10-Q 1 hngr-20220331.htm 10-Q hngr-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10670
HANGER, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
84-0904275
(I.R.S. Employer
Identification No.)
10910 Domain Drive, Suite 300, Austin, TX
(Address of principal executive offices)
78758
(Zip Code)
Registrant’s telephone number, including area code: (512777-3800
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareHNGRNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
As of April 27, 2022, the registrant had 39,029,037 shares of its Common Stock outstanding.



TABLE OF CONTENTS

ii


PART 1.    FINANCIAL INFORMATION

HANGER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value and share amounts)
(Unaudited)
As of March 31,As of December 31,
20222021
ASSETS
Current assets:
Cash and cash equivalents$37,423 $61,692 
Accounts receivable, net139,617 152,058 
Inventories83,288 87,462 
Income taxes receivable548 581 
Other current assets18,527 16,536 
Total current assets279,403 318,329 
Non-current assets:
Property, plant, and equipment, net80,906 82,434 
Goodwill367,914 363,554 
Other intangible assets, net25,032 25,892 
Deferred income taxes45,743 45,494 
Operating lease right-of-use assets141,820 144,491 
Other assets18,844 17,945 
Total assets$959,662 $998,139 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$13,535 $14,938 
Accounts payable57,969 63,565 
Accrued expenses and other current liabilities58,391 60,399 
Accrued compensation related costs37,232 54,465 
Current portion of operating lease liabilities33,182 33,438 
Total current liabilities200,309 226,805 
Long-term liabilities:
Long-term debt, less current portion500,555 502,307 
Operating lease liabilities121,725 124,016 
Other liabilities28,520 34,840 
Total liabilities851,109 887,968 
Commitments and contingencies (Note P)
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 39,204,040 shares issued and 39,061,219 shares outstanding at 2022, and 38,891,438 shares issued and 38,748,617 shares outstanding at 2021
392 389 
Additional paid-in capital373,092 373,644 
Accumulated other comprehensive loss(4,242)(11,150)
Accumulated deficit(259,993)(252,016)
Treasury stock, at cost; 142,821 shares at both 2022 and 2021
(696)(696)
Total shareholders’ equity108,553 110,171 
Total liabilities and shareholders’ equity$959,662 $998,139 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
March 31,
20222021
Net revenues$261,287 $237,470 
Material costs85,592 75,170 
Personnel costs101,675 89,880 
Other operating costs36,168 31,498 
General and administrative expenses32,442 30,903 
Depreciation and amortization7,955 7,998 
(Loss) income from operations(2,545)2,021 
Interest expense, net7,385 7,340 
Non-service defined benefit plan expense160 167 
Loss before income taxes(10,090)(5,486)
Benefit for income taxes(2,113)(2,156)
Net loss$(7,977)$(3,330)
Basic and diluted per common share data:
Basic and diluted loss per share$(0.21)$(0.09)
Weighted average shares used to compute basic and diluted loss per share38,802,420 38,268,332 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in thousands)
(Unaudited)
For the Three Months Ended
March 31,
20222021
Net loss$(7,977)$(3,330)
Other comprehensive income:
Unrealized gain on cash flow hedges, net of tax provision of $2,058 and $796, respectively
$6,896 $2,512 
Unrealized gain on defined benefit plan, net of tax provision of $48 and $19, respectively
12 60 
Total other comprehensive income6,908 2,572 
 Comprehensive loss$(1,069)$(758)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars and share amounts in thousands)
(Unaudited)
Common
Shares
Common
Shares, Par Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Treasury
Stock
Total
Balance, December 31, 202138,749 $389 $373,644 $(11,150)$(252,016)$(696)$110,171 
Net loss— — — — (7,977)— (7,977)
Share-based compensation expense— — 2,903 — — — 2,903 
Issuance of common stock upon vesting of restricted stock units 324 3 (3)— — —  
Effect of shares withheld to cover taxes— — (3,452)— — — (3,452)
Total other comprehensive income— — — 6,908 — — 6,908 
Balance, March 31, 202239,073 $392 $373,092 $(4,242)$(259,993)$(696)$108,553 

Common
Shares
Common
Shares, Par Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Treasury
Stock
Total
Balance, December 31, 202038,179 $383 $365,503 $(20,215)$(293,998)$(696)$50,977 
Net loss— — — — (3,330)— (3,330)
Share-based compensation expense— — 3,179 — — — 3,179 
Issuance in connection with the exercise of stock options29 — 366 — — — 366 
Issuance of common stock upon vesting of restricted stock units365 4 (4)— — —  
