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OFFON

HANGER, INC.

(HNGR)
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HANGER : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/04/2021 | 04:39pm EDT

Forward-Looking Statements

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, including descriptions of our business strategies. These
statements 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 experience in the
industry as well as our perceptions of historical trends, current conditions,
expected future developments, and other factors we believe are appropriate in
these circumstances. We believe these assumptions 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
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. These uncertainties include, but are
not limited to, the financial and business impacts of the COVID-19 pandemic on
our operations and the operations of our customers, suppliers, governmental and
private payors, and others in the healthcare industry and beyond; federal laws
governing the health care industry; governmental policies affecting O&P
operations, including with respect to reimbursement; failure to successfully
implement a new enterprise resource planning system or other disruptions to
information technology systems; the inability to successfully execute our
acquisition strategy, including integration of recently acquired O&P clinics
into our existing business; changes in the demand for our O&P products and
services, including additional competition in the O&P services market;
disruptions to our supply chain; our ability to enter into and derive benefits
from managed-care contracts; our ability to successfully attract and retain
qualified O&P clinicians; labor shortages and increased turnover in our employee
base; contractual, inflationary and other general cost increases, including with
regard to costs of labor, raw materials and freight;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, 2020 (the "2020 Form 10-K"), as well as those described
in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q,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 this 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 inherent in the 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 2020 Form 10-K, in Part II, Item 1A. "Risk Factors"
of this Quarterly Report on Form 10-Q,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 measure used in this
Management's Discussion and Analysis is as follows:



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.



                                       24

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Business Overview



General


We are a leading national provider of products and services that assist in
enhancing or restoring the physical capabilities of patients with disabilities
or injuries, and we and our predecessor companies have provided O&P services for
nearly 160 years. We provide 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.



Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication, and delivery of custom O&P devices through 723 patient care clinics and 112 satellite locations in 46 states and the District of Columbia as of June 30, 2021. We also provide payor network contracting services to other O&P providers through this segment.




Our Products & Services segment is comprised of our distribution services and
therapeutic solutions businesses. As a leading provider of O&P products in the
United States, we engage in the distribution of a broad catalog of O&P parts,
componentry, and devices to independent O&P providers nationwide. The other
business in our Products & Services segment is our therapeutic solutions
business, which develops specialized rehabilitation technologies and provides
evidence-based clinical programs for post-acute rehabilitation to patients at
approximately 3,900 skilled nursing and post-acute providers nationwide.



For the three and six months ended June 30, 2021, our net revenues were $280.8
million and $518.3 million, respectively, and we recorded net income of $10.2
million and $6.8 million, respectively.  For the three and six months ended
June 30, 2020, our net revenues were $233.4 million and $467.2 million,
respectively, and we recorded net income of $31.1 million and $15.3 million,
respectively.



Industry Overview



We estimate that approximately $4.3 billion is spent in the United States each
year for prescription-based O&P products and services through O&P clinics. We
believe our Patient Care segment currently accounts for approximately 21% of the
market, providing a comprehensive portfolio of orthotic, prosthetic, and
post-operative solutions to patients in acute, post-acute, and patient care
clinic settings.



The O&P patient care services market in the United States is highly fragmented
and is characterized by regional and local independent O&P businesses operated
predominantly by independent operators, but also including two O&P product
manufacturers with substantial international patient care services operations.
We do not believe that any single competitor accounts for 2% or more of the
nation's total estimated O&P clinic revenues.



The industry is characterized by stable, recurring revenues, primarily resulting
from new patients as well as the need for periodic replacement and modification
of O&P devices. We 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 typical replacement time for prosthetic devices is three
to five years, while the typical replacement time for orthotic devices varies,
depending on the device.



We estimate that approximately $1.8 billion is spent in the United States each
year 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. We estimate that our
distribution sales account for approximately 9% of the market for O&P products,
components, devices, and supplies (excluding sales to our Patient Care segment).



We estimate the market for rehabilitation technologies, integrated clinical
programs, and clinician training in skilled nursing facilities ("SNFs") to be
approximately $150 million annually. We currently provide these products and
services to approximately 25% of the estimated 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 $400 million annually. We do not currently provide a meaningful
amount of products and services to this broader market.



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Business Description



Patient Care
Our Patient Care segment employs approximately 1,600 clinical prosthetists,
orthotists, and pedorthists, which 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
patients, we also employ technicians, fitters, and other ancillary providers to
assist our clinicians in the performance of their duties. Through this segment,
we additionally provide network contracting services to independent providers of
O&P.


Patients are typically referred to 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 selection of 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 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 at one of our regional or national fabrication facilities.



We have earned a 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. We
utilize multiple scanning and imaging technologies in the fabrication process,
depending on the patient's individual needs, including our proprietary Insignia
scanning system. The 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 clinics in pre-authorization, patient eligibility,
denial management, collections, payor audit coordination, and other accounts
receivable processes.


The principal reimbursement sources for our services are:

Commercial private payors and other non-governmental organizations, which

? consist of individuals, rehabilitation providers, commercial insurance

companies, HMOs, 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 persons with

   disabilities;



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 U.S. Department of Veterans Affairs (the "VA").




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We typically enter into contracts with third party payors that allow us to
perform O&P services for a referred patient and to be reimbursed for our
services. These contracts usually have a stated term of one to three years and
generally may be terminated without cause by either party on 60 to 90 days'
notice, or on 30 days' notice if we have not complied with certain licensing,
certification, program standards, Medicare or Medicaid requirements, or other
regulatory requirements. Reimbursement for services is typically based on a fee
schedule negotiated with the third party payor that reflects various factors,
including 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.



Government reimbursement is comprised of Medicare, Medicaid, and the VA. 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 known as 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.



We, and the O&P 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,
Supplemental Medical Review Contractor ("SMRC") audits, and Unified Program
Integrity Contractor ("UPIC") audits. TPE audits are generally pre-payment
audits, while RAC, CERT, and SMRC audits are generally post-payment audits. UPIC
audits can be both pre- or post-payment audits, with a majority currently
pre-payment. TPE audits replaced the previous Medicare Administrative Contractor
audits. Adverse post-payment audit determinations generally require Hanger to
reimburse Medicare for payments previously made, while adverse pre-payment audit
determinations generally result in the denial of payment. In either case, we can
request a redetermination or appeal, if we believe the adverse determination is
unwarranted, which can take an extensive period of time to resolve, currently up
to six years or more.



Products & Services



Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. ("SPS"),
we distribute O&P components to independent O&P clinics and other customers.
Through our wholly-owned subsidiary, Accelerated Care Plus Corp. ("ACP"), our
therapeutic solutions business is a leading provider of rehabilitation
technologies and integrated clinical programs to skilled nursing and post-acute
rehabilitation providers. Our value proposition is to provide our customers with
a full-service "total solutions" approach encompassing proven medical
technology, evidence-based clinical programs, and ongoing consultative education
and training. Our services support increasingly advanced treatment options for a
broader patient population and more medically complex conditions. We currently
serve approximately 3,900 skilled nursing and post-acute providers nationwide.
Through our SureFit subsidiary, we also manufacture and sell therapeutic
footwear for diabetic patients in the podiatric market. We also operate the
Hanger Fabrication Network, which fabricates custom O&P devices for our patient
care clinics, as well as for independent O&P clinics.



