30.1% in 2017.
Products & Services ~~segment. The $21.6~~material costs increased $0.5 million, or 2.7%, for the three months ended March 31, 2018 compared to the same period in the prior year and reflected an increase on a percent of revenue basis, growing to 40.6% in the three months ended March 31, 2018 from 39.0% in the same period in 2017.
Personnel costs. Personnel costs for the three months ended March 31, 2018 were $86.1 million, a decrease of $1.8 million, or 2.1%, from $88.0 million for the same period in the prior year. Personnel costs by operating segment were as follows:

For the Three Months Ended March 31,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
73,613

$
75,515

$
(1,902
)
(2.5
)%
Products & Services

12,495

12,440

55

0.4
%
Personnel costs

$
86,108

$
87,955

$
(1,847
)
(2.1
)%
Personnel costs for our Patient Care segment were $73.6 million for the three months ended March 31, 2018, a decrease $1.9 million, or 2.5%, from $75.5 million for the same period in the prior year. Patient Care benefits expense decreased $2.5 million from lower medical costs, partially offset by a $0.6 million increase in ~~Patient Care segment sales was comprised of a $7.4 million, or 3.8%, increase in same center sales, with the remaining $14.2 million increase driven by acquisitions. The 16.2% increase~~salary expense and other personnel related costs. Personnel costs in the Products & Services segment ~~sales was~~were relatively flat for the ~~result of stronger sales results~~three months ended March 31, 2018 compared ~~against relatively weak results~~to the same period in the ~~similar period during 2012. as well as the impact of a one-time equipment sale within the segment.~~prior year.

~~Material Costs.~~ Other operating costs~~Material Costs~~. Other operating costs for the three ~~month~~months ended March 31, 2018 were $31.1 million, a decrease of $1.6 million, or 4.9%, from $32.7 million for the same period in the prior year. Bad debt expense decreased $2.5 million, primarily from the adoption of the new revenue accounting standard under which certain of these expenses were re-characterized as implicit price concessions within our Patient Care segment and are now reflected as an adjustment to net revenue. This decrease in was partially offset by a $0.7 million increase in travel and education related expenses and a $0.2 million increase in other operating costs. During the first quarter of each year, we hold our annual Education Fair, which is a national meeting of approximately 1,000 of our employees, primarily comprised of our clinicians. We incurred $2.3 million in costs associated with the Education Fair during the first quarter of 2018 as compared with $2.0 million of expenses in connection with the meeting held in the first quarter of 2017.
General and administrative expenses. General and administrative expenses for the three months ended ~~September 30, 2013 was $79.4~~March 31, 2018 were $25.6 million, an increase of ~~$6.3~~$0.3 million, ~~over $73.1~~or 1.0%, from $25.4 million for the ~~three month~~same period ~~ended September 30, 2012, primarily due to sales growth. Material costs as a percentage of net sales decreased 0.8% primarily due~~in the prior year. This increase included $0.6 million related to a ~~change~~prior year benefit from company owned life insurance and $0.4 million in ~~the mix~~travel and education related expenses, partially offset by decreases in facilities related costs of ~~sales favoring the Patient Care segment, which has lower costs,~~$0.6 million and ~~a reduction~~$0.1 million in ~~product cost resulting from an effort to further improve the movement of materials.~~other expenses.

~~Personnel Costs.~~ Professional accounting and legal fees~~Personnel costs~~. Professional accounting and legal fees for the three ~~month period~~months ended ~~September 30, 2013 increased by $10.7~~March 31, 2018 were $4.8 million, ~~to $94.8~~a decrease of $7.8 million from ~~$84.1~~$12.7 million for the ~~three month~~same period ~~ended September 30, 2012. Approximately $1.5~~in the prior year. Advisory and other fees decreased $4.8 million, ~~of the increase was due to annual merit increases as well as increased benefit costs, $5.9~~audit related fees decreased $2.7 million ~~of the increase was due to the impact of O&P acquisitions~~ and ~~the remaining increase was due to an extra day of labor in 2013 as well as additions to our infrastructure to support growth.~~
~~Other Operating Expenses.~~ ~~Other operating expenses, comprised primarily of professional~~legal fees facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased $6.6 million to $47.8 million, for the three month period ended September 30, 2013 compared to $41.2 million, for the three month period ended September 30, 2012. Approximately $1.9 million of the increase was due to acquisitions, $0.9 million due to an increase in rent expenses, and the remaining balance was generally due to increased software license fees associated with our growth.decreased $0.3 million.

Depreciation and ~~Amortization.~~ amortization. Depreciation and amortization for the three ~~month period~~months ended ~~September 30, 2013 increased $0.5~~March 31, 2018 was $9.3 million, ~~to $9.2~~a decrease of $0.8 million, ~~compared to $8.7~~or 8.0%, from $10.1 million for the same period in the prior year. The decrease included lower amortization of $0.5 million as a result of fully amortized intangible assets, $0.2 million of lower therapeutic equipment depreciation and $0.1 million of lower depreciation on software.
Interest expense, net. Interest expense for the three ~~month~~months ended March 31, 2018 was $12.3 million, a decrease of $1.7 million, or 12.5%, from $14.0 million for the same period ~~ended September 30, 2012.~~in the prior year. The ~~increase~~decrease was primarily due to ~~leasehold improvements and additional capital expenditures over the last 12 months.~~lower interest rates on outstanding borrowing from our debt refinancing in March 2018.

~~Income from Operations.~~Loss on extinguishment of debt. ~~Income from operations increased $4.5 million, to $39.9 million,~~Debt extinguishment costs for the three ~~month period~~months ended ~~September 30, 2013 compared~~March 31, 2018 totaled $17.0 million and related to ~~$35.4 million for the three month period ended September 30, 2012 due primarily to increased sales volume.~~
22

~~Table of Contents~~our debt refinancing on March 6, 2018 - see Note J - “Long-term Debt.”