Effect of shares withheld to cover taxes— — (4,520)— — — (4,520)
Total other comprehensive income— — — 2,572 — — 2,572 
Balance, March 31, 202138,573 $387 $364,524 $(17,643)$(297,328)$(696)$49,244 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the Three Months Ended
March 31,
20222021
Cash flows used in operating activities:
Net loss$(7,977)$(3,330)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization7,955 7,998 
Benefit from doubtful accounts(170)(211)
Share-based compensation expense2,903 3,179 
Deferred income taxes(2,466)(1,795)
Amortization of debt discounts and issuance costs518 472 
Gain on sale and disposal of fixed assets(228)(524)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net12,845 11,093 
Inventories4,259 (1,437)
Other current assets and other assets(2,540)(3,492)
Income taxes33 25 
Accounts payable(6,038)(14,055)
Accrued expenses and other current liabilities1,328 (1,299)
Accrued compensation related costs(17,245)(36,936)
Other liabilities(1,598)(1,576)
Operating lease liabilities, net of amortization of right-of-use assets123 (478)
Changes in operating assets and liabilities:(8,833)(48,155)
Net cash used in operating activities(8,298)(42,366)
Cash flows used in investing activities:
Purchase of property, plant, and equipment(4,003)(6,541)
Acquisitions, net of cash acquired(4,001)(19,377)
Purchase of therapeutic program equipment leased to third parties under operating leases(450)(395)
Proceeds from sale of property, plant, and equipment551 796 
Net cash used in investing activities(7,903)(25,517)
Cash flows used in financing activities:
Payment of employee taxes on share-based compensation(3,452)(4,520)
Payment on Seller Notes(3,087)(446)
Repayment of term loan(1,263)(1,263)
Payments of financing lease obligations(266)(265)
Payments under vendor financing arrangements (275)
Proceeds from the exercise of options 366 
Net cash used in financing activities(8,068)(6,403)
Decrease in cash and cash equivalents(24,269)(74,286)
Cash and cash equivalents at beginning of period61,692 144,602 
Cash and cash equivalents at end of period$37,423 $70,316 
Non-cash financing and investing activities:
Purchase of property, plant, and equipment in accounts payable at period end$3,393 $3,458 
Seller Notes and other non-cash consideration related to acquisitions978 4,865 
Right-of-use assets obtained in exchange for finance lease obligations 82 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5


HANGER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A — Organization and Summary of Significant Accounting Policies
Description of Business
Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries. We provide orthotic and prosthetic (“O&P”) services, distribute O&P devices and components, 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 interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “SEC”).
In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position, and cash flows. All such adjustments are of a normal, recurring nature.  The results of operations for the interim periods are not necessarily indicative of those to be expected for the full year.
A detailed description of our significant accounting policies and management judgments is contained in our 2021 Form 10-K.
Reclassifications
We have reclassified certain amounts in the prior year condensed consolidated financial statements to be consistent with the current year presentation. These relate to immaterial classifications within expense line items in the condensed consolidated statements of operations.
Recent Developments Regarding COVID-19
We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”). The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition remain uncertain and difficult to predict. As a result of the COVID-19 pandemic, we believe that our patients are continuing to defer visits to our O&P clinics, as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. Nevertheless, the overall adverse impact of the COVID-19 pandemic on our business volumes has diminished and stabilized over time, and our patient appointment and other business volumes continue to gradually improve as the prevalence of the virus decreases and COVID-19 vaccines become more widely available and accepted. It remains possible that further outbreaks of COVID-19, including the spread of variants such as the Delta and Omicron variants, or reinstitution of restrictive measures by federal, state, and local governments could cause a recessionary environment impacting the healthcare industry generally, including the O&P industry. The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020.