Through our internal "supply chain" organization, we purchase, warehouse, and
distribute over 475,000 SKUs from approximately 400 different manufacturers
through SPS or directly to our own clinics within our Patient Care segment. Our
warehousing and distribution facilities in Nevada, Georgia, Illinois, and Texas
provide us with the ability to deliver products to the vast majority of our
customers in the United States within two business days. The distribution
facility we formerly operated in Pennsylvania ceased operations in September
2020.


Our supply chain organization 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 control;

? encourage our patient care clinics to use the most clinically appropriate

   products; and




? coordinate new product development efforts with key vendors.


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Effects of the COVID-19 Pandemic

As disclosed previously, we began to see a reduction in business volumes as a
result of the COVID-19 pandemic starting in the last weeks of March 2020.  As
federal, state, and local authorities implemented social distancing and
suppression measures to respond to an increasing number of nationwide COVID-19
infections, we experienced a decrease in our patient appointments and general
business volumes.  In response, during the last week of March 2020, we made
certain changes to our operations, implemented a broad number of cost reduction
measures, and delayed certain capital investment projects.  Although our
business volumes have shown gradual improvement from their initial significant
decline in mid-2020, the adverse impact of the COVID-19 pandemic on our business
has continued through the second quarter of 2021.  As a result, our comparative
financial and operational results when viewed as a whole for the periods
impacted by the COVID-19 pandemic, including temporary labor and cost reduction
measures largely in place during the second and third quarters of 2020, may not
be indicative of future financial and operational performance.  The volume
effects and our operating responses are discussed further in this section, and
the effects of COVID-19 on our financial condition is discussed in the
"Financial Condition, Liquidity and Capital Resources" section below.  Our
results of operations for any quarter during the COVID-19 pandemic may not be
indicative of results of operations that may be achieved for a subsequent
quarter or the full year, and may not be similar to results of operations
experienced in prior years.  In addition, results in any given period in 2021
may be different than 2020 as a result of the depressed conditions in 2020
stemming from the COVID-19 pandemic.



Effect on Business Volumes



Patient appointments in our clinics during the second quarter of 2021 increased
by approximately 38% as compared to the corresponding period in 2020. During the
quarter, our prosthetics and orthotics day-adjusted sales, excluding
acquisitions, increased by approximately 4.3% and 40.4%, respectively, with same
clinic revenues increasing by 18.2% on a per day basis, when compared to the
same period in the prior year. In the quarter ending June 30, 2020, we
experienced a relatively lower decline in prosthetic patient volumes as compared
with the orthotic patient volumes.  We believe the generally more acute nature
of conditions that lead to the need for prosthetics, the patient age
demographics and the relatively greater impact that the absence of access to
these devices can have on a patient's daily life were the primary reasons that
have led to the relatively lower decline in prosthetics patients as compared
with orthotic patients in our Patient Care segment during the prior year period.
As a result, we are seeing a more modest improvement in prosthetic volumes when
compared to the second quarter of 2020.  Patient appointments in our clinics
during the second quarter of 2021 were approximately 93% of the volumes
experienced in the second quarter of 2019 and same clinic revenues were 96% of
those reported in the second quarter of 2019.



Billings for componentry delivered to independent providers of orthotics and
prosthetics by our distribution services business increased by approximately 26%
during the second quarter of 2021, as compared to the same period in 2020.  Net
revenue from distribution services during the quarter was 89% of the level
reported during the second quarter of 2019, primarily due to the continuing
effects of COVID-19 on business conditions, and secondarily due to the impact of
acquisitions of customers by us and the exit of certain products.  Due to
significant geographic product mix and timing differences, there can be no
assurance that these volumes or billing amounts will be reflective of our future
results and are solely provided for the purposes of giving context to the
magnitude of the effect of the COVID-19 pandemic on our business during the
periods impacted by the COVID-19 pandemic.



In the early months of 2021, vaccines for combating COVID-19 were authorized by
the US Food and Drug Administration, and the US government commenced a phased
roll out of these vaccines. However, the initial quantities of the vaccines were
limited, and the US government prioritized distribution to front-line health
care workers and other essential workers, followed by individual populations
that are most susceptible to the severe effects of COVID-19. As vaccines became
more readily available, social adversity to vaccination and other factors
adversely affected the achievement of nationwide vaccination goals. Given the
continuing impact of restrictions to mitigate the spread of COVID-19 and unknown
challenges with regards to the effectiveness, distribution, and acceptance of
COVID-19 vaccines, we believe that the COVID-19 pandemic will continue to affect
our business volumes in 2021 when compared to pre- pandemic levels.Nevertheless,
the overall adverse impact of the COVID-19 pandemic on our business volumes has
diminished 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. Additionally, we
believe that if a patient is initially unable or unwilling to come to one of our
clinics to receive their prosthetic or orthotic device, then their ultimate need
for that device is not likely to change, and we could accordingly have some
favorable volume recovery effect in future periods as the impacts of the
COVID-19 pandemic subsides.



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Operating and Cost Reduction Responses




Throughout the periods affected by the COVID-19 pandemic, given that our
services are considered essential, we have continued to operate our businesses.
However, due to the risks posed to our clinicians, other employees, and
patients, we made certain changes to our operating practices in order to promote
safety and to minimize the risk of virus transmission. These included the
implementation of certain patient screening protocols and the relocation of
certain administrative and support personnel to a "work at home" environment.



As a result of the COVID-19 pandemic in 2020, we found it necessary to reduce
our personnel costs in response to significant decreases in business volumes.
Commencing at the start of April 2020, personnel cost reductions were
implemented through (i) an average 32% decrease in the salaries of all of our
exempt employees, the percentage of which varied from lower amounts for lower
salaried employees up to reduction amounts ranging from 47% to 100% for our
senior leadership team; (ii) the furloughing of certain employees on a voluntary
and involuntary basis; (iii) the reduction of work hours for non-exempt
employees; (iv) modification of bonus, commission, and other variable incentive
plans; (v) the reduction of overtime expenses; (vi) the elimination of certain
open positions; (vii) a reduction in the use of contract employees, and (viii)
the temporary suspension of certain auto allowances. During the period April
2020 through September 2020, salaries were gradually reinstated, with full
reinstatement of all exempt employees' salaries being effective on September 19,
2020. We believe this approach allowed us to retain as many employees as
possible to preserve the experience, culture, and patient service capabilities
of our workforce for periods subsequent to the COVID-19 pandemic.



In addition to these reductions in operating expenses, we temporarily delayed
the implementation of our supply chain and financial systems, further discussed
in the "New Systems Implementations" section. We also suspended construction of
our new fabrication facility in Tempe, Arizona, and other projects related to
the reconfiguration of our distribution facilities. We resumed construction of
the Tempe, Arizona fabrication facility in the first quarter of 2021, and
recommenced the remaining activities in the second quarter of 2021. These
actions to delay activities during 2020 will correspondingly delay our
achievement of the financial benefits expected from them into future periods.



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 $178.0
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 attributable to the COVID-19 pandemic, such
as lost revenues attributable to canceled procedures, as well as to provide
support for health-care related expenses. In April 2020, HHS began making
payments to healthcare providers from the $178.0 billion appropriation. These
are grants, rather than loans, to healthcare providers, and will not need to be
repaid.