~~Interest Expense.~~ Benefit for income taxes~~Interest expense decreased $1.8 million, to $6.0 million, for the three month period ended September 30, 2013, compared to $7.8 million, for the three month period ended September 30, 2012.~~. The ~~decrease resulted from the interest savings from the refinancing that occurred in the second quarter of 2013 as well as a reduction of outstanding borrowings.~~
~~Provision for Income Taxes.~~ ~~The provision~~benefit for income taxes for the three ~~month period~~months ended ~~September 30, 2013~~March 31, 2018 was ~~$12.2~~$6.2 million, or ~~36.1%~~21.5% of ~~pre-tax income,~~loss from continuing operations before taxes, compared to ~~$10.3~~a benefit of $6.0 million, or ~~37.2%~~25.3% of ~~pre-tax income,~~loss from continuing operations before taxes for the three months ended ~~September 30, 2012.~~March 31, 2017. The effective tax rate in 2018 consists principally of the ~~35%~~21% federal statutory tax rate ~~and~~in addition to state income taxes, less permanent tax differences. The ~~2013 period has a lower effective tax rate primarily due to the reinstatement of the Federal Research and Development Tax Credit, and other permanent differences.~~
~~Net Income.~~ Net income increased $4.4 million, to $21.7 million, for the three month period ended September 30, 2013, from $17.3 million for the three month period ended September 30, 2012, primarily due to higher sales volume and reduced material costs.
~~Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012~~
~~Net Sales.~~ Net sales for the nine month period ended September 30, 2013 increased $63.4 million, or 9.0%, to $768.2 million compared to $704.8 million for the same period of 2012. The sales increase was driven by a $15.9 million, or 2.8%, increase in same center sales in the Patient Care segment, a $42.9 million increase from acquired entities, as well as a $4.6 million, or 3.6% increase in sales in the Products & Services segment.
~~Material Costs.~~ Material Costs for the nine month period ended September 30, 2013 was $226.6 million, an increase of $13.9 million from $212.7 million for the nine month period ended September 30, 2012, primarily due to sales growth. Material costs as a percentage of net sales decreased 0.7% primarily due to a change in the mix of sales favoring the Patient Care segment, which has lower costs, and a reduction in product cost resulting from an effort to further improve the movement of materials.
~~Personnel Costs.~~ Personnel costs for the nine month period ended September 30, 2013 increased by $29.2 million to $277.9 million from $248.7 million for the nine month period ended September 30, 2012. Approximately $6.8 million of the increase was due to annual merit increases and other benefit changes, $17.1 million of the increase was due to the impact of O&P acquisitions and the remaining increase was due to additional headcount to support growth in our business.
~~Other Operating Expenses.~~ Other operating expenses, comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased $11.3 million to $136.4 million, for the nine month period ended September 30, 2013 compared to $125.1 million, for the nine month period ended September 30, 2012. However, other operating expenses as a percentage of sales did not increase. Approximately $5.3 million of the increase was due to acquisitions, $2.8 million due to an increase in rent expenses, and the remaining balance was principally due to expenses such as software licenses fees that support our growth.
~~Depreciation and Amortization.~~ Depreciation and amortization for the nine month period ended September 30, 2013 increased $2.6 million, to $28.0 million, compared to $25.4 million for the nine month period ended September 30, 2012. The increase was primarily due to leasehold improvements and additional capital expenditures.
~~Income from Operations.~~ Income from operations increased $6.5 million, to $99.3 million, for the nine months ended September 30, 2013 compared to $92.8 million for the nine months ended September 30, 2012 due primarily to increased sales volume.
~~Interest Expense.~~ Interest expense decreased $1.7 million, to $21.5 million, for the nine month period ended September 30, 2013, compared to $23.2 million, for the nine month period ended September 30, 2012. The decrease is attributed to the interest savings from the refinancing that occurred in the second quarter of 2013 as well as a reduction of outstanding borrowings.
~~Extinguishment of Debt.~~ In conjunction with our bank credit facility refinancing, in the second quarter of 2013, we incurred a charge of approximately $6.6 million related to the write-off existing debt issuance cost associated with our previous credit agreements. There were no similar charges in the same period of 2012.
~~Provision for Income Taxes.~~ The provision for income taxes for the nine months ended September 30, 2013 was $25.9 million, or 36.4% of pre-tax income, compared to $26.3 million, or 37.7% of pre-tax income, for the nine month period ended September 30, 2012. The effective tax rate consists principally of the 35% federal statutory tax rate ~~and state~~in 2017 was 35%. The increase in benefit for income taxes ~~less permanent tax differences. The 2013 period has a~~was largely driven by an increase in loss before income taxes partially offset by the lower effective tax ~~rate primarily~~rate.
The income tax provision for the three months ended March 31, 2018 was computed on a discrete period basis due to ~~the reinstatement of the Federal Research and Development Tax Credit, and other permanent differences.~~
~~Net Income.~~ ~~Net income increased $1.8 million, to $45.2 million, for nine month period ended September 30, 2013, from $43.4 million~~an exceptional circumstance in which we are anticipating only marginal pre-tax book profitability for the ~~nine month~~year, but have significant permanent differences that could result in wide variability in estimating the annual effective tax rate. The tax benefit related to the first quarter ordinary loss was therefore recognized in the interim period ~~ended September 30, 2012, due primarily to increased sales.~~
23

~~Table of Contents~~in which the ordinary loss was reported as permitted under ASC 740.

Financial Condition, Liquidity and Capital Resources

Liquidity ~~and Capital Resources~~

To provide cash for our operations and capital expenditures, our immediate source of liquidity is our cash and investment balances and any amounts we have available for borrowing under our revolving credit facility. We refer to the sum of these two amounts as our “liquidity.”
At March 31, 2018 we had total liquidity of $127.0 million, which reflected an increase of $39.1 million from the $87.9 million in liquidity we had as of December 31, 2017. Our liquidity at March 31, 2018 was comprised of cash and cash equivalents of $32.9 million and $94.1 million in available borrowing capacity under our $100 million revolving credit facility. This increase in liquidity relates primarily to the net proceeds of $49.7 million from the refinancing of our indebtedness on March 6, 2018.
If we are not compliant with our debt covenants in any period, absent a waiver or amendment of our Credit Agreement, we may be unable to access funds in our revolving credit facility.
Working Capital and Days Sales Outstanding
At March 31, 2018, we had a working capital ~~at September 30, 2013 was $257.8~~of $107.9 million compared to ~~$251.5~~working capital of $78.7 million at December 31, ~~2012. The increase in~~2017. Our working capital ~~is primarily~~increased $29.2 million in 2018 compared to 2017 due to decreases in current liabilities of $29.3 million and increases in ~~inventories, accounts receivable and other~~ current ~~assets. The increases are~~assets of $0.2 million.
Our current liabilities decreased primarily due to the ~~organic growth~~decreases in the accrued compensation related costs of the business, acquisitions completed in 2012 and the impact of Medicare audit related receivables. Days sales outstanding (“DSO”), which is the number of days between the billing date of O&P services and the date of receipt of payment thereof, for the nine months ended September 30, 2013 increased to 61 days from 60 days for the same period last year, and excludes the impact of acquired accounts receivable. The increase in DSO is$35.8 million, primarily related to the payment of annual bonuses during the first quarter, offset by an increase in ~~accounts receivable subject~~the current portion of long term debt of $6.0 million. When comparing these outflows to ~~Medicare audits.~~the prior period, we paid $16.5 million less in annual bonuses and 401(k) matching contributions in the first quarter of 2017 as compared to the amounts we paid in the first quarter of 2018. This was due to our relatively weaker performance for the year ended December 31, 2016 as compared to our performance for the year ended December 31, 2017.