CARES Act
The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $203.5 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.
During the full year of 2021, we recognized a total benefit of $1.1 million in our consolidated statement of operations within Other operating costs in our Patient Care segment for the grant proceeds we received under the CARES Act (“Grants”) from HHS. We accounted for the proceeds from the Grants by analogy to International Accounting Standard (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance and its principles surrounding the recognition of grants related to income. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We are using the Grants for their intended purpose, and are compliant to the reporting requirements set by the terms and conditions of the grant.
The CARES Act also provided for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allowed us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We paid the first half in September 2021, and deferred $5.9 million of payroll taxes within Accrued compensation related costs in the condensed consolidated balance sheet as of March 31, 2022.
Recent Accounting Pronouncements, Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU, effective beginning on March 12, 2020, provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. We are currently evaluating the effects that the adoption of this guidance, and related clarifying standards, will have on our condensed consolidated financial statements and the related disclosures.
Note B — Earnings Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per 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 loss per share computation were 32,891 and 3,471 for the three months ended March 31, 2022 and 2021, respectively.
Our Credit Agreement (as defined below) restricts the payment of dividends or other distributions to our shareholders by us or any of our subsidiaries. See Note K - “Debt and Other Obligations” within these condensed consolidated financial statements.
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The reconciliation of the numerators and denominators used to calculate basic and diluted net income per share are as follows:
For the Three Months Ended
March 31,
(in thousands except share and per share amounts)20222021
Net loss$(7,977)$(3,330)
Weighted average shares outstanding - basic
38,802,420 38,268,332 
Effect of potentially dilutive restricted stock units and options (1)
  
Weighted average shares outstanding - diluted
38,802,420 38,268,332 
Basic and diluted loss per share$(0.21)$(0.09)
(1) In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amounts exclude potentially dilutive shares related to unvested restricted stock units and unexercised options. For the three months ended March 31, 2022 and 2021, potentially dilutive shares of 490,081 and 906,116 shares, respectively, were excluded, as we were in a net loss position.
Note C — Revenue Recognition
Patient Care Segment
Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs (the “VA”), or private or patient pay (“Private Pay”) individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.
The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three months ended March 31, 2022 and 2021:
For the Three Months Ended
March 31,
(in thousands)20222021
Patient Care Segment
Medicare$65,854 $57,335 
Medicaid39,272 34,048 
Commercial insurance / managed care (excluding Medicare and Medicaid managed care)77,343 69,663 
VA21,049 19,764 
Private Pay16,300 14,872 
Total$219,818 $195,682 
The impact to revenue related to prior period performance obligations was not material for the three months ended March 31, 2022 or 2021.
Products & Services Segment
Revenue in our Products & Services segment is derived from the distribution of O&P components and from therapeutic solutions which includes the leasing and sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.
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The following table disaggregates revenue from contracts with customers in our Products & Services segment for the three months ended March 31, 2022 and 2021:
For the Three Months Ended
March 31,
(in thousands)20222021
Products & Services Segment
Distribution services, net of intersegment revenue eliminations$31,390 $30,660 
Therapeutic solutions10,079 11,128 
Total$41,469 $41,788 
Note D — Accounts Receivable, Net
Accounts receivable, net represents outstanding amounts we expect to collect from the transfer of our products and services. Principally, these amounts are comprised of receivables from Medicare, Medicaid, and commercial insurance plans. Our accounts receivable represent amounts outstanding from our gross charges, net of contractual discounts, sales returns, and other implicit price concessions including estimates for payor disallowances and patient non-payments.
We are exposed to credit losses primarily through our accounts receivable. These receivables are short in nature because their due date varies between due upon receipt of invoice and 90 days. We assess our receivables, divide them into similar risk pools, and monitor our ongoing credit exposure through active review of our aging buckets. Our activities include timely account reconciliations, dispute resolution, and payment confirmations. We also employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
Our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current status of our patients and customers’ trade accounts receivable balances. We also group our receivables into similar risk pools to better measure the risks for each pool. After evaluating the risk for each pool, we have determined that additional credit loss risk is immaterial for the Patient Care segment. For the Products & Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” As of March 31, 2022, we have considered the current and future economic and market conditions resulting in a decrease to the allowance for doubtful accounts by approximately $0.1 million since December 31, 2021.