During 2020, we recognized a total benefit of $24.0 million in our consolidated
statement of operations within Other operating costs for the grant proceeds we
received under the CARES Act from HHS. In April 2021, we received approximately
$0.7 million in additional grant proceeds under the CARES Act from HHS.



Other Products & Services Performance Considerations

As discussed in our 2020 Form 10-K, under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", several of the
larger independent O&P providers we served through the distribution of
componentry encountered financial difficulties during the year ended December
31, 2020, which resulted in our discontinuing distribution services to these
customers. Generally, we believe our distribution customers encounter
reimbursement pressures similar to those we experience in our own Patient Care
segment and, depending on their ability to adapt to the increased claims
documentation standards that have emerged in our industry, this may either limit
the rate of growth of some of our customers, or otherwise affect the rate of
growth we experience in our distribution of O&P componentry to independent
providers. During future periods, in addition to the adverse effects of the
COVID-19 pandemic discussed above, we currently believe our rate of revenue
growth in this segment may decrease as we choose to limit the extent to which we
distribute certain low margin orthotic products. Additionally, to the extent
that we acquire independent O&P providers who are pre-existing customers of our
distribution services, our revenue growth in this segment would be adversely
affected as we would no longer recognize external revenue from the components we
provide them.



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Within our Products & Services segment, in addition to our distribution of
products, we provide therapeutic equipment and services to patients at SNFs and
other healthcare provider locations. Since 2016, a number of our clients,
including several of our larger SNF clients, have been discontinuing their use
of our therapeutic services. We believe these discontinuances relate primarily
to their overall efforts to reduce the costs they bear for therapy-related
services within their facilities. As a part of those terminations of service, in
a number of cases, we elected to sell terminating clients the equipment that we
had utilized for their locations. Within this portion of our business, we have
and continue to respond to these historical trends through the expansion of our
products and services offerings.



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.
The following is a summary of our payor mix, expressed as an approximate
percentage of net revenues for the periods indicated:




                                            For the Three Months Ended       For the Six Months Ended
                                                     June 30,                       June 30,
                                              2021              2020           2021            2020
Medicare                                          31.4 %            32.8 %        30.4 %          32.6 %
Medicaid                                          18.5 %            16.0 %        18.0 %          16.1 %
Commercial Insurance / Managed Care
(excluding Medicare and Medicaid
Managed Care)                                     33.7 %            36.2 %        34.6 %          35.6 %
Veterans Administration                            9.1 %             8.6 %         9.6 %           9.0 %
Private Pay                                        7.3 %             6.4 %         7.4 %           6.7 %
Patient Care                                     100.0 %           100.0 %       100.0 %         100.0 %



Patient Care constituted 84.3% and 83.4% of our net revenues for the three and
six months ended June 30, 2021 and 83.9% and 82.6% for the three and six months
ended June 30, 2020.  Our remaining net revenues were provided by our Products &
Services segment which derives its net revenues 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. It is our belief the increased nationwide efforts
to reduce health care costs has driven changes in industry trends with increases
in payor pre-authorization processes, documentation requirements, pre-payment
reviews, and pre- and post-payment audits, and our ability to successfully
undertake these tasks using our traditional approach has become increasingly
challenging. For example, the Medicare contractor for Pricing, Data Analysis and
Coding (referred to as "PDAC") recently announced verification requirements and
code changes that has reduced the reimbursement level for certain prosthetic
feet, and the VA is in the process of reassessing the method it uses to
determine reimbursement levels for O&P services and products provided under
certain miscellaneous codes.



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, or that we filed or appealed
the payor's determination timely, as well as on the basis of our coding, failure
by certain classes of patients to pay their portion of a claim, or 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.

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In recent years, we have taken a number of actions to manage payor disallowance
trends. These initiatives included: (i) the creation of a central revenue cycle
management function; (ii) the implementation of a 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.



Payor disallowances is considered an adjustment to the transaction price.
Estimated uncollectible amounts due to us by patients are generally considered
implicit price concessions and are presented as a reduction of net revenues.
These amounts recorded in net revenues within the Patient Care segment for the
three and six months ended June 30, 2021 and 2020 are as follows:




                                           For the Three Months Ended          For the Six Months Ended
                                                    June 30,                           June 30,
(dollars in thousands)                       2021               2020             2021             2020
Gross charges                           $      245,196$      202,536$     446,648$   402,489
Less estimated implicit price
concessions arising from:
Payor disallowances                              6,802              6,577           11,316          14,651
Patient non-payments                             1,607                100            2,863           1,796
Payor disallowances and patient
non-payments                                     8,409              6,677           14,179          16,447
Net revenues                            $      236,787$      195,859$     432,469$   386,042

Payor disallowances                     $        6,802$        6,577$      11,316$    14,651
Patient non-payments                             1,607                100            2,863           1,796
Payor disallowances and patient
non-payments                            $        8,409$        6,677

$ 14,179$ 16,447

Payor disallowances %                              2.8 %              3.2 %            2.5 %           3.6 %
Patient non-payments %                             0.6 %              0.1 %            0.7 %           0.5 %
Percent of gross charges                           3.4 %              3.3 %            3.2 %           4.1 %




During 2020 and through the second quarter of 2021, we benefited from reductions
in claims denials and increases in our rates of collection. This has been due to
a variety of factors, including increases in our revenue cycle management
staffing and an increased focus on collections and liquidity during a period of
reduced business volumes, a possible temporary relaxing of payor review
procedures during the COVID-19 pandemic, the benefit of CARES Act funds on the
ability of patients to pay their portion of claims and other factors relating to
our pre-authorization and documentation procedures for devices. We do not
believe this favorable trend will necessarily be sustainable in future periods
as the COVID-19 pandemic subsides and patient volumes and resulting revenues
increase.



Acquisitions


During 2021, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows:

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. We completed the acquisitions with the intention of expanding

the geographic footprint of our patient care offerings through the acquisition

   of these high quality O&P providers.




   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.




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During 2020, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows:

In the second quarter of 2020, we acquired all of the outstanding equity

interests of an O&P business for total consideration of $46.2 million at fair

value, of which $16.8 million was cash consideration, net of cash acquired,

$21.9 million was issued in the form of notes to the former shareholders, $3.5

million in the form of a deferred payment obligation to the former

shareholders, and $4.0 million in additional consideration. Of the $21.9

million in notes issued to the former shareholders, approximately $18.1 million

of the notes were paid in October 2020 in a lump sum payment and the remaining

$3.8 million of the notes are payable in annual installments over a period of

three years on the anniversary date of the acquisition. Total payments of $4.0

? million under the deferred payment obligation are due in annual installments

beginning in the fourth year following the acquisition and for three years

thereafter. Additional consideration includes approximately $3.6 million in

liabilities incurred to the shareholders as part of the business combination

payable in October 2020 and is included in Accrued expenses and other

liabilities in the consolidated balance sheet. The remaining $0.4 million in

additional consideration represents the effective settlement of amounts due to

us from the acquired O&P business as of the acquisition date. We completed the

acquisition with the intention of expanding the geographic footprint of our

   patient care offerings through the acquisition of this high quality O&P
   provider.




   In the fourth quarter of 2020, we completed the acquisitions of all the

outstanding equity interests of four O&P businesses for total consideration of

· $7.1 million, of which $4.9 million was cash consideration, net of cash

acquired, $1.9 million was issued in the form of notes to shareholders at fair

   value, and $0.3 million in additional consideration.