Our current assets increased primarily due to a $31.4 million increase in cash and cash equivalents offset by a decrease of $19.3 million in net accounts receivable and a decrease of $12.3 million of income tax receivables. Cash ~~Flows~~
~~Net cash provided by operating activities~~received for income taxes was ~~$68.5~~$12.3 million for the ~~nine month period~~three months ended ~~September 30, 2013~~March 31, 2018, as compared to ~~$59.0~~$0.8 million for the same period in the prior year. We are anticipating only marginal pre-tax book profitability for the year, and expect to utilize net operating loss carryforwards to offset our tax provision such that we expect cash paid for Federal taxes in 2018 to be minimal. The decrease in accounts receivable primarily relates to the seasonality of our business, whereby the fourth quarter reflects the highest
seasonal quarter and the first quarter is the lowest. This sequential quarterly decline in revenue contributes directly to a seasonal drop in our accounts receivable balances from December 31st of each year to March 31st of the next year.
Days sales outstanding (“DSO”) is a calculation that approximates the average number of days between the billing for our services and the date of our receipt of payment, which we estimate using a 90 day rolling period of net revenue. This computation can provide a relative measure of the effectiveness of our billing and collections activities. As of March 31, 2018 our DSO was 49 days, which compares to a DSO of 48 days as of March 31, 2017. At December 31, 2017, our DSO was 46 days, which was unchanged from a DSO of 46 days reported as of December 31, 2016. Increases in our DSO from December of each year to March relate primarily to the seasonal decrease in quarterly revenue we experience in the first quarter of each year.
Sources and Uses of Cash in Three Months Ended March 31, 2018 Compared to March 31, 2017
Cash flows used in operating activities decreased $3.2 million to $8.5 million for the three months ended March 31, 2018 from $11.7 million for the three months ended March 31, 2017. This was due primarily to the changes in working capital in 2018 compared to 2017 which were discussed above.
Cash flows used in investing activities increased $4.8 million to $6.2 million for the three months ended March 31, 2018 from $1.4 million for the three months ended March 31, 2017. The increase in ~~cash provided by operating activities in the current year resulted primarily from improved cash earnings along with net decrease in cash used for changes in operating assets and liabilities.~~
~~Net~~ cash used in investing activities ~~was $25.5~~included $2.0 million ~~for the nine month period ended September 30, 2013, compared to $42.3~~increase in purchases of property, plant and equipment, $1.4 million in ~~the prior year.~~purchases of therapeutic program equipment, and a $1.3 million decrease in proceeds of sale of property, plant and equipment. We currently anticipate that we will expend an increased amount for capital expenditures in 2018 as compared with recent years. In ~~the first nine months~~addition to general increases in technology and leasehold improvements, we also plan to increase our purchase of ~~2013, we purchased five O&P companies~~therapy equipment for ~~$5.7 million, net of cash acquired. During the same period~~use in ~~2012, we acquired 14 patient care clinics for $14.3 million, net of cash acquired. Additionally, in 2013, we invested $27.5 million in~~our Products & Services segment. We currently believe that our total capital ~~assets, compared to $24.9 million for the same period in 2012.~~
Net cash used in financing activities was $55.1 million and $4.0 million for the nine month periods ended September 30, 2013 and 2012, respectively. For the nine month period ended September 30, 2013 we: (i) borrowed $225.0 millionexpenditures related to ~~term loan borrowings; (ii) repaid $294.7~~property, plant and equipment, and therapeutic program equipment purchases will be approximately $34.8 million related to term loan borrowings; (iii) borrowed $163.0 million under our revolving credit agreement; (iv) repaid $137.0 million under the revolving credit agreement; (v) made $9.2 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (vi) received $1.6 million of proceeds from employee stock compensation plan awards. For the nine month period ended September 30, 2012 we: (i) repaid $2.9 million related to term loan borrowings under our credit facilities; (ii) made $3.4 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (iii) received $2.2 million of proceeds from employee stock compensation plan awards.
~~Debt~~
~~Long-term debt consisted of the following:~~

September 30,

December 31,

(In thousands)

2013

2012

Revolving Credit Facility

$
26,000

$
—

Term Loan

223,594

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

21,463

27,346

Total Debt

471,057

520,646

Less current portion

(13,673
)
(11,082
)
Long Term Debt

$
457,384

$
509,564

~~Refinancing~~
During the second quarter of 2013 the Company refinanced its bank credit facilities through a new 5 year credit agreement that increased its senior secured facilities to an aggregate principal amount of up to $425.0 million from $400.0 million previously. The new credit agreement includes a $200.0 million revolving credit facility and a $225.0 million term loan facility. Each new facility matures on June 17, 2018 and is subject to a leveraged-based pricing grid, with initial pricing of LIBOR plus 1.75%. In conjunction with the refinancing, the Company incurred a pre-tax non-cash charge of approximately $6.6 million during the second quarter of 2013 related to the write-off of existing debt issuance costs associated with its previous credit agreement. No prepayment penalties were incurred.
24

~~Table of Contents~~
~~Revolving Credit Facility~~
The $200.0 million Revolving Credit Facility matures on June 17, 2018 and bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the Credit Agreement). As of September 30, 2013, the Company had $170.4 million available under this facility. The amounts outstanding under the Revolving Credit Facility as of September 30, 2013 were $26.0 million, net of standby letters of credit of approximately $3.6 million. 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 all of the Company’s assets, all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.
~~Term Loan~~
The Term Loan Facility, of which $223.6 million is outstanding, matures on June 17, 2018 and 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 the Term Loan, commencing September 30, 2013. From time to time, mandatory prepayments may be required as a result of certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. No such mandatory prepayments were required during the third quarter of 2013. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in all of the Company’s assets, all the assets of the Company’s subsidiaries and the equity interests 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 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 additional interest to the redemption date with the proceeds of a public offering of its equity securities. Also, prior to November 15, 2014, the Company may redeem all or some of the notes at a redemption price of 103.6% all to interest that would have become due from the redemption date 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 10-K for the year ended December 31, ~~2012.~~2018.
Cash flows provided by financing activities increased $37.9 million to $45.1 million for the three months ended March 31, 2018 from $7.3 million for the three months ended March 31, 2017. This increase included $52.2 million related to our refinancing of indebtedness and $1.8 million reduction in payments on seller notes and other contingent consideration, partially offset by $15.2 million in payment of debt issuance costs, extinguishment costs and fees and $0.9 million employee stock based compensation and capital lease obligations.