Accounts receivable, net as of March 31, 2022 and December 31, 2021 is comprised of the following:
As of March 31, 2022As of December 31, 2021
(in thousands)Patient CareProducts & ServicesConsolidatedPatient CareProducts & ServicesConsolidated
Gross charges before estimates for implicit price concessions$157,814 $21,089 $178,903 $173,115 $21,459 $194,574 
Less estimates for implicit price concessions:
Payor disallowances(30,300) (30,300)(33,007) (33,007)
Patient non-payments(7,059) (7,059)(7,500) (7,500)
Accounts receivable, gross120,455 21,089 141,544 132,608 21,459 154,067 
Allowance for doubtful accounts (1,927)(1,927) (2,009)(2,009)
Accounts receivable, net$120,455 $19,162 $139,617 $132,608 $19,450 $152,058 
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Note E — Inventories
Our inventories are comprised of the following:
As of March 31,As of December 31,
(in thousands)20222021
Raw materials$22,569 $22,759 
Work in process19,783 15,807 
Finished goods40,936 48,896 
Total inventories$83,288 $87,462 
Note F — Acquisitions
2022 Acquisition Activity
In the first quarter of 2022, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $5.0 million, of which $4.0 million was cash consideration, net of cash acquired, and $1.0 million was issued in the form of notes to shareholders at fair value. The acquisition was completed with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of this high quality O&P provider. The acquisition was not material to our financial position, results of operations, or cash flows.
We accounted for this transaction under the acquisition method of accounting and have reported the results of operations of the acquisition as of the date of the acquisition. We based the estimated fair values of intangible assets on an income approach utilizing the excess earnings method for customer relationships. The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions. Other significant judgments used in the valuation of tangible assets acquired in the acquisition include estimated selling price of inventory and estimated replacement cost for acquired property, plant, and equipment. For all other assets acquired and liabilities assumed, the fair value reflects the carrying value of the asset or liability due to their short maturity. We recorded the excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired as goodwill. The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce. We expect that substantially all of the goodwill, which has been assigned to our Patient Care reporting unit, will not be deductible for federal income tax purposes.
Acquisition-related costs are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the three months ended March 31, 2022 were $0.3 million, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisition completed during the three months ended March 31, 2022 were $0.1 million.
We have not presented pro forma combined results for this acquisition because the impact on previously reported statements of operations would not have been material.
Purchase Price Allocation
We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisition. The final purchase price allocation will be determined when we have completed and fully reviewed the detailed valuations which could differ materially from the preliminary allocations. The final allocation may include changes in allocations of acquired intangible assets as well as goodwill and other changes to assets and liabilities, including deferred taxes. The estimated useful lives of acquired intangible assets are also preliminary.
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The aggregate purchase price of this acquisition was allocated on a preliminary basis as follows:
(in thousands)
Cash paid, net of cash acquired$4,001 
Issuance of Seller Notes at fair value981 
Aggregate purchase price4,982 
Accounts receivable310 
Inventories85 
Customer relationships (Weighted average useful life of 5.0 years)
500 
Non-compete agreements (Weighted average useful life of 5.0 years)
243 
Other assets and liabilities, net(103)
Net assets acquired1,035 
Goodwill$3,947 
Right-of-use assets and lease liabilities related to operating leases recognized in connection with the acquisition completed for the three months ended March 31, 2022 were $0.4 million.
During the second quarter of 2022 to date, we completed the acquisition of one O&P business for a total purchase price of $3.2 million. Total consideration transferred for this acquisition is comprised of $2.4 million in cash consideration and $0.8 million in the form of notes to shareholders at fair value. Due to the proximity in time of this transaction to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the acquisition. Acquisition-related expenses related to this transaction were not material.
In March 2022, we entered into a definitive share purchase agreement in connection with the acquisition of one O&P business for a total purchase price of approximately $9.0 million. Due to the proximity in time of this transaction to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed in this acquisition. Acquisition-related expenses were not material for this transaction.