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 and six months ended June 30, 2021 were $0.4
million and $0.8 million, respectively, which includes those costs for
transactions that are in progress or were not completed during the respective
period.  Acquisition-related costs incurred for the acquisitions completed
during the three and six months ended June 30, 2021 were $0.2 million and $0.4
million, respectively.  Total acquisition-related costs incurred during the year
ended December 31, 2020 were $0.9 million, which includes those costs for
transactions that are in progress or not completed during the respective period.

Acquisition-related costs incurred for acquisitions completed during the year ended December 31, 2020 were $0.6 million.

New Systems Implementations

During 2019, we commenced the design, planning, and initial implementation of
new financial and supply chain systems ("New Systems Implementations"), and
planned to invest in new servers and software that operate as a part of our
technology infrastructure. As discussed in the "Effects of the COVID-19
Pandemic" section, we elected in 2020 to temporarily delay our New Systems
Implementations as part of our efforts to preserve liquidity. We recommenced
these activities in the second quarter of 2021.



In connection with our new financial and supply chain systems, for the three and
six month period ended June 30, 2021, we have expensed $1.7 million and $2.3
million, respectively, and for the three and six month period ended June 30,
2020, we expensed $0.6 million and $1.5 million, respectively.  For the year
ended December 31, 2020, we expensed $2.6 million.  We currently anticipate that
we will spend $5.9 million for the full year 2021 on these systems.



As of June 30, 2021, we capitalized $7.1 million of implementation costs for
cloud computing arrangements, net of accumulated amortization, and recorded in
other current assets and other assets in the condensed consolidated balance
sheet.



Personnel



While we have traditionally been able to recruit and retain adequate staffing to
operate and support our business, our ability to support growth is dependent on
our ability to add new personnel.  Nevertheless, like many other employers, we
are currently finding it difficult to recruit and retain personnel in certain
positions, including clinic front office administrative, distribution center,
and fabrication center positions. Our inability to successfully recruit and
maintain staffing levels for these positions could introduce constraints on our
ability to achieve our revenue growth objectives in coming quarters. We may find
it necessary to increase wages in these areas in coming quarters if we find that
we are unable to attract a sufficient number of personnel.  Please refer to Part
II, Item 1A. "Risk Factors" in this report for further discussion.

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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. 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. However, historical seasonality patterns have been
impacted by the COVID-19 pandemic and may not be reflective of our prospective
financial results and operations. Please refer to the "Effects of the COVID-19
Pandemic" section for further discussion.



Our results are also affected, to a lesser extent, by our holding of an
education fair in the first quarter of each year.  This event is conducted to
assist our clinicians in maintaining their training and certification
requirements and to facilitate a national meeting with our clinical leaders.  We
also invite manufacturers of the componentry for the devices we fabricate to
these annual events so they can demonstrate their products and otherwise assist
in our training process.  Due to the COVID-19 pandemic, we conducted our first
virtual education fair in 2021. During the three months ended March 31, 2021 and
2020 we spent $0.3 million and $2.3 million on travel and other costs associated
with this event, respectively.  In addition to the costs we incur associated
with this annual event, we also lose the productivity of a significant portion
of our clinicians during the period in which this event occurs, which
contributes to the lower seasonal revenue level we experience during the first
quarter of each year.



Critical Accounting Policies



Our analysis and discussion of our financial condition and results of operations
is based upon the condensed consolidated financial statements that have been
prepared in accordance with 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,
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 fairly present, in all
material respects, our operating results, and financial 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 condensed consolidated financial statements:



 ? Revenue recognition




 ? Accounts receivable, net




 ? Inventories




 ? Business combinations



? Goodwill and other intangible assets, net




 ? Income taxes




The use of different estimates, assumptions, or judgments could have a material
effect on reported amounts of assets, liabilities, revenue, expenses, and
related disclosures as of the date of the financial statements and during the
reporting period. These critical accounting policies are described in more
detail in our 2020 Form 10-K, under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in Note A -
"Organization and Summary of Significant Accounting Policies" contained within
these condensed consolidated financial statements.



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Results of Operations



Our results of operations for the three months ended June 30, 2021 and 2020 were
as follows (unaudited):




                                               For the Three Months Ended          Percent
                                                        June 30,                  Change (1)
(dollars in thousands)                           2021               2020         2021 vs 2020
Net revenues                                $      280,819$      233,434            20.3 %
Material costs                                      89,271             69,972            27.6 %
Personnel costs                                     97,549             73,822            32.1 %
Other operating costs                               32,721              8,277           295.3 %
General and administrative expenses                 33,177             33,623           (1.3) %
Depreciation and amortization                        8,007              8,879           (9.8) %
Operating expenses                                 260,725            194,573            34.0 %
Income from operations                              20,094             38,861          (48.3) %
Interest expense, net                                7,152              8,636          (17.2) %
Non-service defined benefit plan expense               167                158             5.7 %
Income before income taxes                          12,775             30,067          (57.5) %
Provision (benefit) for income taxes                 2,616              (987)              NM
Net income                                  $       10,159$       31,054          (67.3) %




(1) NM - Not Meaningful



During these periods, our operating expenses as a percentage of net revenues
were as follows:




                                         For the Three Months Ended June 30,
                                            2021                     2020
Material costs                                    31.8 %                   30.0 %
Personnel costs                                   34.7 %                   31.6 %
Other operating costs                             11.6 %                    3.6 %
General and administrative expenses               11.8 %                  
14.4 %
Depreciation and amortization                      2.9 %                    3.8 %
Operating expenses                                92.8 %                   83.4 %



Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020




Relevance of Second Quarter Results to Comparative and Future Periods. As
discussed in "Effects of the COVID-19 Pandemic" above, commencing late in the
first quarter of 2020, our revenues and operating results began to be adversely
affected by the COVID-19 pandemic, a trend that continued throughout 2020 and
into 2021.  The effects of this public health emergency on our revenues and
earnings, particularly in 2020, impacted the comparison to our historical
financial results. As a result, our comparative financial and operational
results when viewed as a whole for the periods impacted by the COVID-19
pandemic, including temporary labor and other cost reduction measures largely in
place during the second and third quarters of 2020, may not be indicative of
future financial and operational performance.  Please refer to the "Effects of
the COVID-19 Pandemic" section above and the "Financial Condition, Liquidity and
Capital Resources" section below for additional forward-looking information
concerning our current expectations regarding the effect of the COVID-19
pandemic on our prospective results and financial condition.

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Net revenues.  Net revenues for the three months ended June 30, 2021 were $280.8
million, an increase of $47.4 million, or 20.3%, from $233.4 million for the
three months ended June 30, 2020.  Net revenues by operating segment, after
elimination of intersegment activity, were as follows:




                             For the Three Months Ended
                                      June 30,                             Percent
(dollars in thousands)         2021               2020          Change     Change
Patient Care              $      236,787$      195,859$ 40,928       20.9 %
Products & Services               44,032             37,575       6,457       17.2 %
Net revenues              $      280,819$      233,434$ 47,385       20.3 %




Patient Care net revenues for the three months ended June 30, 2021 were $236.8
million, an increase of $40.9 million, or 20.9%, from $195.9 million for the
same period in the prior year.  Same clinic revenues increased $34.3 million for
the three months ended June 30, 2021 compared to the same period in the prior
year, reflecting an increase of 18.2% on a per-day basis. Net revenues from
acquired clinics and consolidations increased $6.7 million, and revenues from
other services decreased $0.1 million. During the second quarter we estimate
that our same clinic net revenues were approximately 96% of the level we
reported in the second quarter of 2019, prior to the pandemic.  Given this, we
are not currently operating at a level that utilizes our capacity at the same
levels as we did prior to the pandemic, and this has been a primary contributing
factor to the decrease in our earnings and margins when compared to this
pre-pandemic period.