~~Subsidiary Guarantees~~Effect of Indebtedness

~~The Revolving Credit Facility, Term Loan Facilities~~Due to the then pending maturity of our previously existing credit agreement which was scheduled to mature on June 17, 2018 for which we had $151.9 million outstanding at December 31, 2017, 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~~given that we would not have ~~independent assets or operations. The guarantees~~produced operating cash flow sufficient to retire this obligation through cash sources arising from our normal operations, on March 6, 2018 we entered into the Credit Agreement in order to refinance our indebtedness. These changes to our indebtedness are ~~full and unconditional and joint and several. There are no restrictions on~~disclosed in Note J - “Long-Term Debt,” in the ~~ability of the Company’s subsidiaries to transfer cash~~notes to the ~~Company or to co-guarantors.~~condensed consolidated financial statements. Our new indebtedness bears reduced rates of interest as compared with those that we incurred under our prior indebtedness, and as such, for the year ended December 31, 2018, we currently anticipate that we will report interest expense of approximately $40.0 million as compared with the $57.7 million we reported in 2017. Cash paid for interest totaled $10.6 million and $12.2 million for the three months ended March 31, 2018 and 2017, respectively.

~~Debt Covenants~~Liquidity Outlook and Going Concern Evaluation

~~The terms~~Our Credit Agreement has a term loan facility with $505 million in principal outstanding at March 31, 2018, due in quarterly principal installments equal to 0.25% of the ~~Senior Notes,~~original aggregate principal amount of $505 million, commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025 and a revolving credit facility with no borrowings and a maximum aggregate amount of availability of $100 million at March 31, 2018 that matures in March 2023. We currently believe that our anticipated operating trends, when coupled with anticipated decreases in our payments of interest expense and professional fees, will provide us with sufficient liquidity to meet our financial obligations during the ~~Revolving Credit Facility, and the Term Loan Facility limit the Company’s~~coming twelve months.
ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires that we evaluate whether there is substantial doubt about our ability to ~~among other things, purchase capital assets, incur additional indebtedness, create liens, pay dividends~~meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to be issued. We have performed such an evaluation and,
based on the results of that assessment, we are not aware of any relevant conditions or ~~redeem capital stock, make certain investments, make restricted payments, make certain dispositions~~events that raise substantial doubt regarding our ability to continue as a going concern within one year of assets, engage in transactions with affiliates, engage in certain business activities, and engage in mergers, consolidations and certain sales of assets. The 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 September 30, 2013, the ~~Company was in compliance with all covenants under these debt agreements.~~date the financial statements are issued.

~~General~~Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that may or could have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for $5.9 million of letters of credit outstanding and $3.0 million of interest rate swap liabilities as of March 31, 2018.
Scheduled maturities of debt at March 31, 2018 were as follows (in thousands):
2018 (remainder of year)

$
7,320

2019

8,095

2020

7,011

2021

5,619

2022

5,720

Thereafter

492,210

Total debt before unamortized discount and debt issuance costs, net

525,975

Unamortized discount and debt issuance costs, net

(10,428
)
Total debt

$
515,547

Subsequent Events
On May 15, 2018, we received a favorable settlement of $1.7 million in connection with our long standing damage claims relating to the “Deepwater Horizon” disaster, and the prior adverse effect which it had on our clinic operations along the Gulf Coast in April of 2010. We anticipate the receipt of no further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims. Given that this amount is considered a gain contingency, we did not record income associated with this settlement during the period ending March 31, 2018, or in any prior period. We intend to recognize this settlement amount as income in our condensed consolidated financial statements for the quarter ending June 30, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future financial results are subject to a variety of risks, including interest rate risk. Our interest expense is sensitive to changes in market interest rates. To manage the impact of the interest rate risk associated with our Credit Agreement, we enter into interest rate swaps from time to time, effectively converting a portion of the cash flows related to variable-rate debt into fixed-rate cash flows.

As of ~~September 30, 2013, $249.6~~March 31, 2018, we had a combined principal amount of $505.0 million ~~or 53.0%,~~ of ~~our total~~variable rate debt and a notional amount of ~~$471.1~~$325.0 million ~~was subject~~of fixed to variable interest rates based on a LIBOR plus 1.75%. We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources of liquidity, including borrowings available under the Revolving Credit Facility, will be sufficient for at least the next twelve months to fund our operations including anticipated capital expenditures, our acquisition plans and to make required payments of principal and interestrate swap agreements. Based on our ~~debt.~~hedged and unhedged positions, a hypothetical increase or decrease in interest rates by 1.0% would impact our annual interest expense by $1.8 million.
ITEM 4. CONTROLS AND PROCEDURES

~~Obligations~~Evaluation of Disclosure Controls and ~~Commercial Commitments~~Procedures

~~The following table sets forth our contractual obligations~~Disclosure controls and ~~commercial commitments as of September 30, 2013 (unaudited):~~procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

25

~~Table~~Management, under the supervision and with the participation of ~~Contents~~

Payments Due by Period

(In thousands)

Remainder of 2013

2014

2015

2016

2017

Thereafter

Total

Long-term debt

$
2,973

$
16,516

$
21,605

$
22,979

$
28,626

$
378,358

$
471,057

Interest payments on long-term debt (1)

8,330

19,021

18,559

18,048

17,537

14,381

95,876

Operating leases

12,547

43,750

32,913

25,726

19,841

38,554

173,331

Capital leases

120

619

628

649

589

1,935

4,540

Other long-term obligations (2)

4,788

13,621

10,056

2,878

2,752

230

34,325

Total contractual cash obligations

$
28,758

$
93,527

$
83,761

$
70,280

$
69,345

$
433,458

$
779,129

~~(1)Interest projections were based on the assumptions that the future interest rate for the Revolving Credit Facility~~our Chief Executive Officer and ~~Term Loan will remain at the current rate of 1.93%.~~
~~(2)Other long-term obligations include commitments under our SERP plan in addition to IT and telephone contracts. Refer to Note K~~Chief Financial Officer, conducted an evaluation of the ~~Company’s Annual Report~~effectiveness of the design and effectiveness of our disclosure controls and procedures as of March 31, 2018. Based on ~~Form 10-K for additional~~that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our 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~~controls and ~~operations, and certain legal proceedings. Actual results may differ materially from projected or expected results~~procedures were not effective as of March 31, 2018 due to ~~changes~~the material weaknesses in ~~the demand for~~ our ~~O&P products~~internal control over financial reporting described in Item 9A - “Controls 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 disclosedProcedures” in our Annual Report on Form 10-K for the year ended December 31, 2012 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.2017 (the “2017 10-K”).

~~ITEM 3.~~Changes in Internal Control over Financial Reporting~~Quantitative and Qualitative Disclosures about Market Risk~~

~~Our future financial result is subject to a variety of risks, including interest rate risk.~~ As of September 30, 2013, the interest expense arising from the $249.6 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 $2.5 million of cash equivalents. As of September 30, 2013, we had $221.5 million of fixed 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 September 30, 2013 that are sensitive to changes in interest rates. The table demonstrates the changes in estimated annual cash flow related to the outstanding balance under the Revolving and Term Loan Facilities, calculated for an instantaneous shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. As of September 30, 2013, the interest rate on the Revolving and Term Loan facilities was 1.93% based on a LIBOR rate of 0.18% and the applicable margin of 1.75%.

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

No Change
in Interest

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

Cash Flow Risk

(150 BPS)

(100 BPS)

(50 BPS)

Rates

50 BPS

100 BPS

150 BPS

(In thousands)

Revolving and Term Loan

$
4,375

$
4,380

$
4,385

$
4,832

$
6,068

$
7,303

$
8,539

~~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 evaluationpart 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 asadoption of ~~September 30, 2013 as a result of the material weakness in~~ASC 606, we are implementing changes to our internal controls over financial reporting relating to the valuation of work-in-process inventory discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, under Part II, Item 9A. The Company has implemented remediation procedures as described in further detail in the following paragraph.
26

~~Table of Contents~~
~~Status of Remediation of Material Weakness~~
~~As of September 30, 2013, we have implemented procedures designed to address the material weakness disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012~~ related to ~~the~~revenue recognition to ensure adequate evaluation of contracts and proper ~~valuation~~recording of ~~work-in-process inventory. Management has implemented additional quarterly reviews, analysis and calculations surrounding the valuation~~revenue. Additionally, due to our ongoing remediation efforts of the ~~work-in-process inventory~~aforementioned material weaknesses, additional changes to account for the changing sales volume from period to period. Management believes these measures will remediate the material weakness identified in the Form 10-K Annual report. As the Company continues to evaluate and work to improve itsour internal control over financial reporting ~~management may determine~~are likely to ~~take~~have occurred during the period ended March 31, 2018. See Item 9A - “Controls and Procedures” in the 2017 10-K for additional ~~measures to address this material weakness or determine to modify the~~information regarding our ongoing remediation ~~steps described above.~~efforts.

~~Changes~~Therefore, in ~~Internal Control Over Financial Reporting~~
In accordance with Rule 13a-15(d) ~~under~~of the ~~Securities~~ Exchange Act, ~~of 1934,~~ management, with the participation of ~~the Company’s~~our Chief Executive Officer and our Chief Financial Officer, determined that ~~there were no~~elements of the changes ~~in the Company’s~~listed above to our internal control over financial reporting ~~beyond those remediation processes discussed above, that~~ occurred during the ~~three months~~period ended ~~September 30, 2013, that has~~March 31, 2018 and have materially affected or isare reasonably likely to materially affect ~~the Company’s~~our internal control over financial reporting.
~~Part~~PART II. ~~Other Information~~OTHER INFORMATION

ITEM 1. LEGAL ~~PROCEEDINGS.~~PROCEEDINGS

Securities and Derivative Litigation
In November 2014, a securities class action complaint, City of Pontiac General Employees’ Retirement System v. Hanger, et al., C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.
On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint. On July 1, 2016, plaintiffs filed an amended complaint. On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit. On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim. On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. Appellate briefing was completed on August 18, 2017 and the appeal remains pending. The Court of Appeals held oral argument for the appeal on March 5, 2018. We are now awaiting a ruling from the Court of Appeals.
In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated into Judy v. Asar, et. al., Cause No. D-1-GN-15-000625. On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 345th Judicial District Court of Travis County, Texas.
The amended complaint in the consolidated derivative action names us and certain of our current and former officers and directors as defendants. It alleges claims for breach of fiduciary duty based, inter alia, on the defendants’ alleged failure to exercise good faith to ensure that we had in place adequate accounting and financial controls and that disclosures regarding our business, financial performance and internal controls were truthful and accurate. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief.
As disclosed in our Current Report on Form 8-K filed with the SEC on June 6, 2016, the Board of Directors appointed a Special Litigation Committee of the Board (the “Special Committee”). The Board delegated to the Special Committee the authority to (1) determine whether it is in our best interests to pursue any of the allegations made in the derivative cases filed in Texas state court (which cases were consolidated into the Judy case discussed above), (2) determine whether it is in our best interests to pursue any remedies against any of our current or former employees, officers or directors as a result of the conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation. The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests. In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue any of the claims in the Judy derivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.
On April 14, 2017, we filed a motion to dismiss the consolidated derivative action based on the resolution by the Special Committee that it is not in our best interest to pursue the derivative claims. Counsel for the derivative plaintiffs opposed that motion and moved to compel discovery. In a hearing held on June 12, 2017, the Travis County court denied plaintiffs’ motion to compel, and held that the motion to dismiss would be considered only after appropriate discovery was concluded.
The plaintiffs have since subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, take the position that the full report is not discoverable under Texas law. Plaintiffs’ counsel has filed a motion to compel the Special Committee’s counsel to produce the report. The hearing on the motion to compel is scheduled for June 28, 2018. We intend
to vigorously oppose the motion. Upon resolution of the discovery dispute and completion of discovery, we intend to file a motion to dismiss the consolidated derivative action.
Management intends to continue to vigorously defend against the shareholder derivative action and the appeal in the securities class action. At this time, we cannot predict how the Courts will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Should we ultimately be found liable, the resulting damages could have a material adverse effect on our consolidated financial position, liquidity or results of our operations.
Other Matters
In May 2015, one of our clinics received a civil investigative demand for records relating to a sample of claims submitted to Medicare and Medicaid for reimbursement, and we provided records in response to the subpoena. In May 2017, we were informed by an Assistant United States Attorney that it was investigating whether we properly provided and claimed reimbursement for prosthesis skins and covers from July 2013 (after an industry announcement) to the present. We have reviewed the claims, and have cooperated with the government’s investigation. This matter was resolved in March 2018 and did not have a material impact on the first quarter of 2018.
From time to time we are subject to legal proceedings and claims which arise ~~from time to time~~ in the ordinary course of our business, including additional payments under business purchase agreements. In the opinion of ~~our~~ management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on ~~the~~our consolidated financial position, liquidity or results of our operations.

We are in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities. ~~To date these inquiries have not resulted in material liabilities, but no~~No assurance can be given ~~that future regulatory agencies’ inquiries will be consistent with the results to date or~~ that any discrepancies identified during a regulatory review will not have a material adverse effect on our condensed consolidated financial statements.
On May 20, 2013, the Staff of the SEC’s Division of Enforcement informed us that it was conducting an investigation of the Company and made a request for a voluntary production of documents and information concerning our calculations of bad debt expense and allowance for doubtful accounts. We are cooperating fully with the SEC Staff.
ITEM 1A. RISK FACTORS.

~~Part I,~~Our business and financial results are subject to numerous risks and uncertainties. The risk and uncertainties have not changed materially from those reported in Item 1A ~~(“Risk Factors”) of the Company’s~~in our Annual Report on Form 10-K for the year ended December 31, ~~2012 sets forth~~2017, which are incorporated by reference. For additional information ~~relating to important~~regarding risks and uncertainties, ~~that could materially adversely affect~~see the ~~Company’s business, financial condition or operating results. Those risk factors continue to be relevant to an understanding~~information provided under the header “Forward Looking Statements” contained in Part I, Item 2, “Management’s Discussion and Analysis of ~~the Company’s business, financial condition~~Financial Condition and ~~operating results. Certain~~Results of ~~those risk factors have been updated~~Operations” in this Quarterly Report on 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.~~
~~Changes in government reimbursement levels could adversely affect our net sales, cash flows and profitability.~~
We derived 40.5% and 40.8% of our net sales for the nine months ended September 30, 2013 and 2012, 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 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) for 2013, 2012, and 2011 were 0.8%, 2.4%, and (0.1%) respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 (“PPACA”) changed the Medicare inflation factors applicable to O&P (and other) suppliers.
27

~~Table of Contents~~
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 $1.7 million through September 30, 2013) ; no permanent reductions in the Medicare DMEPOS fee schedule have been made as a result of sequestration, therefore reimbursements from Medicaid, the VA and commercial payers who use the Medicare fee schedule as a basis for reimbursement have not been impacted.
In addition to the risks to our Patient Care segment businesses discussed above, changes in government reimbursement levels could also adversely affect the net sales, cash flows and profitability of our Products & Services segment business. In particular, a significant majority of ACP’s sales involve devices and related services provided to skilled nursing facilities (SNFs) and similar businesses. Reductions in government reimbursement levels to SNFs could cause such SNFs to reduce or cancel their use of ACP’s devices and modalities, negatively impacting net sales, cash flows and profitability. For example in July 2011 CMS announced an across the board reduction of approximately 10% in SNF reimbursement levels, negatively impacting the demand for ACP’s devices and treatment modalities. We cannot predict whether any other modifications to reimbursement levels will be implemented, or if implemented what form any modifications might take.
~~Our substantial indebtedness could impair our financial condition and our ability to fulfill our obligations under our indebtedness.~~
~~We have substantial debt. As of September 30, 2013, we had approximately $471.1 million of total indebtedness and $26.0 million borrowed under our Revolving Credit Facility.~~
~~The level of our indebtedness could have important consequences to us. For example, our substantial indebtedness could:~~
·~~make it more difficult for us to satisfy our obligations;~~
·~~increase our vulnerability to adverse general economic and industry conditions;~~
·require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements;
·~~limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;~~
·~~place us at a competitive disadvantage compared to our competitors that have proportionately less debt;~~
·~~make it more difficult for us to borrow money for working capital, capital expenditures, acquisitions or other purposes;~~
·~~limit our ability to refinance indebtedness, or the associated costs may increase; and~~
·~~expose us to the risk of increased interest rates with respect to that portion of our debt that has a variable rate of interest.~~
28

~~Table of Contents~~10-Q.

ITEM 6.~~Exhibits~~2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~(a)Exhibits. The following exhibits are filed herewith:~~
~~Exhibit No.~~
~~Document~~
~~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 September 30, 2013, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements (1)
~~(1)~~
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.
29

~~Table of Contents~~There has been no share repurchase activity during the quarter ended March 31, 2018.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities during the quarter ended March 31, 2018.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None to report.
ITEM 6. EXHIBITS
The documents in the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this report and such Exhibit Index is incorporated herein by reference.
SIGNATURES

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

HANGER, INC.

Dated: ~~November 8, 2013~~June 14, 2018
By:
/s/~~Vinit K. Asar~~ THOMAS E. KIRALY

~~Vinit K. Asar~~
~~President~~ ~~and~~
~~Chief Executive Officer~~
~~(Principal Executive Officer)~~
~~Dated: November 8, 2013~~
~~/s/George~~Thomas E. ~~McHenry~~
~~George E. McHenry~~Kiraly

Executive Vice President and Chief Financial Officer

~~(Principal~~
Dated: June 14, 2018
By:
/s/ GABRIELLE B. ADAMS
Gabrielle B. Adams
Vice President and Chief Accounting Officer
EXHIBITS INDEX
Exhibit
No.
Document
31.1
Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
31.2
Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
32
Written Statement of the Chief Executive Officer and ~~Principal Accounting Officer)~~Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
101.INS
XBRL Instance Document. (Filed herewith.)
101.SCH
XBRL Taxonomy Extension Schema. (Filed herewith.)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LAB
XBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEF
XBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)

3045

	September 30,		December 31,
	2013		2012

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	7,216	$	19,211
Restricted cash	—		3,120
Accounts receivable, less allowance for doubtful accounts of $8,358 and $7,526 in 2013 and 2012, respectively	176,663		165,668
Inventories	144,374		127,295
Prepaid expenses, other assets, and income taxes receivable	14,560		15,673
Deferred income taxes	31,115		27,685
Total current assets	373,928		358,652

PROPERTY, PLANT AND EQUIPMENT
Land	794		794
Buildings	8,896		8,896
Furniture and fixtures	20,382		19,582
Machinery and equipment	61,178		60,364
Equipment leased to third parties under operating leases	33,224		34,827
Leasehold improvements	81,708		74,615
Computer and software	99,974		98,186
Total property, plant and equipment, gross	306,156		297,264
Less accumulated depreciation	190,193		182,803
Total property, plant and equipment, net	115,963		114,461

INTANGIBLE ASSETS
Goodwill	678,215		674,774
Customer list and other intangible assets, less accumulated amortization of $25,607 and $20,643 in 2013 and 2012, respectively	58,638		64,281
Total intangible assets, net	736,853		739,055

OTHER ASSETS
Debt issuance costs, net	8,994		14,033
Other assets	12,261		11,126
Total other assets	21,255		25,159

TOTAL ASSETS	$	1,247,999	$	1,237,327

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net sales	$	271,053	$	242,536	$	768,201	$	704,794
Material costs	79,401		73,109		226,585		212,706
Personnel costs	94,768		84,135		277,897		248,723
Other operating expenses	47,754		41,210		136,434		125,099
Depreciation and amortization	9,224		8,709		28,019		25,432
Income from operations	39,906		35,373		99,266		92,834

Interest expense	6,017		7,751		21,502		23,212
Extinguishment of debt	—		—		6,645		—
Income before taxes	33,889		27,622		71,119		69,622

Provision for income taxes	12,230		10,278		25,891		26,257
Net income	$	21,659	$	17,344	$	45,228	$	43,365

Other comprehensive income	—		—		—		—
Comprehensive income	$	21,659	$	17,344	$	45,228	$	43,365

Basic Per Common Share Data
Net income	$	0.62	$	0.50	$	1.30	$	1.27
Shares used to compute basic per common share amounts	34,902,103		34,362,757		34,783,419		34,224,756

Diluted Per Common Share Data
Net income	$	0.61	$	0.50	$	1.28	$	1.25
Shares used to compute diluted per common share amounts	35,401,273		35,002,351		35,315,897		34,817,680

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Cash paid during the period for:
Interest	16,299	16,902
Income taxes (net of refunds)	21,033	22,106

Non-cash financing and investing activities:
Issuance of restricted stock units	10,990	5,452
Issuance of notes in connections with acquistisions	675	7,625

	Three Months Ended March 31, 2013				Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
	As Previously				As Previously				As Previously
(in thousands)	Reported		As Revised		Reported		As Revised		Reported			As Revised

Consolidated Statements of Income and Comprehensive Income
Net sales	$	233,535	$	229,350	$	273,735	$	267,798	$	507,270		$	497,148
Other operating expenses*	$	43,843	$	39,658	$	54,959	$	49,022	$	98,802		$	88,680

Consolidated Statements of Cash Flows
Provision for doubtful accounts	$	5,229	$	1,657					$	14,905		$	4,591
Change in accounts receivable	$	3,644	$	7,216					$	(18,026	)	$	(7,712	)

	Three Months Ended March 31, 2012				Three Months Ended June 30, 2012				Six Months Ended June 30, 2012						Three Months Ended September 30, 2012
	As Previously				As Previously				As Previously						As Previously
(in thousands)	Reported		As Revised		Reported		As Revised		Reported			As Revised			Reported		As Revised

Consolidated Statements of Income and Comprehensive Income
Net sales	$	218,091	$	214,355	$	251,754	$	247,902	$	469,845		$	462,257		$	243,503	$	242,536
Other operating expenses*	$	40,219	$	36,483	$	51,256	$	47,404	$	91,475		$	83,887		$	42,177	$	41,210
Consolidated Statement of Cash Flows
Provision for doubtful accounts	$	4,723	$	907					$	12,925		$	4,462
Change in accounts receivable	$	851	$	4,667					$	(16,190	)	$	(7,727	)

	Three Months Ended March 31,
(in thousands, except share and per share data)	2018			2017

Net loss	$	(22,618	)	$	(17,734	)

Weighted average shares used to compute basic earnings per common share	36,498,482			36,084,630
Effect of potentially dilutive restricted stock units and options (1)	—			—
Weighted average shares used to compute diluted earnings per common share	36,498,482			36,084,630

Basic and diluted loss per common share	$	(0.62	)	$	(0.49	)

	Nine Months Ended September 30, 2012
(in thousands, except per share amounts)	As Previously Reported			As Revised

Consolidated Statements of Income and Comprehensive Income
Net sales	$	713,349		$	704,794
Material costs	$	210,107		$	212,706
Personnel costs	$	251,189		$	248,723
Other operating expenses	$	135,566		$	125,099
Income from operations	$	91,055		$	92,834
Income before taxes	$	67,843		$	69,622
Provision for income taxes	$	25,558		$	26,257
Net income	$	42,285		$	43,365
Basic earnings per share	$	1.24		$	1.27
Diluted earnings per share	$	1.21		$	1.25

Consolidated Statement of Cash Flows
Provision for doubtful accounts	$	15,926		$	6,580
Change in accounts receivable	$	(19,612	)	$	(10,266	)

	Year Ended December 31, 2010						Year Ended December 31, 2011						Year Ended December 31, 2012
(in thousands)	As Previously Reported			As Revised			As Previously Reported			As Revised			As Previously Reported			As Revised

Consolidated Statements of Income and Comprehensive Income
Net Sales	$	817,379		$	808,766		$	918,539		$	907,794		$	985,550		$	974,429
Other operating expenses	$	165,158		$	156,545		$	177,910		$	167,165		$	188,868		$	177,747

Consolidated Statements of Cash Flows
Provision for doubtful accounts	$	20,276		$	7,252		$	24,837		$	9,396		$	19,773		$	9,589
Change in accounts receivable	$	(31,041	)	$	(18,017	)	$	(42,024	)	$	(26,583	)	$	(40,443	)	$	(30,259	)

Year (In thousands)	Classification	Balance at beginning of year		Additions Charged to Costs and Expenses		Write-offs		Balance at end of year
2012	Allowance for doubtful accounts
	Previously reported	$	22,028	$	19,773	$	20,422	$	21,379
	Revised	$	7,236	$	9,589	$	9,299	$	7,526

2011	Allowance for doubtful accounts
	Previously reported	$	16,686	$	22,101	$	16,759	$	22,028
	Revised	$	5,153	$	9,396	$	7,313	$	7,236

2010	Allowance for doubtful accounts
	Previously reported	$	10,526	$	20,276	$	14,116	$	16,686
	Revised	$	4,286	$	7,252	$	6,385	$	5,153

	As of March 31, 2018									As of December 31, 2017
(in thousands)	Patient Care			Products & Services			Consolidated			Patient Care			Products & Services			Consolidated
Accounts receivable, before allowances	$	170,274		$	23,179		$	193,453		$	193,150		$	23,494		$	216,644
Allowances for estimated implicit price concessions arising from:
Allowance for estimated payor disallowances	(53,370		)	—			(53,370		)	(56,233		)	—			(56,233		)
Allowance for estimated patient non-payments	(8,848		)	—			(8,848		)	—			—			—
Accounts receivable, gross	108,056			23,179			131,235			136,917			23,494			160,411
Allowance for doubtful accounts	—			(4,225		)	(4,225		)	(9,894		)	(4,171		)	(14,065		)
Accounts receivable, net	$	108,056		$	18,954		$	127,010		$	127,023		$	19,323		$	146,346

(in thousands)	March 31, 2018		December 31, 2017
Raw materials	$	20,161	$	19,929
Work in process	11,543		8,996
Finished goods	38,347		40,213
Total inventories	$	70,051	$	69,138

(in thousands)
2018 (remainder of year)	$	4,721
2019	3,714
2020	3,457
2021	879
2022	817
Thereafter	2,083
Total	$	15,671

2018 (remainder of year)	$	7,320
2019	8,095
2020	7,011
2021	5,619
2022	5,720
Thereafter	492,210
Total debt before unamortized discount and debt issuance costs, net	525,975
Unamortized discount and debt issuance costs, net	(10,428		)
Total debt	$	515,547

(in thousands)	Cash Flow Hedges
Balance at December 31, 2017	$	—
Unrealized loss recognized in other comprehensive loss, net of tax	2,538
Reclassification of loss to interest expense, net	(248		)
Balance at March 31, 2018	$	2,290

	Employee Service-Based Awards				Employee Performance-Based Awards				Director Awards
	Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2017	1,183,039		$	14.30	632,636		$	18.87	98,406		$	12.66
Granted	560,657		15.68		267,522		17.93		—		—
Vested	(352,106	)	16.14		(135,200	)	25.95		(21,928	)	12.77
Forfeited	(47,808	)	12.58		(26,479	)	18.38		—		—
Nonvested at March 31, 2018	1,343,782		$	14.45	738,479		$	17.25	76,478		$	12.63

(in thousands)
Benefit obligation at December 31, 2017	$	20,793
Service cost	92
Interest cost	150
Payments	(1,877		)
Benefit obligation at March 31, 2018	$	19,158

Benefit obligation at December 31, 2016	$	21,304
Service cost	85
Interest cost	167
Payments	(1,811		)
Benefit obligation at March 31, 2017	$	19,745

	September 30, 2013							December 31, 2012
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer Lists	$	46,072	$	(10,628	)	$	35,444	$	48,044	$	(7,846	)	$	40,198
Trade Name	9,932		(197		)	9,735		9,070		—			9,070
Patents and Other Intangibles	28,241		(14,782		)	13,459		27,810		(12,797		)	15,013
	$	84,245	$	(25,607	)	$	58,638	$	84,924	$	(20,643	)	$	64,281

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

(In thousands)
Net benefit cost accrued at December 31, 2012	$	22,377
Service cost	735
Interest cost	519
Payments	(1,246		)
Net benefit cost accrued at September 30, 2013	$	22,385

(In thousands)
Net benefit cost accrued at December 31, 2011	$	20,230
Service cost	690
Interest cost	570
Payments	(705		)
Net benefit cost accrued at September 30, 2012	$	20,785

(in thousands) For the Three Months Ended	Expensed		Paid		Balance to be Paid in Future Periods
March 31, 2017	$	11,537	$	14,766	$	19,672
June 30, 2017	7,567		13,765		13,474
September 30, 2017	6,839		6,430		13,883
December 31, 2017	6,358		9,956		10,285
March 31, 2018	3,700		7,755		6,230

September 30, 2013

(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care
Commercial insurance	$	44,325	$	11,157	$	13,282	$	68,764
Private pay	3,839		3,138		6,696		13,673
Medicaid	11,976		3,806		4,872		20,654
Medicare	29,479		6,069		18,195		53,742
VA	2,340		462		400		3,201
Products & Services
Trade accounts receivable	16,254		3,512		5,221		24,987
	$	108,213	$	28,144	$	48,666	$	185,021

	For the Three Months Ended March 31,						Percent Change
(dollars in thousands)	2018			2017			2018 v 2017
Net revenue	$	233,995		$	233,681		0.1	%
Material costs	76,356			74,405			2.6	%
Personnel costs	86,108			87,955			(2.1	)%
Other operating costs	31,096			32,689			(4.9	)%
General and administrative expenses	25,636			25,386			1.0	%
Professional accounting and legal fees	4,846			12,650			(61.7	)%
Depreciation and amortization	9,330			10,137			(8.0	)%
Operating expenses	233,372			243,222			(4.0	)%
Income (loss) from operations	623			(9,541		)	**
Interest expense, net	12,263			14,009			(12.5	)%
Loss on extinguishment of debt	16,998			—			100.0	%
Non-service defined benefit plan expense	176			184			(4.3	)%
Loss before income taxes	(28,814		)	(23,734		)	21.4	%
Benefit for income taxes	(6,196		)	(6,000		)	3.3	%
Net loss	$	(22,618	)	$	(17,734	)	27.5	%

	For the Three Months Ended March 31,							Percent
(dollars in thousands)	2018		2017		Change			Change
Patient Care	$	188,507	$	187,637	$	870		0.5	%
Products & Services	45,488		46,044		(556		)	(1.2	)%
Net revenue	$	233,995	$	233,681	$	314		0.1	%

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

Long-term debt	$	2,973	$	16,516	$	21,605	$	22,979	$	28,626	$	378,358	$	471,057
Interest payments on long-term debt (1)	8,330		19,021		18,559		18,048		17,537		14,381		95,876
Operating leases	12,547		43,750		32,913		25,726		19,841		38,554		173,331
Capital leases	120		619		628		649		589		1,935		4,540
Other long-term obligations (2)	4,788		13,621		10,056		2,878		2,752		230		34,325
Total contractual cash obligations	$	28,758	$	93,527	$	83,761	$	70,280	$	69,345	$	433,458	$	779,129

	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points						No Change in Interest		Annual Interest Expense Given an Interest Rate Increase of X Basis Points
Cash Flow Risk	(150 BPS)		(100 BPS)		(50 BPS)		Rates		50 BPS		100 BPS		150 BPS
(In thousands)
Revolving and Term Loan	$	4,375	$	4,380	$	4,385	$	4,832	$	6,068	$	7,303	$	8,539

~~Exhibit No.~~		~~Document~~

~~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 September 30, 2013, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements (1)

	HANGER, INC.


Dated: ~~November 8, 2013~~June 14, 2018	By:	/s/~~Vinit K. Asar~~ THOMAS E. KIRALY
	~~Vinit K. Asar~~
	~~President~~ ~~and~~
	~~Chief Executive Officer~~
	~~(Principal Executive Officer)~~


~~Dated: November 8, 2013~~	~~/s/George~~Thomas E. ~~McHenry~~
	~~George E. McHenry~~Kiraly
	Executive Vice President and Chief Financial Officer
	~~(Principal~~
Dated: June 14, 2018	By:	/s/ GABRIELLE B. ADAMS
	Gabrielle B. Adams
	Vice President and Chief Accounting Officer

Exhibit No.		Document
31.1		Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
31.2		Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
32		Written Statement of the Chief Executive Officer and ~~Principal Accounting Officer)~~Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
101.INS		XBRL Instance Document. (Filed herewith.)
101.SCH		XBRL Taxonomy Extension Schema. (Filed herewith.)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LAB		XBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEF		XBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)