2021 Acquisition Activity
During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash flows.
In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form of notes to shareholders at fair value, and $1.0 million in additional consideration.
In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $21.0 million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value, and $0.1 million in additional consideration.
In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of notes to shareholders at fair value, and $0.8 million in additional consideration.
In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1 million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair value.
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Acquisition-related costs are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the year ended December 31, 2021 were $2.1 million, which includes those costs for transactions that were in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the year ended December 31, 2021 were $1.6 million.
The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:
(in thousands)
Cash paid, net of cash acquired$79,927 
Issuance of Seller Notes at fair value22,706 
Additional consideration, net1,925 
Aggregate purchase price104,558 
Accounts receivable6,569 
Inventories4,683 
Customer relationships (Weighted average useful life of 5.0 years)
11,745 
Non-compete agreements (Weighted average useful life of 5.0 years)
558 
Other assets and liabilities, net(5,121)
Net assets acquired18,434 
Goodwill$86,124 
Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2021 were $8.9 million.
Note G — Goodwill and Other Intangible Assets
We assess goodwill and indefinite-lived intangible assets for impairment annually as of October 1st, and between annual tests if an event occurs, or circumstances change, that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
The following table summarizes the activity in goodwill of the Patient Care operating segment for the period indicated:
For the Three Months Ended March 31, 2022
(in thousands)Goodwill, GrossAccumulated ImpairmentGoodwill, Net
As of December 31, 2021$792,222 $(428,668)$363,554 
Additions from acquisitions3,947 — 3,947 
Measurement period adjustments (1)
413 — 413 
As of March 31, 2022$796,582 $(428,668)$367,914 
(1) Measurement period adjustments relate to 2021 acquisitions of approximately $0.4 million and are primarily attributable to adjustments to the preliminary allocations of acquired assets.
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The balances related to intangible assets as of March 31, 2022 are as follows:
As of March 31, 2022
(in thousands)Gross Carrying AmountAccumulated AmortizationAccumulated ImpairmentNet Carrying Amount
Customer lists$29,124 $(11,364)$— $17,760 
Trade name255 (208)— 47 
Patents and other intangibles9,815 (6,707)— 3,108 
Definite-lived intangible assets39,194 (18,279)— 20,915 
Indefinite-lived trade name9,070 — (4,953)4,117 
Total other intangible assets$48,264 $(18,279)$(4,953)$25,032 
Amortization expense related to other intangible assets was approximately $1.6 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively.
Note H — Other Current Assets and Other Assets
Other current assets consist of the following:
As of March 31,As of December 31,
(in thousands)20222021
Non-trade receivables$6,291 $7,725 
Prepaid maintenance4,781 4,553 
Prepaid insurance2,397 510 
Other prepaid assets5,058 3,748 
Total other current assets$18,527 $16,536 
Other assets consist of the following:
As of March 31,As of December 31,
(in thousands)20222021
Implementation costs for cloud computing arrangements$6,301 $6,459 
Cash surrender value of company-owned life insurance4,235 4,471 
Finance lease right-of-use assets2,536 2,732 
Deposits2,214 2,178 
Non-trade receivables1,583 1,172 
Other1,975 933 
Total other assets$18,844 $17,945 
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Note I — Accrued Expenses and Other Current Liabilities and Other Liabilities
Accrued expenses and other current liabilities consist of:
As of March 31,As of December 31,
(in thousands)20222021
Patient prepayments, deposits, and refunds payable$28,992 $26,475 
Insurance and self-insurance accruals9,296 8,943 
Accrued sales taxes and other taxes7,900 7,803 
Derivative liability2,698 6,425 
Accrued professional fees710 750 
Accrued interest payable723 707 
Other current liabilities8,072 9,296 
Total$58,391 $60,399 
Other liabilities consist of:
As of March 31,As of December 31,
(in thousands)20222021
Supplemental executive retirement plan obligations$19,018 $20,779 
Long-term insurance accruals7,264 7,112 
Derivative liability 4,664 
Other2,238 2,285 
Total$28,520 $34,840 
Note J — Income Taxes
We recorded a benefit for income taxes of $2.1 million and $2.2 million for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate was 20.9% and 39.3% for the three months ended March 31, 2022 and 2021, respectively.