Prosthetics constituted approximately 54% of our total Patient Care revenues for
the three months ended June 30, 2021 and 61% for the same period in 2020,
excluding the impact of acquisitions. Prosthetic revenues for the three months
ended June 30, 2021 were 4.3% higher, on a per-day basis, than the same period
in the prior year, excluding the impact of acquisitions. Orthotics, shoes,
inserts, and other products increased by 40.4% on a per-day basis compared to
the same comparative prior periods, excluding the impact of
acquisitions. Revenues in the second quarter of 2020, particularly orthotic
revenues, were adversely affected due to a decline in patient appointment
volumes as a result of the onset of the COVID-19 pandemic, governmental
suppression measures implemented in response to the COVID-19 pandemic, and other
factors impacting our business volumes discussed in the "Effects of the COVID-19
Pandemic" section.



Products & Services net revenues for the three months ended June 30, 2021 were
$44.0 million, an increase of $6.5 million, or 17.2% from the same period in the
prior year.  This was primarily attributable to an increase of $6.7 million, or
25.4%, in the distribution of O&P componentry to independent providers in the
period stemming primarily from lower volumes in the same period of 2020 due to
the COVID-19 pandemic, as discussed in the "Effects of the COVID-19 Pandemic"
section above.  In addition, net revenues from therapeutic solutions decreased
$0.3 million, or 2.6%, primarily as a result of historical customer lease
cancellations and discounts, partially offset by lease installations.



Material costs. Material costs for the three months ended June 30, 2021 were
$89.3 million, an increase of $19.3 million or 27.6%, from the same period in
the prior year.  Total material costs as a percentage of net revenues increased
to 31.8% in the three months ended June 30, 2021 from 30.0% in the three months
ended June 30, 2020 primarily due to changes in our Products & Services segment
business and product mix.  Material costs by operating segment, after
elimination of intersegment activity, were as follows:




                             For the Three Months Ended
                                     June 30,                             Percent
(dollars in thousands)        2021               2020          Change     Change
Patient Care              $      71,717$      55,236$ 16,481       29.8 %
Products & Services              17,554             14,736       2,818       19.1 %
Material costs            $      89,271$      69,972$ 19,299       27.6 %




Patient Care material costs increased $16.5 million, or 29.8%, for the three
months ended June 30, 2021 compared to the same period in the prior year as a
result of the increase in segment net sales, additional costs as a result of our
acquisitions, and changes in the segment product mix. Patient Care material
costs as a percent of segment net revenues increased to 30.3% for the three
months ended June 30, 2021 from 28.2% for the three months ended June 30, 2020.



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Products & Services material costs increased $2.8 million, or 19.1%, for the three months ended June 30, 2021 compared to the same period in the prior year.

 As a percent of net revenues in the Products & Services segment, material costs
were 39.9% for the three months ended June 30, 2021 as compared to 39.2% in the
same period of 2020.  The increase in cost of materials as a percent of segment
net revenues was primarily due to a change in business volume and product mix
within the segment.


Personnel costs.  Personnel costs for the three months ended June 30, 2021 were
$97.5 million, an increase of $23.7 million, or 32.1%, from $73.8 million for
the same period in the prior year.  Personnel costs by operating segment were as
follows:




                             For the Three Months Ended
                                     June 30,                             Percent
(dollars in thousands)        2021               2020          Change     Change
Patient Care              $      83,198$      63,576$ 19,622       30.9 %
Products & Services              14,351             10,246       4,105       40.1 %
Personnel costs           $      97,549$      73,822$ 23,727       32.1 %




Personnel costs for the Patient Care segment were $83.2 million for the three
months ended June 30, 2021, an increase of $19.6 million, or 30.9%, from $63.6
million in the same period of the prior year.  The increase in Patient Care
personnel costs during the three months ended June 30, 2021 was primarily
related to an increase in salary expense of $20.2 million from the prior period
due to the personnel cost reductions implemented as a result of the COVID-19
pandemic during the three months ended June 30, 2020.  Additionally, benefits
increased $3.0 million, payroll taxes increased $1.4 million, and commissions
increased $0.6 million compared to the three months ended June 30, 2020.  These
increases were offset by a $1.1 million lower vacation accrual and a decrease in
variable compensation and other personnel costs of $4.5 million compared to the
same period in the prior year.



Personnel costs in the Products & Services segment were $14.4 million for the
three months ended June 30, 2021, an increase of $4.1 million compared to the
same period in the prior year.  The increase is primarily related to an increase
in salary expense of $3.9 million due to the personnel cost reductions
implemented as a result of the COVID-19 pandemic during the three months ended
June 30, 2020.  Bonus, commissions, benefits, and other personnel cost increased
$0.2 million for the three months ended June 30, 2021 compared to the same
period in the prior year.



Other operating costs. Other operating costs for the three months ended June 30,
2021 were $32.7 million, an increase of $24.4 million, or 295.3%, from $8.3
million for the same period in the prior year.  Other operating costs increased
by $19.2 million, largely due to the benefit associated with the recognition of
$20.5 million in proceeds from grants under the CARES Act included in Other
operating costs, as discussed in the "Effects of the COVID-19 Pandemic" section,
in the three months ended June 30, 2020.  Additionally, travel and other
expenses increased $4.4 million as a result of cost mitigation efforts in the
prior year period, and bad debt expense increased $0.8 million as compared to
the same period in the prior year.



General and administrative expenses.  General and administrative expenses for
the three months ended June 30, 2021 were $33.2 million, a decrease of $0.4
million, or 1.3%, from the same period in the prior year.  The decrease is the
result of incremental share-based compensation expense of $5.9 million
recognized during the comparative period of 2020 due to the modification of
certain equity awards granted in 2017, and a $1.8 million decrease in incentive
compensation and other personnel-related costs, offset by increases in salary
expense of $4.7 million, professional accounting and legal fees of $0.5 million,
and other expenses of $2.1 million compared to the three months ended June
30,
2020.


Depreciation and amortization.  Depreciation and amortization for the three
months ended June 30, 2021 was $8.0 million, a decrease of $0.9 million, or
9.8%, from the same period in the prior year.  Amortization expense decreased
$0.5 million and depreciation expense decreased $0.4 million when compared to
the same period in the prior year.



Interest expense, net.  Interest expense for the three months ended June 30,
2021 decreased 17.2% to $7.2 million from $8.6 million for the same period
in
the prior year.



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  Table of Contents



Provision (benefit) for income taxes.  The provision for income taxes for the
three months ended June 30, 2021 was $2.6 million, or 20.5% of income before
income taxes, compared to a benefit of $1.0 million, or (3.3)% of income before
income taxes for the three months ended June 30, 2020.  The effective tax rate
for the three months ended June 30, 2021 consisted principally of the 21%
federal statutory tax rate, research and development credits, permanent tax
differences, and a windfall from share-based compensation. The increase in the
effective tax rate for the three months ended June 30, 2021 compared with the
three months ended June 30, 2020 is primarily attributable to 2017 through 2019
research and development tax credits recognized in the three months ended
June 30, 2020, partially offset by a windfall from share-based compensation for
the three months ended June 30, 2021.



We evaluate our deferred tax assets quarterly to determine whether adjustments
to the valuation allowance are appropriate in light of changes in facts or
circumstances, such as changes in expected future pre-tax earnings, tax law,
interactions with taxing authorities, and developments in case law. Our material
assumptions include forecasts of future pre-tax earnings and the nature and
timing of future deductions and income represented by the deferred tax assets
and liabilities, all of which involve the exercise of significant judgment. As
of June 30, 2021, our valuation allowance was approximately $2.1 million.



For the year ending December 31, 2021, we estimate a research and development
tax credit of $3.0 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, 2020,
we recognized research and development tax credits of $2.2 million, net of tax
reserves, related to 2020, and $6.1 million, net of tax reserves, related to
prior years.



Our results of operations for the six months ended June 30, 2021 and 2020 were
as follows (unaudited):




                                                       For the Six Months Ended        Percent
                                                               June 30,               Change (1)
(dollars in thousands)                                   2021             2020       2021 vs 2020
Net revenues                                         $     518,289$  467,173            10.9 %
Material costs                                             164,441        147,213            11.7 %
Personnel costs                                            187,429        163,007            15.0 %
Other operating costs                                       64,181         44,163            45.3 %
General and administrative expenses                         64,118        
65,392           (1.9) %
Depreciation and amortization                               16,005         17,710           (9.6) %
Operating expenses                                         496,174        437,485            13.4 %
Income from operations                                      22,115         29,688          (25.5) %
Interest expense, net                                       14,492         16,906          (14.3) %
Non-service defined benefit plan expense                       334            316             5.7 %
Income before income taxes                                   7,289         12,466          (41.5) %
Provision (benefit) for income taxes                           460        (2,840)              NM
Net income                                           $       6,829$   15,306          (55.4) %




(1) NM - Not Meaningful




During these periods, our operating expenses as a percentage of net revenues
were as follows:




                                        For the Six Months Ended
                                                June 30,
                                          2021             2020
Material costs                               31.7 %           31.5 %
Personnel costs                              36.2 %           34.9 %
Other operating costs                        12.3 %            9.4 %
General and administrative expenses          12.4 %           14.0 %
Depreciation and amortization                 3.1 %            3.8 %
Operating expenses                           95.7 %           93.6 %




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Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

Relevance of Six Months Ended Results to Comparative and Future Periods. As
discussed in "Effects of the COVID-19 Pandemic" above, commencing late in the
first quarter of 2020, our revenues and operating results began to be adversely
affected by the COVID-19 pandemic, a trend that continued throughout 2020 and
into 2021.  The effects of this public health emergency on our revenues and
earnings in the, particularly in 2020, impacted the comparison to our historical
financial results.  As a result, our comparative financial and operational
results when viewed as a whole for the periods impacted by the COVID-19
pandemic, including temporary labor and other cost reduction measures largely in
place during the second and third quarters of 2020, may not be indicative of
future financial and operational performance.  Please refer to the "Effects of
the COVID-19 Pandemic" section above and the "Financial Condition, Liquidity and
Capital Resources" section below for additional forward-looking information
concerning our current expectations regarding the effect of the COVID-19
pandemic on our prospective results and financial condition.



Net revenues.  Net revenues for the six months ended June 30, 2021 were $518.3
million, an increase of $51.1 million, or 10.9%, from $467.2 million for the six
months ended June 30, 2020.  Net revenues by operating segment, after
elimination of intersegment activity, were as follows:




                            For the Six Months Ended
                                    June 30,                          Percent
(dollars in thousands)        2021             2020       Change      Change
Patient Care              $     432,469$  386,042$ 46,427       12.0 %
Products & Services              85,820         81,131       4,689        5.8 %
Net revenues              $     518,289$  467,173$ 51,116       10.9 %




Patient Care net revenues for the six months ended June 30, 2021 were $432.5
million, an increase of $46.4 million, or 12.0%, from $386.0 million for the
same period in the prior year. Same clinic revenues increased $31.0 million for
the six months ended June 30, 2021 compared to the same period in the prior
year, reflecting an increase of 9.9% on a per-day basis.  Net revenues from
acquired clinics and consolidations increased $15.7 million, and revenues from
other services decreased $0.3 million. For the year-to-date, we estimate that
our same clinic net revenues were approximately 97% of the level we reported for
the first six months of 2019, prior to the pandemic.  Given this, we are not
currently operating in a manner that utilizes our capacity at the same levels as
we did prior to the pandemic, and this has been a primary contributing factor to
the decrease in our earnings and margins when compared to that pre-pandemic
period.



Prosthetics constituted approximately 53% of our total Patient Care revenues for
the six months ended June 30, 2021 and 57% for the same period in 2020,
excluding the impact of acquisitions.  Prosthetic revenues for the six months
ended June 30, 2021 were 2.9% higher, on a per-day basis, than the same period
in the prior year, excluding the impact of acquisitions.  Orthotics, shoes,
inserts, and other products increased by 19.2% on a per-day basis compared to
the same comparative prior periods, excluding the impact of acquisitions.
 Revenues in the second quarter of 2020, particularly orthotic revenues, were
adversely affected due to a decline in patient appointment volumes as a result
of the onset of the COVID-19 pandemic, governmental suppression measures
implemented in response to the COVID-19 pandemic, and other factors impacting
our business volumes discussed in the "Effects of the COVID-19 Pandemic"
section.



Products & Services net revenues for the six months ended June 30, 2021 were
$85.8 million, an increase of $4.7 million, or 5.8% from the same period in the
prior year.  This was primarily attributable to an increase of $5.7 million, or
9.8%, in the distribution of O&P componentry in the period to independent
providers stemming primarily from lower volumes in the same period of 2020 due
to the COVID-19 pandemic, as discussed in the "Effects of the COVID-19 Pandemic"
section above, and a $1.0 million, or 4.5%, decrease in net revenues from
therapeutic solutions primarily as a result of historical customer lease
cancellations and discounts, partially offset by lease installations.



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Material costs. Material costs for the six months ended June 30, 2021 were
$164.4 million, an increase of $17.2 million or 11.7%, from the same period in
the prior year.  Total material costs as a percentage of net revenues increased
to 31.7% in the six months ended June 30, 2021 from 31.5% in the six months
ended June 30, 2020 due to changes in our Products & Services segment business
and product mix.  Material costs by operating segment, after elimination of
intersegment activity, were as follows:




                            For the Six Months Ended
                                    June 30,                          Percent
(dollars in thousands)        2021             2020        Change     Change
Patient Care              $     131,639$  114,913$ 16,726       14.6 %
Products & Services              32,802         32,300         502        1.6 %
Material costs            $     164,441$  147,213$ 17,228       11.7 %



Patient Care material costs increased $16.7 million, or 14.6%, for the six
months ended June 30, 2021 compared to the same period in the prior year as a
result of the increase in segment net sales, additional costs as a result of our
acquisitions, and changes in the segment product mix.  Patient Care material
costs as a percent of segment net revenues increased to 30.4% for the six months
ended June 30, 2021 from 29.8% for the six months ended June 30, 2020.



Products & Services material costs increased $0.5 million, or 1.6%, for the six
months ended June 30, 2021 compared to the same period in the prior year.  As a
percent of net revenues in the Products & Services segment, material costs were
38.2% for the six months ended June 30, 2021 as compared to 39.8% in the same
period of 2020.  The decrease in material costs as a percent of segment net
revenues was due to a change in business and product mix within the segment, as
well as cost savings related to certain supply chain initiatives.



Personnel costs.  Personnel costs for the six months ended June 30, 2021 were
$187.4 million, an increase of $24.4 million, or 15.0%, from $163.0 million for
the same period in the prior year.  Personnel costs by operating segment were as
follows:




                            For the Six Months Ended
                                    June 30,                          Percent
(dollars in thousands)        2021             2020         Change    Change
Patient Care              $     158,952$  139,921$ 19,031       13.6 %
Products & Services              28,477         23,086       5,391       23.4 %
Personnel costs           $     187,429$  163,007$ 24,422       15.0 %




Personnel costs for the Patient Care segment were $159.0 million for the six
months ended June 30, 2021, an increase of $19.0 million, or 13.6%, from $139.9
million for the same period in the prior year.  The increase in Patient Care
personnel costs during the six months ended June 30, 2021 was primarily related
to an increase in salary expense of $20.0 million from the prior year period due
to the personnel cost reductions implemented as a result of the COVID-19
pandemic during the six months ended June 30, 2020.  Additionally, benefits
increased $3.7 million, payroll taxes increased $1.2 million, and commissions
increased $0.4 million compared to the six months ended June 30, 2020.  These
increases were offset by a $2.0 million lower vacation accrual and a decrease in
variable compensation and other personnel costs of $4.3 million compared to the
same period in the prior year.



Personnel costs in the Products & Services segment were $28.5 million for the
six months ended June 30, 2021, an increase of $5.4 million compared to the same
period in the prior year.  The increase is primarily related to an increase in
salary expense of $4.3 million due to the personnel cost reductions implemented
as a result of the COVID-19 pandemic during the six months ended June 30, 2020.

Bonus, commissions, and other personnel cost increased $1.1 million for the six months ended June 30, 2021 compared to the same period in the prior year.

Other operating costs. Other operating costs for the six months ended June 30,
2021 were $64.2 million, an increase of $20.0 million, or 45.3%, from $44.2
million for the same period in the prior year.   Other operating costs increased
by $20.6 million, largely due to the benefit associated with the recognition of
$20.5 million in proceeds from grants under the CARES Act included in Other
operating costs,  as discussed in the "Effects of the COVID-19 Pandemic"
section, in the six months ended June 30, 2020.  Additionally rent expense
increased $0.7 million and travel and other expenses increased $0.1 million,
partially offset by a decrease in bad debt expense of $1.4 million, as compared
to the same period in the prior year.



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General and administrative expenses. General and administrative expenses for the
six months ended June 30, 2021 were $64.1 million, a decrease of $1.3 million,
or 1.9%, from the same period in the prior year.  The decrease is the result of
incremental share-based compensation expense of $5.9 million recognized during
the comparative period of 2020 due to the modification of certain equity awards
granted in 2017, a decrease in professional accounting and legal fees of $1.0
million, and a decrease in incentive compensation and other personnel-related
costs of $0.4 million, offset by increases in salary expense of $4.3 million,
and other expenses of $1.7 million compared to the six months ended June 30,
2020.



Depreciation and amortization.  Depreciation and amortization for the six months
ended June 30, 2021 was $16.0 million, a decrease of $1.7 million, or 9.6%, from
the same period in the prior year.  Depreciation expense decreased $1.0 million
and amortization expense decreased $0.7 million when compared to the same period
in the prior year.



Interest expense, net.  Interest expense for the six months ended June 30, 2021
decreased 14.3% to $14.5 million from $16.9 million for the same period in
the
prior year.



Provision (benefit) for income taxes.  The provision for income taxes for the
six months ended June 30, 2021 was $0.5 million, or 6.3% of income before income
taxes, compared to a benefit of $2.8 million, or (22.8)% of income before income
taxes for the six months ended June 30, 2020.  The effective tax rate for the
six months ended June 30, 2021 consisted principally of the 21% federal
statutory tax rate, research and development credits, permanent tax differences,
and a windfall from share-based compensation.  The increase in the effective tax
rate for the six months ended June 30, 2021 compared with the six months ended
June 30, 2020 is primarily attributable to 2017 through 2019 research and
development tax benefits recognized in the six months ended June 30, 2020,
partially offset by a windfall from share-based compensation for the six months
ended June 30, 2021.



We evaluate our deferred tax assets quarterly to determine whether adjustments
to the valuation allowance are appropriate in light of changes in facts or
circumstances, such as changes in expected future pre-tax earnings, tax law,
interactions with taxing authorities, and developments in case law.  Our
material assumptions include forecasts of future pre-tax earnings and the nature
and timing of future deductions and income represented by the deferred tax
assets and liabilities, all of which involve the exercise of significant
judgment.  As of June 30, 2021, our valuation allowance approximated $2.1
million.



For the year ending December 31, 2021, we estimate a research and development
tax credit of $3.0 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, 2020,
we recognized research and development tax credits of $2.2 million, net of tax
reserves, related to 2020, and $6.1 million, net of tax reserves, related to
prior years.


Financial Condition, Liquidity, and Capital Resources



Liquidity



Our cash and cash equivalents, and any amounts we have available for borrowing
under our revolving credit facility, are immediately available to provide cash
for our operations and capital expenditures.  We refer to the sum of these
two
amounts as our "liquidity."


At June 30, 2021, we had total liquidity of $171.1 million, which reflected a
decrease of $68.3 million from the $239.4 million in liquidity we had as of
December 31, 2020.  Our liquidity at June 30, 2021 was comprised of cash and
cash equivalents of $76.2 million and $94.9 million in available borrowing
capacity under our $100.0 million revolving credit facility.  This decrease in
liquidity primarily related to a decrease in cash of $68.4 million, comprised of
net cash used in operations of $9.3 million, cash paid for acquisitions, net of
cash acquired, of $35.3 million, capital expenditures of $14.2 million, and net
cash used in financing activities of $10.9 million.



Our Credit Agreement contains customary representations and warranties, as well
as financial covenants, including that we maintain compliance with certain
leverage and interest coverage ratios.  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 under our revolving credit facility.  Due to
the additional borrowings under our revolving credit facility in March 2020,
which were repaid in full during the third quarter of 2020, and in anticipation
of the potential economic impact of the COVID-19 pandemic, we entered into an
amendment to the Credit Agreement that provided for, among other things,
increases in the allowable level of indebtedness we may carry relative to our
earnings, changes in the definition of EBITDA used to compute certain financial
ratios, certain restrictions regarding investments and payments we made until
the completion of the first quarter of 2021 and increases in the interest costs
associated with borrowings under our revolving credit facility. We were in
compliance with our debt covenants as of June 30, 2021.

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For additional information, please refer to the Liquidity Outlook section below.

Working Capital and Days Sales Outstanding




At June 30, 2021, we had working capital of $93.8 million compared to working
capital of $129.3 million at December 31, 2020.  Our working capital decreased
$35.5 million during the six months ended June 30, 2021 due to a decrease in
current assets of $60.2 million, partially offset by a decrease in current
liabilities of $24.7 million.



The decrease in current assets of $60.2 million was primarily attributable to a
decrease in Cash and cash equivalents of $68.4 million discussed in the
"Liquidity" section above, and a decrease in Accounts receivable, net of $3.6
million.  The decreases were offset by an increase of approximately $7.5 million
in Inventories and $4.3 million in Other current assets.



The decrease in current liabilities of $24.7 million was primarily attributable
to a net decrease in accrued incentive compensation related costs of $21.3
million, primarily due to the payment of $42.9 million in annual incentive
compensation and the employer 401(k) matching contribution made during the first
quarter of the year.  The remainder of the decrease is primarily attributable to
a decrease of $6.7 million in Accounts payable.



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.  Clinics acquired during the past 90-day
period are excluded from the calculation.  As of June 30, 2021, our DSO was 40
days, which compares favorably to a DSO of 45 days as of June 30, 2020.  The
reduction is attributable to improved collections experience due to the targeted
efforts of our centralized revenue cycle management function.



Sources and Uses of Cash for the Six Months Ended June 30, 2021 Compared to June 30, 2020

Net cash flows used in operating activities increased $89.4 million to $9.3 million for the six months ended June 30, 2021 from net cash provided by operating activities of $80.1 million for the six months ended June 30, 2020.

 The most significant increase in cash used in operating activities was due to a
$39.6 million increase in cash used in Accounts receivable, net as revenue
volumes increased.  In addition, in the second quarter of 2020 we recognized
approximately $20.5 million in proceeds from the grants received under the CARES
Act within Net income.  The remaining increase in cash flows used in operations
is largely attributable to cash used in the satisfaction of Accounts payable and
Accrued expenses and other current liabilities of $12.0 million, and changes in
Inventories of $11.0 million.



Cash flows used in investing activities increased $13.5 million to $48.2 million
for the six months ended June 30, 2021, from $34.7 million for the six months
ended June 30, 2020.  The increase in cash used in investing activities was due
to an increase of $18.6 million in cash paid for acquisitions, net of cash
acquired, partially offset by $4.6 million less in capital expenditures.



Cash flows used in financing activities was $10.9 million for the six months
ended June 30, 2021, as compared to cash provided by financing activities of
$10.1 million for the six months ended June 30, 2020.  The decrease in cash used
in financing activities is primarily due to net borrowings of $22.0 million on
our revolving credit facility in 2020, offset by the net effect of activities of
$1.0 million.



Effect of Indebtedness


On March 6, 2018, we entered into a $605.0 million Credit Agreement, which
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.  For additional discussion surrounding the Credit
Agreement, see Note K - "Debt and Other Obligations," in the notes to the
condensed consolidated financial statements contained elsewhere in this report.

Cash paid for interest totaled $13.0 million and $15.0 million for the six months ended June 30, 2021 and 2020, respectively.



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In May 2020, we entered into an amendment to the Credit Agreement (the
"Amendment") that provided for, amongst other things, an increase in the maximum
Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarter ended March 31, 2021;
5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30,
2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day
of each fiscal quarter thereafter.  In addition, the Amendment changed the
definition of EBITDA used in the Net Leverage Ratio and minimum interest
coverage ratio to adjust for declines in net revenue attributable to the
COVID-19 pandemic through the third quarter of 2020.  Borrowings under the
revolving credit facility will bear interest at a variable rate equal to the
greater of LIBOR or 1.00%, plus 3.75%.  In addition, the Amendment contained
certain restrictions and covenants that further limited our ability, and certain
of our subsidiaries' ability, to consolidate or merge, create liens, incur
additional indebtedness, or dispose of assets.  During the fourth quarter of
2020, we recommenced our acquisition of O&P providers as we met certain
Amendment parameters around leverage and liquidity thresholds.



Scheduled maturities of debt as of June 30, 2021 were as follows:




(in thousands)
2021 (remainder of year)                                               $   4,955
2022                                                                      11,661
2023                                                                      11,310
2024                                                                      10,697
2025                                                                     473,011
Thereafter                                                                 2,496

Total debt before unamortized discount and debt issuance costs, net 514,130 Unamortized discount and debt issuance costs, net

(6,628)
Total debt                                                             $ 507,502




Liquidity Outlook



Our Credit Agreement has a term loan facility with $488.6 million in principal
outstanding at June 30, 2021, due in quarterly principal installments equal to
0.25% of the original aggregate principal amount of $505.0 million, with all
remaining outstanding principal due at maturity in March 2025, and, as of June
30, 2021, a revolving credit facility with no borrowings and available borrowing
capacity of $94.9 million that matures in March 2023.



Our primary sources of liquidity are cash and cash equivalents, and available
borrowings under our revolving credit facility. Due to the economic and social
activity impacts outlined in the "Effects of the COVID-19 Pandemic" section
above, we expect the continuing disruption to have an unfavorable impact on our
operations, financial condition, and results of operations. While the duration
and extent of the impact from the COVID-19 pandemic on our operations and
liquidity depends on future developments which cannot be predicted with
certainty, we believe that our existing sources of liquidity, when combined with
our operating cash flows and other measures taken to enhance our liquidity
position and cost structure, will continue to allow us to finance our operations
for the foreseeable future. Please refer to the "Effects of the COVID-19
Pandemic" section above for additional discussion.



As business volumes return to more typical pre-pandemic levels, it is likely
that we will experience a natural corresponding increase in our investment in
working capital.  Additionally, during 2021, we currently estimate that we will
expend $30 million to $35 million for capital expenditures.  We also anticipate
that we will continue to pursue acquisitions and other growth initiatives that
provide value to our shareholders.



With these factors in mind, we continue to anticipate we will generate positive
operating cash flows that, together with our retained cash and revolving credit
facility, will allow us to invest in acquisitions and other growth opportunities
to provide value to our shareholders.  From time to time, we may seek additional
funding through the issuance of debt or equity securities to provide additional
liquidity to fund acquisitions aligned with our strategic priorities and for
other general corporate purposes.



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  Table of Contents



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 $178.0
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 $178.0 billion appropriation. These are payments, rather than loans, to
healthcare providers, and will not need to be repaid.



During 2020, we recognized a total benefit of $24.0 million in our condensed
consolidated statement of operations within Other operating costs Grants from
HHS. 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 recognized the benefit from the Grants within
Other operating costs in our Patient Care segment. In April 2021, we recognized
an additional $0.7 million in proceeds received from grants under the CARES Act.



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 deferred $11.8 million of payroll
taxes within Accrued compensation related costs and Other liabilities in the
condensed consolidated balance sheet as of June 30, 2021.



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.



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  Table of Contents

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Financials (USD)
Sales 2021 1 155 M - -
Net income 2021 40,5 M - -
Net Debt 2021 - - -
P/E ratio 2021 17,7x
Yield 2021 -
Capitalization 706 M 706 M -
Capi. / Sales 2021 0,61x
Capi. / Sales 2022 0,58x
Nbr of Employees 4 700
Free-Float 94,2%
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Managers and Directors
Vinit K. Asar President, Chief Executive Officer & Director
Thomas E. Kiraly Chief Financial Officer & Executive Vice President
Christopher B. Begley Non-Executive Chairman
C. Scott Ranson Chief Information Officer & EVP-Corporate Services
James H. Campbell Chief Clinical Officer & Senior Vice President
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