The decrease in the effective tax rate for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 is primarily attributable to a decrease in pre-tax book income, nondeductible permanent items, and a windfall for the three months ended March 31, 2021 compared to a shortfall for the three months ended March 31, 2022. Our effective tax rate for the three months ended March 31, 2022 is similar to the federal statutory tax rate of 21%, but the difference consists primarily of research and development credits offset by non-deductible expenses and shortfall from share-based compensation. Our effective tax rate for the three months ended March 31, 2021 differed from the federal statutory tax rate of 21% primarily due to research and development credits, non-deductible expenses, and windfall from share-based compensation.
For the year ending December 31, 2022, we estimate a research and development tax credit of $2.7 million, net of tax reserves. We record the tax benefit, net of tax reserves, as a deferred tax asset. For the year ended December 31, 2021, we recognized research and development tax credits of $4.3 million, net of tax reserves.
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Note K — Debt and Other Obligations
Debt consists of the following:
As of March 31,As of December 31,
(in thousands)20222021
Debt:
Term Loan B$484,800 $486,063 
Seller Notes27,725 29,812 
Deferred payment obligation4,000 4,000 
Finance lease liabilities and other3,097 3,344 
Total debt before unamortized discount and debt issuance costs519,622 523,219 
Unamortized discount and debt issuance costs, net(5,532)(5,974)
Total debt$514,090 $517,245 
Current portion of long-term debt:
Term Loan B$5,050 $5,050 
Seller Notes7,595 8,969 
Finance lease liabilities and other890 919 
Total current portion of long-term debt13,535 14,938 
Long-term debt$500,555 $502,307 
Credit Agreement and Term B Borrowings
As of March 31, 2022, we have a Senior Credit Facility (the “Credit Agreement”) which provides for (i) a Term Loan B facility with $484.8 million outstanding which is due in quarterly principal installments with all remaining outstanding principal due at maturity in March 2025 and (ii) a revolving credit facility with an availability of $135.0 million which matures on November 23, 2026 (subject to a springing maturity if the term loans outstanding under the Credit Agreement are not repaid prior to the date that is 91 days prior to the stated maturity thereof). Availability under the revolving credit facility is reduced by outstanding letters of credit, which were $5.2 million as of March 31, 2022, resulting in approximately $129.8 million in available borrowing capacity.
Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.
Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, subject to a LIBOR interest rate floor of 0.00% per annum, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. For the three months ended March 31, 2022, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 3.6%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note M - “Derivative Financial Instruments.”
We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such letter of credit.
The Credit Agreement and its amendments contain various restrictions and covenants, including: (i) requirements that we maintain certain financial ratios at prescribed levels, (ii) a prohibition on payment of dividends and other distributions and
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(iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry. The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement: (i) a maximum consolidated first lien net leverage ratio (“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) shall be up to (a) 5.00 to 1.00 for the fiscal quarters ending March 31, 2022, June 30, 2022, and September 30, 2022 and (b) 4.75 to 1.00 for the fiscal quarter ending December 31, 2022 and the last day of each fiscal quarter thereafter, (ii) permit, at our election and up to three times during the term of the Credit Agreement, the maximum allowable leverage ratio for covenant purposes to be temporarily increased by an additional 0.50 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions, and (iii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.
The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency, or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) upon acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the lenders’ request, during the continuance of any other event of default.
We were in compliance with all covenants at March 31, 2022.
Seller Notes and the Deferred Payment Obligation
We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of $0.8 million and $0.9 million as of March 31, 2022 and December 31, 2021, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.50% to 3.00%. Principal and interest are payable in quarterly or annual installments and mature through November 2026.
Amounts due under the deferred payment obligation to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized discount of $0.4 million as of March 31, 2022 and December 31, 2021, respectively. The deferred payment obligation was measured at its estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due in annual installments beginning in 2024 and for three years thereafter.
Note L — Fair Value Measurements
Financial Instruments
The carrying value of our outstanding term loan as of March 31, 2022 (excluding unamortized discounts and debt issuance costs of $4.7 million) was $484.8 million compared to its fair value of $477.5 million. The carrying value of our outstanding term loan as of December 31, 2021 (excluding unamortized discounts and debt issuance costs of $5.1 million) was $486.1 million compared to its fair value of $484.8 million. Our estimates of fair value are based on a discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.
We have interest rate swap agreements designated as cash flow hedges which are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement. See Note K - “Debt and Other Obligations” and Note M - “Derivative Financial Instruments” for further information.
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We believe that the carrying value of the Seller Notes and the deferred payment obligation approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement. The carrying value of our outstanding Seller Notes and the deferred payment obligation issued in connection with past acquisitions as of March 31, 2022 and December 31, 2021 was $30.9 million and $32.9 million, net of unamortized discounts of $0.8 million and $0.9 million, respectively.
Note M — Derivative Financial Instruments
Cash Flow Hedges of Interest Rate Risk
In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024. As of March 31, 2022 and December 31, 2021, our swaps had a notional value outstanding of $275.0 million and $287.5 million, respectively.
Change in Net Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021, respectively:
(in thousands)Cash Flow Hedges
Balance as of December 31, 2021$(8,504)
Unrealized gain recognized in other comprehensive income before reclassifications, net of tax5,020 
Reclassification to interest expense, net of tax1,876 
Balance as of March 31, 2022$(1,608)
Balance as of December 31, 2020$(16,771)
Unrealized gain recognized in other comprehensive loss before reclassifications, net of tax529 
Reclassification to interest expense, net of tax1,983 
Balance as of March 31, 2021$(14,259)
The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021:
As of March 31, 2022As of December 31, 2021
(in thousands)AssetsLiabilitiesAssetsLiabilities
Derivatives designated as cash flow hedging instruments:
Other assets$563 $ $ $ 
Accrued expenses and other current liabilities 2,698  6,425 
Other liabilities   4,664 
Note N — Share-Based Compensation
On May 17, 2019, the shareholders approved the Hanger, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan authorizes the issuance of (a) up to 2,025,000 shares of Common Stock, plus (b) 243,611 shares available for issuance under the Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”). Upon approval of the 2019 Plan, the 2016 Plan was no longer available for future awards.
As of March 31, 2022, there were 1,609,030 unvested restricted stock awards outstanding. This was comprised of 1,166,910 employee service-based awards with a weighted average grant date fair value of $20.65 per share, 392,764 employee performance-based awards with a weighted average grant date fair value of $20.57 per share, and 49,356 director service-based awards with a weighted average grant date value of $25.53 per share. As of March 31, 2022, there were 275,783 outstanding options exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 4.8 years.
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We recognized approximately $2.9 million and $3.2 million of share-based compensation expense for the three months ended March 31, 2022 and 2021, respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.
Note O — Supplemental Executive Retirement Plans
Defined Benefit Supplemental Executive Retirement Plan
Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives. The DB SERP, which we administer, calls for fifteen annual payments upon retirement with the payment amount based on years of service and final average salary. Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates, and other factors. 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 change in net benefit cost and obligation during the three months ended March 31, 2022 and 2021 is as follows:
Change in Benefit Obligation:
(in thousands)20222021
Benefit obligation as of December 31, 2021 and 2020, respectively$17,935 $19,746 
Service cost116 123 
Interest cost99 87 
Payments(1,877)(1,877)
Benefit obligation as of March 31$16,273 $18,079 

Amounts Recognized in the Condensed Consolidated Balance Sheets:
As of March 31,As of December 31,
(in thousands)20222021
Current accrued expenses and other current liabilities$1,913 $1,913 
Non-current other liabilities14,360 16,022 
Total accrued liabilities$16,273 $17,935 

Defined Contribution Supplemental Executive Retirement Plan
In 2013, we established a defined contribution plan (“DC SERP”) that covers certain of our senior executives. Each participant is given a notional account to manage his or her annual distributions and allocate the funds among various investment options (e.g., mutual funds). These accounts are tracking accounts only for the purpose of calculating the participant’s benefit. The participant does not have ownership of the underlying mutual funds. When a participant initiates or changes the allocation of his or her notional account, we will generally make an allocation of our investments to match those chosen by the participant. While the allocation of our sub accounts is generally intended to mirror the participant’s account records (i.e., the distributions and gains or losses on those funds), the employee does not have legal ownership of any funds until payout upon retirement. The underlying investments are owned by the insurance company with which we own an insurance policy.
As of March 31, 2022 and December 31, 2021, the estimated accumulated benefit obligation is $4.7 million and $4.8 million, of which $4.5 million and $4.1 million is funded and $0.2 million and $0.6 million is unfunded at March 31, 2022 and December 31, 2021, respectively.
In connection with the DC SERP benefit obligation, we maintain a company-owned life insurance policy (“COLI”). The carrying value of the COLI is measured at its cash surrender value and is presented within “Other assets” in our condensed consolidated balance sheets. See Note H - “Other Current Assets and Other Assets” for additional information.
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Note P — Commitments and Contingencies
Guarantees and Indemnification
In the ordinary course of our business, we may enter into service agreements with service providers in which we agree to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement. We have reviewed our existing contracts containing indemnification or clauses of guarantees and do not believe that our liability under such agreements is material.
Other Matters
From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, and are also subject to additional payments under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on our consolidated financial position, liquidity or results of operations.
We operate in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities. No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on our consolidated financial statements.
Note Q — Segment and Related Information
We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each segment’s income from operations. The operating segments are described further below.
Patient Care - This segment consists of (i) our owned and operated patient care clinics, and (ii) our contracting and network management business. The patient care clinics provide services to design and fit O&P devices to patients. These clinics also instruct patients in the use, care, and maintenance of the devices. The principal reimbursement sources for our services are:
Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation, workers’ compensation programs, and similar sources;
Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with disabilities, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules (generally with either 10 regional pricing areas or state level prices) for prosthetics and orthotics and by state for durable medical equipment (DMEPOS);
Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons requiring financial assistance, regardless of age, which may supplement Medicare benefits for persons aged 65 or older requiring financial assistance; and
the VA.
Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies. We partner with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers.
Products & Services - This segment consists of our distribution business, which distributes and fabricates O&P products and components to sell to both the O&P industry and our own patient care clinics, and our therapeutic solutions business. The therapeutic solutions business leases and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.
Corporate & Other - This consists of corporate overhead and includes unallocated expense such as personnel costs, professional fees, and corporate offices expenses.
The accounting policies of the segments are the same as those described in Note A - “Organization and Summary of Significant Accounting Policies” in our 2021 Form 10-K.
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Intersegment revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care segment. The sales are priced at the cost of the related materials plus overhead.
Summarized financial information concerning our reportable segments is shown in the following tables. Total assets for each of the segments has not materially changed from December 31, 2021.
Patient CareProducts & Services
For the Three Months Ended
March 31,
For the Three Months Ended
March 31,
(in thousands)2022202120222021
Net revenues
Third party$219,818 $195,682 $41,469 $41,788 
Intersegments  54,675 47,047 
Total net revenues219,818 195,682 96,144 88,835 
Material costs
Third party suppliers59,918 51,617 25,674 23,553 
Intersegments11,058 8,305 43,617 38,742 
Total material costs70,976 59,922 69,291 62,295 
Personnel expenses86,409 75,754 15,266 14,126 
Other expenses40,696 36,141 7,057 5,803 
Depreciation & amortization4,744 4,815 2,023 1,935 
Segment income from operations$16,993 $19,050 $2,507 $4,676 

A reconciliation of the total of the reportable segments’ income from operations to consolidated net loss is as follows:
For the Three Months Ended
March 31,
(in thousands)20222021
(Loss) income from operations
Patient Care$16,993 $19,050 
Products & Services2,507 4,676 
Corporate & other(22,045)(21,705)
(Loss) income from operations(2,545)2,021 
Interest expense, net7,385 7,340 
Non-service defined benefit plan expense160 167 
Loss before income taxes(10,090)(5,486)
Benefit for income taxes(2,113)(2,156)
Net loss$(7,977)$(3,330)
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A reconciliation of the reportable segments’ net revenues to consolidated net revenues is as follows: