HANGER, INC. - Annual Report: 2013 (Form 10-K)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the transition period from           

to

Commission File Number 1-10670

HANGER, INC.
(Exact name of registrant as specified in its charter.)

Registrant's phone number, including area code: (512) 777-3800

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $1,139,661,827

As of March 28, 2014 the registrant had 35,136,602 shares of its Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III of the Form 10-K is incorporated by reference from the registrant's definitive proxy statement or amendment hereto which will be filed not later than 120 days after the end of the fiscal year covered by this report.

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INDEX

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PART I

ITEM 1.    BUSINESS

Business Overview

General

The goal of Hanger, Inc. ("Hanger" or the "Company") is to be the world's premier provider of services and products that enhance human physical capabilities. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, Hanger is steeped in 150 years of clinical excellence and innovation. We provide orthotic and prosthetic (O&P) patient care services, distribute O&P devices and components, manage O&P networks and provide therapeutic solutions to the broader post-acute market. We have two operating segments—Patient Care and Products & Services.

Our Patient Care segment is comprised of Hanger Clinic, Cares, Dosteon, other related O&P businesses and our contracting network management business. Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic patient care clinics in the United States and (ii) manage an O&P provider network of approximately 1,150 clinics that coordinates all aspects of O&P patient care for insurance companies. We operate in excess of 740 O&P patient care clinics located in 45 states and the District of Columbia.

Our Products & Services segment is comprised of our distribution business, one of the largest distributors of O&P products in the United States, and our rehabilitative solutions business. Our distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania and Texas allow us to deliver products to the vast majority of our distribution customers in the United States within two business days. Our rehabilitative solutions business develops specialized rehabilitation technologies and is a leading provider of evidence-based clinical programs for post-acute rehabilitation, serving more than 4,200 long-term care facilities and other sub-acute rehabilitation providers throughout the United States. This segment also develops neuromuscular technologies through independent research.

For the years ended December 31, 2013, 2012 and 2011, our net sales were $1,046.4 million, $974.4 million, and $907.8 million, respectively. We recorded net income of $63.6 million, $63.7 million and $54.5 million, for the years ended December 31, 2013, 2012 and 2011, respectively.

We have two operating segments—Patient Care and Products & Services. The following table summarizes the percentage of Net sales derived from each segment:

See Note O to our Consolidated Financial Statements contained herein elsewhere in this Annual Report on Form 10-K for financial information about our segments.

Industry Overview

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

The traditional O&P patient care industry is highly fragmented and is characterized by local, independent O&P businesses, with the majority of these businesses generally having a single facility

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with annual revenues of less than $1.0 million. We do not believe that any single competitor accounts for more than 2% of the country's total estimated O&P patient care clinic revenues.

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

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

We estimate the market for rehabilitation technologies, integrated clinical programs and therapist training in skilled nursing facilities (SNF) to be approximately $240 million annually. We currently provide these products and services to approximately 27% of the estimated 15,700 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs and training within the broader post-acute rehabilitation markets to be approximately $600 million.

Business Strategy

Our goal is to be the partner of choice for services and products that enhance human physical capabilities. Our strategy is to pursue the creation of an integrated rehabilitative solutions model that will have a strong focus on O&P and immediately adjacent categories in order to provide our patients and customers a spectrum of related services that cater to their specific needs. In order to deliver superior long-term returns to our shareholders, we will focus on growth initiatives aligned with the changing healthcare environment, risk reduction strategies centered on product and customer diversification and cost reduction strategies aimed at protecting and enhancing our margins.

Significant changes to the business environment over the next five years, driven primarily by healthcare reform, will focus on lowering healthcare costs while improving patient outcomes and satisfaction. As a result, Hanger will focus on lowering product and service costs, efficiently managing increased patient volume, increasing partnerships with a variety of healthcare providers and investing in process and technologies to measure and report patient outcomes and satisfaction. Aging demographics and chronic disease prevalence will continue to drive demand for both O&P and rehabilitative services.

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Our key growth and risk reduction strategies include:

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continuing to focus on organic O&P growth in our clinics, supplemented with a robust O&P acquisition program;



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developing competency around measuring and improving patient outcome and satisfaction data as a service to our customers;



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pursuing entry points to new markets that are immediately adjacent to our core O&P business;



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developing new channels and customers for the Products & Services segment; and



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enhancing product development, fabrication and commercialization capabilities.

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Our margin enhancement strategies include:

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investing in and developing new processes to improve the productivity of our clinicians and our distribution centers, including the use of scanning technology as well as development of a comprehensive electronic clinic management system;



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increasing harmonization in the delivery of services to provide higher value solutions and drive down costs; this will focus on portfolio optimization, formulary solutions, branding execution and measurable care standards;



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leveraging corporate services such as IT, HR and Finance by enhancing enterprise systems and process infrastructure while increasing levels of service to the organization; and



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balancing the skill set of our labor force to assure that we have the flexibility and efficiency necessary to succeed in the changing healthcare environment, both from a care delivery and cost perspective.

Business Description

Patient Care

Our Patient Care segment is comprised of Hanger Clinic, Cares, Dosteon, other related O&P businesses and our contracting network management business. Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic patient care clinics in the United States and (ii) manage an O&P provider network of approximately 1,150 clinics that coordinates all aspects of O&P patient care for insurance companies. As of December 31, 2013, Hanger Clinic provided O&P patient care services through over 740 patient care clinics and approximately 1,300 clinicians in 45 states and the District of Columbia. Substantially all of our clinicians are certified, or are candidates for formal certification, by the O&P industry certifying boards. A clinician manages each of our patient care clinics. Our patient care clinics also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

In our orthotics business, we design, fabricate, fit and maintain a wide range of custom-made braces and other devices (such as spinal, knee and sports-medicine braces) that provide external support to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints and injuries from sports or other activities. In our prosthetics business, we design, fabricate, fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. O&P devices are increasingly technologically advanced and are custom-designed to add functionality and comfort to patients' lives, shorten the rehabilitation process and lower the cost of rehabilitation. Patients are typically referred to Hanger Clinic by an attending physician who determines a patient's treatment and writes a prescription. Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the design of an orthotic or prosthetic device to meet the patient's needs.

The fitting process often involves several stages to successfully achieve desired functional and cosmetic results. Custom devices are fabricated and fitted by our skilled technicians using plaster castings, measurements and designs made by our clinicians. Frequently, our proprietary Insignia scanning system is used to measure and design devices. The Insignia system scans the patient and produces a very accurate computer generated image of the patient's residual limb, resulting in a faster turnaround for the patient's device and a more professional overall experience. In order to provide timely service to our patients, we employ technical personnel and maintain laboratories at many of our patient care clinics. We have earned a strong reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability and can significantly enhance the rehabilitation process.

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The principal reimbursement sources for our services are:

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

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

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

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U.S. Department of Veterans Affairs.

Government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 40.0%, 40.4%, and 40.0% of our net sales in 2013, 2012, and 2011, respectively. These payors have set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each year based on the Consumer Price Index-Urban ("CPIU") unless Congress acts to change or eliminate the adjustment. The CPIU is adjusted further by an efficiency factor ("the Productivity Adjustment" or "the MFP Adjustment") in order to determine the final rate adjustment each year. The Medicare price increases/(decreases) for 2014, 2013, 2012, 2011, and 2010 were 1.0%, 0.8%, 2.4%, (0.1%), and 0.0%, respectively. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

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

Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market for national and regional insurance companies. We partner with healthcare insurance companies either as a preferred provider or to manage their O&P network of providers. Our network now includes approximately 1,150 O&P provider locations in total, composed of approximately 750 Hanger locations and 400 independent providers. As of December 31, 2013, Linkia had 57 contracts with national and regional insurance companies.

Products & Services

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

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Our distribution business enables us to:

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

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

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improve inventory quality control;

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

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coordinate new product development efforts with key vendor "partners."

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

Through our wholly-owned subsidiary, Accelerated Plus ("ACP"), our rehabilitative solutions business is the nation's leading provider of rehabilitation technologies and integrated clinical programs to rehabilitation providers. Our unique value proposition is to provide our customers with a full-service "total solutions" approach encompassing proven medical technology; evidence based clinical programs, and continuous onsite therapist education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We serve more than 4,200 skilled nursing facilities nationwide, including 21 of the 25 largest national providers.

We also have a product development business specializing in the commercialization of emerging products in the O&P and rehabilitation markets. Working with inventors under licensing and consulting agreements, we commercialize the design, obtain regulatory approvals, develop clinical protocols for the technology, and then introduce the devices to the marketplace through a variety of distribution channels. We currently have two commercial products: the V-Hold, which is active vacuum technology used in lower extremity prosthetic devices, and the WalkAide system, which benefits patients with a condition referred to as foot drop. The V-Hold is primarily sold through our patient care clinics. The WalkAide system is currently reimbursable for Medicare beneficiaries with foot drop due to incomplete spinal cord injuries. Our product development business conducted randomized clinical trials in an effort to gain additional coverage for stroke patients with foot drop, which represents the largest potential patient population. We analyzed the clinical trial data and were accepted for publication in 2013. In February 2014, the trial result findings were published in the peer-reviewed journal Neurorehabilitation and Neural repair, and we submitted these findings to the Centers of Medicare and Medicaid Services (CMS) as part of a request for expanded coverage for the WalkAide. The WalkAide system is sold in the United States through our patient care clinics and SPS. We are also marketing the system internationally through a network of distributors in Europe, the Middle East/Africa, Latin America, Canada, and Asia. Research and development expenses, which were reported in Other operating expenses on our Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2013, 2012 and 2011 were $0.5 million, $0.7 million and $1.2 million, respectively.

Competitive Strengths

We believe the combination of the following competitive strengths will help us to grow our businesses by increasing our net sales, net income and market share:

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Leading market position both in the O&P market place and in the post-acute rehabilitation markets;

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National scale of operations, which better enables us to:

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establish our brand name and generate economies of scale;

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implement best practices throughout the Company;



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contract with national and regional managed care entities;



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utilize shared fabrication facilities;



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identify, test and deploy emerging technology; and



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increase our influence on, and input into, regulatory trends;

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Distribution of, and purchasing power for, O&P components and finished O&P products, which enables us to:

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negotiate greater purchasing discounts from manufacturers and freight providers;



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reduce patient care clinic inventory levels and improve inventory turns through centralized purchasing control;



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quickly access prefabricated and finished O&P products;



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promote the usage by our patient care clinics of clinically appropriate products that also enhance our profit margins;



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engage in co-marketing and O&P product development programs with suppliers; and



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expand the non-Hanger client base of the distribution business in our Products & Services segment

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Marketing of leading-edge technology through our patient care clinics and licensed distributors worldwide;

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Proven ability to rapidly incorporate technological advances in the fitting and fabrication of O&P devices;

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History of successful integration of small and medium-sized O&P business acquisitions, including 124 O&P businesses since 1997, representing over 320 patient care clinics;

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Highly trained clinicians, whom we provide with the highest level of continuing education and training through programs designed to inform them of the latest technological developments in the O&P industry;

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Experienced and committed management team; and

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Successful government relations efforts which enables us to promote and educate legislators on the benefits and cost effectiveness of O&P services.

Suppliers

In our O&P patient care businesses, we purchase prefabricated O&P devices, components and materials from in excess of 375 suppliers across the country that our technicians use to fabricate O&P products. These devices, components and materials are used in the products we offer in our patient care clinics throughout the United States. As of December 31, 2013 only three of our third-party suppliers accounted for more than 5% of our total annual purchases.

Sales and Marketing

In our O&P patient care business, individual clinicians in local patient care clinics historically have conducted our sales and marketing efforts. Due primarily to the fragmented nature of the O&P industry, the success of a particular patient care clinic has been largely a function of its local reputation for quality of care, responsiveness and length of service in the local communities. In our Products & Services segment, we employ dedicated sales professionals that generally are responsible for a geographic region or specific product line.

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In addition, we have developed a centralized marketing department, the goal of which is to augment the efforts of the business segment personnel. In the case of our O&P business, this enables the clinician to focus more of his or her efforts on patient care. Our sales and marketing effort targets the following:

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Marketing and Public Relations.    Our objective is to increase the visibility of the "Hanger" name by building relationships with major referral sources through activities such as co-sponsorship of sporting events and co-branding of products. We also continue to explore creating alliances with certain vendors to market products and services on a nationwide basis.

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Business Development.    We have dedicated personnel in most of our operating regions who are responsible for arranging seminars, clinics and forums to educate and consult with patients and to increase the local community's awareness of the "Hanger" name. These business development managers ("BDMs") also meet with local referral and contract sources to help our clinicians develop new relationships in their markets.

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Insurance Contracts.    Linkia is actively seeking contracts with national insurance companies to manage their network. We also have regional contract managers who negotiate with hospitals and regional payors.

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Other Initiatives.    We are constantly seeking and developing new technology and products to enable us to provide the highest quality patient oriented care. We continue to use our Insignia laser scanning system, which enables our clinicians to create and modify a computer-based scan of patients' limbs to create more comprehensive patient records and a better prosthetic fit. Due to the improvement Insignia offers to our patient care, it has been an effective marketing tool for our clinicians.

Acquisitions

In 2013, we acquired nine O&P companies with approximately $19.2 million in annualized revenue, operating a total of 18 patient care clinics located in Colorado, Florida, Georgia, Kansas, Kentucky, Maryland, Tennessee and Virginia. The aggregate purchase price for these O&P businesses was $14.1 million, including $9.1 million in cash and $5.0 million in unsecured notes and contingent earn-out payments to be paid over the next two years. We have preliminarily allocated the purchase price for 2013 acquisitions to the individual assets acquired and liabilities assumed. Our valuations are subject to adjustment as additional information is obtained; however, these adjustments are not expected to be material. The excess of purchase price over the aggregate fair values was recorded as goodwill. We incurred $0.9 million of one-time legal costs and other related acquisition expenses. Acquisition related expenses are included in Other operating expenses on our Consolidated Statements of Income and Comprehensive Income in the period incurred.

In 2012, we acquired 18 O&P companies with approximately $60.2 million in annualized revenue, operating a total of 59 patient care clinics located in Michigan, Montana, Washington, Alabama, Colorado, Tennessee, Texas, Oregon, Mississippi, Ohio, South Carolina, Maryland, Indiana, Georgia, Louisiana, North Carolina and California. The aggregate purchase price for these O&P businesses was $83.1 million, including $60.1 million in cash and $23.0 million in unsecured notes and contingent earn-out payments to be paid over the next five years. We have allocated the purchase price for 2012 acquisitions to the individual assets acquired and liabilities assumed. The excess of purchase price over the aggregate fair values was recorded as goodwill. We incurred $1.2 million of one-time legal costs and other related acquisition expenses. Acquisition related expenses are included in Other operating expenses on our Consolidated Statements of Income and Comprehensive Income in the period incurred.

Subsequent to December 31, 2013, the Company acquired seven O&P companies for approximately $29 million.

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Competition

The O&P services industry is highly fragmented, consisting mainly of local O&P patient care clinics. The business of providing O&P patient care services is highly competitive in the markets in which we operate. We compete with numerous small independent O&P providers for referrals from physicians, therapists, employers, HMOs, PPOs, hospitals, rehabilitation centers, out-patient clinics and insurance companies on both a local and regional basis. We compete with other patient care service providers, including device manufacturers that have independent sales forces, on the basis of quality and timeliness of patient care, location of patient care clinics and pricing for services.

We also compete with independent O&P providers for the retention and recruitment of qualified clinicians. In some markets, the demand for clinicians exceeds the supply of qualified personnel.

Our Products & Services segment competes with other distributors, manufactures who sell their products directly, and providers of equipment and services on a regional and national basis that have similar sales forces and products. Some of our distributor competitors are also dedicated to the O&P industry, but many others are large medical product distributors who also distribute O&P products, particularly orthotic products. We strive to differentiate our products with additional services such as clinical protocols and continuing education.

Government Regulation

We are subject to a variety of federal, state and local governmental regulations. We make every effort to comply with all applicable regulations through compliance programs, policies and procedures, manuals, and personnel training. Despite these efforts, we cannot guarantee that we will be in absolute compliance with all regulations at all times. Failure to comply with applicable governmental regulations may result in significant penalties, including exclusion from the Medicare and Medicaid programs, which would have a material adverse effect on our business.

Medical Device Regulation.    We distribute products that are subject to regulation as medical devices by the U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug and Cosmetic Act ("FDCA") and accompanying regulations. With the exception of two products which have been cleared for marketing as prescription medical devices under section 510(k) of the FDCA, we believe that the products we distribute, including O&P medical devices, accessories and components, are exempt from the FDA's regulations for pre-market clearance or approval requirements and from requirements relating to quality system regulation (except for certain recordkeeping and complaint handling requirements). We are required to adhere to regulations regarding adverse event reporting, establishment registration, and product listing; and we are subject to inspection by the FDA for compliance with all applicable requirements. Labeling and promotional materials also are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Our medical device operations are subject to inspection by the FDA for compliance with applicable FDA requirements, and the FDA has raised compliance concerns in connection with these investigations. We believe we have addressed these concerns and are in compliance with applicable FDA requirements, but we cannot assure that we will be found to be in compliance at all times. Non-compliance could result in a variety of civil and/or criminal enforcement actions, which could have a material adverse effect on our business and results of operations.

Fraud and Abuse.    Violations of fraud and abuse laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal healthcare programs, including Medicare, Medicaid, U.S. Department of Veterans Affairs health programs and the Department of Defense's TRICARE program, formerly known as CHAMPUS. These laws, which include but are not limited to, antikickback laws, false claims laws, physician self-referral laws, and federal criminal healthcare fraud laws, are discussed in further detail below. We believe our billing practices, operations, and compensation and financial arrangements with referral sources and others

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materially comply with applicable federal and state requirements. However, we cannot assure that such requirements will not be interpreted by a governmental authority in a manner inconsistent with our interpretation and application. The failure to comply, even if inadvertent, with any of these requirements could require us to alter our operations and/or refund payments to the government. Such refunds could be significant and could also lead to the imposition of significant penalties. Even if we successfully defend against any action against us for violation of these laws or regulations, we would likely be forced to incur significant legal expenses and divert our management's attention from the operation of our business. Any of these actions, individually or in the aggregate, could have a material adverse effect on our business and financial results.

Antikickback Laws.    Our operations are subject to federal and state antikickback laws. The federal Antikickback Statute (Section 1128B(b) of the Social Security Act) prohibits persons or entities from knowingly and willfully soliciting, offering, receiving, or paying any remuneration in return for, or to induce, the referral of persons eligible for benefits under a federal healthcare program (including Medicare, Medicaid, the U.S. Department of Veterans Affairs health programs and TRICARE), or the ordering, purchasing, leasing, or arranging for, or the recommendation of purchasing, leasing or ordering of, items or services that may be paid for, in whole or in part, by a federal healthcare program. Courts have held that the statute may be violated when even one purpose (as opposed to a primary or sole purpose) of the remuneration is to induce referrals or other business.

Recognizing that the Antikickback Statute is broad and may technically prohibit beneficial arrangements, the Office of Inspector General of the Department of Health and Human Services has developed regulations addressing certain business arrangements that will offer protection from scrutiny under the Antikickback Statute. These "Safe Harbors" describe activities which may be protected from prosecution under the Antikickback Statute, provided that they meet all of the requirements of the applicable Safe Harbor. For example, the Safe Harbors cover activities such as offering discounts to healthcare providers and contracting with physicians or other individuals or entities that have the potential to refer business to us that would ultimately be billed to a federal healthcare program. Failure to qualify for Safe Harbor protection does not mean that an arrangement is illegal. Rather, the arrangement must be analyzed under the Antikickback Statute to determine whether there is intent to pay or receive remuneration in return for referrals. Conduct and business arrangements that do not fully satisfy one of the Safe Harbors may result in increased scrutiny by government enforcement authorities. In addition, some states have antikickback laws that vary in scope and may apply regardless of whether a federal healthcare program is involved.

Our operations and business arrangements include, for example, discount programs or other financial arrangements with individuals and entities, such as lease arrangements with hospitals and certain participation agreements. Therefore, our operations and business arrangements are required to comply with the antikickback laws. Although our business arrangements and operations may not always satisfy all the criteria of a Safe Harbor, we believe that our operations are in material compliance with federal and state antikickback statutes.

HIPAA Violations.    The Health Insurance Portability and Accountability Act ("HIPAA") provides criminal penalties for, among other offenses: health care fraud; theft or embezzlement with respect to a health care benefit program; false statements in connection with the delivery of or payment for health care benefits, items or services; and obstruction of criminal investigation of health care offenses. Unlike other federal laws, these offenses are not limited to Federal health care programs.

In addition, HIPAA authorizes the imposition of civil monetary penalties where a person offers or pays remuneration to any individual eligible for benefits under a federal healthcare program that such person knows or should know is likely to influence the individual to order or receive covered items or services from a particular provider, clinician or supplier. Excluded from the definition of "remuneration" are incentives given to individuals to promote the delivery of preventive care (excluding

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cash or cash equivalents), incentives of nominal value and certain differentials in or waivers of coinsurance and deductible amounts.

These laws may apply to certain of our operations. As noted above, we have established various types of discount programs and other financial arrangements with individuals and entities. We also bill third-party payors and other entities for items and services provided at our patient care clinics. While we endeavor to ensure that our discount programs and other financial arrangements, and billing practices comply with applicable laws, such programs, arrangements and billing practices could be subject to scrutiny and challenge under HIPAA.

False Claims Laws.    We are also subject to federal and state laws prohibiting individuals or entities from knowingly presenting, or causing to be presented, claims for payment to third-party payors (including Medicare and Medicaid) that are false or fraudulent, are for items or services not provided as claimed, or otherwise contain misleading information. Each of our patient care clinics is responsible for the preparation and submission of reimbursement claims to third-party payors for items and services furnished to patients. In addition, our personnel may, in some instances, provide advice on billing and reimbursement to purchasers of our products. While we endeavor to assure that our billing practices comply with applicable laws, if claims submitted to payors are deemed to be false, fraudulent, or for items or services not provided as claimed, we may face liability for presenting or causing to be presented such claims.

Physician Self-Referral Laws.    We are also subject to federal and state physician self-referral laws. With certain exceptions, the federal Medicare physician self-referral law (the "Stark Law") (Section 1877 of the Social Security Act) prohibits a physician from referring Medicare beneficiaries to an entity for "designated health services"—including prosthetic and orthotic devices and supplies—if the physician or the physician's immediate family member has a financial relationship with the entity. A financial relationship includes both ownership or investment interests and compensation arrangements. An entity that furnishes designated health services pursuant to a prohibited referral may not present or cause to be presented a claim or bill for such designated health services. Penalties for violating the Stark Law include denial of payment for the service, an obligation to refund any payments received, civil monetary penalties, and the possibility of being excluded from the Medicare or Medicaid programs.

With respect to ownership/investment interests, there is an exception under the Stark Law for referrals made to a publicly traded entity in which the physician or the physician's immediate family member has an investment interest if the entity's shares are generally available to the public at the time of the designated health service referral, and are traded on certain exchanges, including the New York Stock Exchange, and the entity had shareholders' equity exceeding $75.0 million for its most recent fiscal year or as an average during the three previous fiscal years. We meet these tests and, therefore, believe that referrals from physicians who have ownership interests in our stock, or whose immediate family members have ownership interests in our stock, should not result in liability under the Stark Law.

With respect to compensation arrangements, there are exceptions under the Stark Law that permit physicians to maintain certain business arrangements, such as personal service contracts and equipment or space leases, with healthcare entities to which they refer patients for designated health services. Unlike the Antikickback Statute, all of the elements of a Stark Law exception must be met in order for the exception to apply. We believe that our compensation arrangements with physicians comply with the Stark Law, either because the physician's relationship fits fully within a Stark Law exception or because the physician does not generate prohibited referrals. If, however, we receive a prohibited referral, our submission of a bill for services rendered pursuant to such a referral could subject us to sanctions under the Stark Law and applicable state self-referral laws. State self-referral laws may extend the prohibitions of the Stark Law to Medicaid beneficiaries.

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Certification and Licensure.    Our clinicians and/or certain operating units may be subject to certification or licensure requirements under the laws of some states. Most states do not require separate licensure for clinicians. However, several states currently require clinicians to be certified by an organization such as the American Board for Certification. The American Board for Certification conducts a certification program for clinicians and an accreditation program for patient care clinics. The minimum requirements for a certified clinician are a college degree, completion of an accredited academic program, one to four years of residency at a patient care clinic under the supervision of a certified clinician and successful completion of certain examinations. Minimum requirements for an accredited patient care clinic include the presence of a certified clinician and specific plant and equipment requirements.

Some states may require licensure or registration of facilities that dispense or distribute prescription medical devices within or from outside of the state. In addition, some states may require a license or registration to provide services such as those offered by Linkia. We are in the process of meeting these requirements.

While we endeavor to comply with all state licensure requirements, we cannot assure that we will be in compliance at all times with these requirements. Failure to comply with state licensure requirements could result in suspension or termination of licensure, civil penalties, termination of our Medicare and Medicaid agreements, and repayment of amounts received from Medicare and Medicaid for services and supplies furnished by an unlicensed individual or entity.

Confidentiality and Privacy Laws.    The Administrative Simplification Provisions of HIPAA, and their implementing regulations, set forth privacy standards and implementation specifications concerning the use and disclosure of individually identifiable health information (referred to as "protected health information") by health plans, healthcare clearinghouses and healthcare providers that transmit health information electronically in connection with certain standard transactions ("Covered Entities"). HIPAA further requires Covered Entities to protect the confidentiality of health information by meeting certain security standards and implementation specifications. In addition, under HIPAA, Covered Entities that electronically transmit certain administrative and financial transactions must utilize standardized formats and data elements ("the transactions/code sets standards"). HIPAA imposes civil monetary penalties for non-compliance, and, with respect to knowing violations of the privacy standards, or violations of such standards committed under false pretenses or with the intent to sell, transfer or use individually identifiable health information for commercial advantage, criminal penalties. We believe that we are subject to the Administrative Simplification Provisions of HIPAA and are taking steps to meet applicable standards and implementation specifications. The new requirements have had a significant effect on the manner in which we handle health data and communicate with payors. Our billing system, OPS, was designed to meet these requirements.

In addition, state confidentiality and privacy laws may impose civil and/or criminal penalties for certain unauthorized or other uses or disclosures of individually identifiable health information. We are also subject to these laws. While we endeavor to assure that our operations comply with applicable laws governing the confidentiality and privacy of health information, we could face liability in the event of a use or disclosure of health information in violation of one or more of these laws.

Personnel and Training

None of our employees are subject to a collective-bargaining agreement. We believe that we have satisfactory relationships with our employees and strive to maintain these relationships by offering competitive benefit packages, training programs and opportunities for advancement. During the year ended December 31, 2013, we had an average of approximately 4,800 employees of which approximately 1,300 were clinicians.

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We provide a series of ongoing training programs to improve the professional knowledge of our clinicians. For example, we have an annual Education Fair that is attended by over 850 of our clinicians and consists of lectures and seminars covering many clinical topics including the latest technology and process improvements, business courses and other courses that allow the clinicians to fulfill their ongoing continuing education requirements.

Insurance

We currently maintain insurance coverage for professional liability, product liability, general liability, workers' compensation, executive protection and property damage and other lines of insurance. Our general liability insurance coverage is $1.0 million per incident, with a $50.0 million umbrella insurance policy. The coverage for professional liability, product liability and workers' compensation is self-insured with both individual specific claim and aggregate stop-loss policies to protect us from either significant individual claims or dramatic changes in our loss experience. Based on our experience and prevailing industry practices, we believe our coverage is adequate as to risks and amount.

Special Note On Forward-Looking Statements

Some of the statements contained in this report discuss our plans and strategies for our business or make other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including the following:

•

the demand for our services and products;

•

changes in federal Medicare reimbursement levels and other governmental policies;

•

the impact of federal healthcare reform initiatives, including but not limited to the Patient Protection and Affordable Care Act, on healthcare delivery and payment in the United States;

•

our ability to integrate effectively the operations of businesses that we have acquired and plan to acquire in the future;

•

our ability to enter into regional contracts;

•

our ability to attract and retain qualified orthotic and prosthetic clinicians;

•

our indebtedness, the impact of changes in prevailing interest rates and the availability of favorable terms of equity and debt financing to fund the anticipated growth of our business;

•

changes in, or failure to comply with, federal, state and/or local governmental regulations; and

•

liabilities relating to orthotic and prosthetic services and products and other claims asserted against us.

For a discussion of important risk factors affecting our business, including factors that could cause actual results to differ materially from results referred to in the forward-looking statements, see "Item 1A—Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. We do not have any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 1A.    RISK FACTORS

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

We derived 40.0%, 40.4% and 40.0% of our net sales for the years ended December 31, 2013, 2012 and 2011, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Department of Veterans Affairs. Each of these programs set maximum reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to reimbursement reductions by these organizations. Reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. For example, a number of states have reduced their Medicaid reimbursement rates for O&P services and products, or have reduced Medicaid eligibility, and others are in the process of reviewing Medicaid reimbursement policies generally, including for prosthetic and orthotic devices. Additionally, Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. Medicare prices are adjusted each year based on the Consumer Price Index—Urban ("CPIU") unless Congress acts to change or eliminate the adjustment. The Medicare price increases/(decreases) for 2014, 2013, 2012, 2011 and 2010 were 1.0%, 0.8%, 2.4%, (0.1%) and 0.0%, respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 ("PPACA") changed the Medicare inflation factors applicable to O&P (and other) suppliers. The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-month period ending with June of the previous year. Section 3401(m) of PPACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the 12-month period ending with June of the previous year is to be adjusted by the annual change in economy-wide private nonfarm business multifactory productivity ("the MFP Adjustment"). The MFP Adjustment may result in the percentage increase being less than zero for a year, and may result in payment rates for a year being less than such payment rates for the preceding year. CMS has not yet issued a final rule implementing these adjustments for years beyond 2011, but has indicated in a proposed rule that it will do so as part of the annual program instructions to the O&P fee schedule updates. See 75 Fed. Reg. 40040, 40122, et seq. (July 13, 2010). If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected.

The Budget Control Act of 2011 required, among other things, mandatory across-the-board reductions in Federal spending, or "sequestration." While delayed by the American Taxpayer Relief Act of 2012, President Obama issued a sequestration order on March 1, 2013. For services provided on or after April 1, 2013, Medicare fee-for-service claim payments, including those for DMEPOS (durable medical equipment (DME), prosthetics, orthotics and supplies) as well as claims under the DME Competitive Bidding Program, are reduced by 2 percent. This is a claims payment adjustment with limited impact on the Company (approximately $2.8 million through December 31, 2013) ; no permanent reductions in the Medicare DMEPOS fee schedule have been made as a result of sequestration, therefore reimbursements from Medicaid, the VA and commercial payers who use the Medicare fee schedule as a basis for reimbursement have not been impacted.

In addition to the risks to our Patient Care segment businesses discussed above, changes in government reimbursement levels could also adversely affect the net sales, cash flows and profitability of one of the business in our Product & Services segment business. In particular, a significant majority of sales at ACP involve devices and related services provided to skilled nursing facilities (SNFs) and similar

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businesses. Reductions in government reimbursement levels to SNFs could cause such SNFs to reduce or cancel their use of ACP's devices and modalities, negatively impacting net sales, cash flows and profitability. For example in July 2011 CMS announced an across the board reduction of approximately 10% in SNF reimbursement levels, negatively impacting the demand for ACP's devices and treatment modalities. We cannot predict whether any other modifications to reimbursement levels will be implemented, or if implemented what form any modifications might take.

Changes in payor reimbursements could negatively affect our net sales volume.

Recent years have seen a consolidation of healthcare companies coupled with certain payors terminating contracts, imposing caps or reducing reimbursement for O&P products. Additionally, employers are increasingly pushing healthcare costs down to their employees. These trends could result in decreased O&P revenue.

Healthcare reform in the United States may adversely affect our net sales, cash flows and profitability.

Various healthcare reform measures have been enacted into law in recent years, including the Patient Protection and Affordable Care Act adopted in March of 2010 ("PPACA"). These reforms are significant and over time could significantly change the way healthcare, including O&P services and products, are obtained and paid for in the United States. These changes are designed to increase access to and reduce the cost of healthcare through, among other things: expanded access to Medicaid; incentives to encourage shared savings programs, such as accountable care organizations; other alternative payment methodologies for Medicare reimbursement; and mandated private insurance for most non-indigent individuals under the age of 65. The reforms also include stronger enforcement tools and increased penalties. These changes could have a dramatic impact on the healthcare market generally, including the O&P services and products markets. It remains unclear, however, the ultimate impact the reforms will have since they will not be fully implemented for a number of years, and the reforms have been, and could be, further modified, delayed or repealed prior to full implementation. Nevertheless, the reforms, when implemented, may have an adverse affect our net sales, cash flows and profitability.

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

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

•

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

•

imposition of fines, penalties and other sanctions on us;

•

loss of our right to participate in various federal programs;

•

damage to our reputation in various markets; or

•

material and/or adverse effects on our business, financial condition and results of operations.

In recent years we have seen a significant increase in Medicare audits, including Recover Audit Contractor or RAC audits, Comprehensive/Error Rate Testing or CERT audits and Medicare Administrative Contractor (MAC) prepayment audits. At December 31, 2013, 2012 and 2011 we had approximately $15.2 million, $5.4 million and an immaterial amount of claims subject to pending Medicare audits, respectively. Through December 31, 2013, our success rate on these audits at final adjudication (the Administrative Law Judge hearing) was approximately 90%. Nevertheless, Medicare

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audits could have a material and adverse effect on our business financial condition and result of operations, particularly if our success rate at final adjudication were to decline.

We are subject to numerous federal, state and local governmental regulations, noncompliance with which could result in significant penalties that could have a material adverse effect on our business.

A failure by us to comply with the numerous federal, state and/or local healthcare and other governmental regulations to which we are subject, including the regulations discussed under "Government Regulation" in Item 1 above, could result in significant penalties and adverse consequences, including exclusion from the Medicare and Medicaid programs, which could have a material adverse effect on our business.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.

In connection with our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013, we concluded there were certain material weaknesses in internal control over financial reporting. Specifically, we did not design and maintain effective controls over i) raw materials to ensure items are priced using the first in first out method resulting from the identification of inaccurate prices utilized in the valuation of our inventory quantities on hand based on physical observation; ii) the accuracy of the stage of completion in valuing work-in-process inventory resulting from the identification of data input errors from our physical inventory observation used in the valuation of our work-in-process inventory; and iii) certain key assumptions used in the valuation of work-in-process inventory resulting from the identification of inaccurate or imprecise data used in the development of these assumptions. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected or corrected on a timely basis.

We are working to remediate the material weaknesses. We have begun taking steps and plan to take additional measures to remediate the underlying causes of the material weaknesses, primarily through the continued development and implementation of formal policies, improved processes and documented procedures, as well as the hiring of additional finance personnel. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. Although we plan to complete this remediation as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating our material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, then there exists a risk that our consolidated financial statements may contain material misstatements that are unknown to us at that time, and such misstatements could require us to restate our financial results.

Our management or our independent registered public accounting firm may identify other material weaknesses in our internal control over financial reporting in the future. The existence of a material weakness in our internal control over financial reporting may result in current and potential stockholders losing confidence in our financial reporting, which could negatively impact the market price of our common stock.

In addition, the existence of material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our inability to timely file periodic reports under the Exchange Act could result in the SEC revoking the registration of our common stock, the New York Stock Exchange delisting our

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common stock, or a default or an event of default under our credit and other debt agreements. Any of these events could have a material adverse effect on the market price of our common stock or on our business, financial condition and results of operations.

The implementation of Janus, our new comprehensive clinic management system, could interfere with our patient care clinic operations and adversely affect our business, financial condition and results of operations.

We depend on our information technology infrastructure to achieve our business objectives. We are currently in the process of implementing Janus, our new comprehensive clinic management system in our patient care clinics. We are in the process of rolling out Janus, and expect the rollout to continue through 2016. Any disruptions, delays or complications in the implementation process, or any deficiencies in the design, operation or expected performance of this new system, could result in higher than expected implementation costs, the diversion of management's and other employee's attention from the day-to-day operations of our patient care clinics, including scheduling patient visits, and other disruptions to our patient care business. Any of these consequences could have an adverse impact on our revenue or costs and could materially and adversely affect our business, financial condition and results of operations.

If the non-competition agreements we have with our key executive officers and key clinicians were found by a court to be unenforceable, we could experience increased competition resulting in a decrease in our net sales.

We generally enter into employment agreements with our executive officers and a significant number of our clinicians which contain non-compete and other provisions. The laws of each state differ concerning the enforceability of non-competition agreements. State courts will examine all of the facts and circumstances at the time a party seeks to enforce a non-compete covenant. We cannot predict with certainty whether or not a court will enforce a non-compete covenant in any given situation based on the facts and circumstances at that time. If one or more of our key executive officers and/or a significant number of our clinicians were to leave us and the courts refused to enforce the non-compete covenant, we might be subject to increased competition, which could materially and adversely affect our business, financial condition and results of operations.

Our Website

Our website is http://www.hanger.com. We make available free of charge, on or through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings (i.e. Forms 3, 4 and 5), proxy statements, and other documents as required by applicable law and regulations as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission at http://www.sec.gov. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 (1-800-732-0330). The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website also contains the charters of the Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee and Quality and Technology Committee of our Board of Directors; our Code of Business Conduct and Ethics for Directors and Employees, which includes our principal executive, financial and accounting officers; as well as our Corporate Governance Guidelines. Information contained on our website is not part of this report.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.    PROPERTIES

As of December 31, 2013, we operated over 740 patient care clinics and facilities in 45 states and the District of Columbia. We own 14 buildings that house a patient care clinic. The remaining clinics are occupied under leases expiring between 2014 and 2023. We believe our leased and owned facilities are adequate for carrying out our current and anticipated future O&P operations. We believe we will be able to renew such leases as they expire or find comparable or alternative space on commercially suitable terms.

The following table sets forth the number of our patient care clinics located in each state as of December 31, 2013:

Other real estate holdings include our lease distribution facilities in Texas, California, Georgia, Florida, Illinois & Pennsylvania, our corporate headquarters in Austin, Texas, and the headquarters for our rehabilitative solutions in Reno, Nevada. Substantially all of our owned properties are pledged to collateralize bank indebtedness. See Note G to our Consolidated Financial Statements for further information regarding our outstanding debt.

ITEM 3.    LEGAL PROCEEDINGS

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

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

On May 20, 2013, the Staff of the SEC's Division of Enforcement informed us that it was conducting an investigation of the Company and made a request for a voluntary production of documents and

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information concerning our calculations of bad debt expense and allowance for doubtful accounts. We are cooperating fully with the SEC Staff.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding current executive officers of the Company and certain of its subsidiaries:

Vinit K. Asar has been our Chief Executive Officer and President since May 2012, and served as our President and Chief Operating Officer from September 2011 to May 2012. Mr. Asar also served as our Executive Vice President and Chief Growth Officer from December 2008 to September 2011. Mr. Asar came to Hanger from the Medical Device & Diagnostic sector at Johnson and Johnson, having worked at the Ethicon, Ethicon-Endo-Surgery, Cordis and Biosense Webster franchises. During his 18 year career at Johnson and Johnson, Mr. Asar held various roles of increasing responsibility in Finance, Product Development, Manufacturing, and Marketing and Sales in the US and in Europe. Prior to joining Hanger, Mr. Asar was the Worldwide Vice-President at Biosense Webster, the Electrophysiology division of Johnson and Johnson, responsible for the Worldwide Sales, Marketing and Services organizations. Mr. Asar has a B.S.B.A from Aquinas College and an M.B.A. from Lehigh University.

Richmond L. Taylor is our Executive Vice President of Hanger Inc, and the President and Chief Operating Officer of Hanger Prosthetics & Orthotics, Inc. and HPO, Inc., our two wholly-owned subsidiaries which operate all of our patient care clinics. Previously, Mr. Taylor served as the Chief Operating Officer of NovaCare O&P from June 1996 until July 1999, and held the positions of Region Vice-President and Region President of NovaCare O&P for the West Region from 1989 to June 1996. Prior to joining NovaCare O&P, Mr. Taylor spent 20 years in the healthcare industry in a variety of management positions including Regional Manager at American Hospital Supply Corporation, Vice President of Operations at Medtech, Vice President of Sales at Foster Medical Corporation and Vice President of Sales at Integrated Medical Systems.

George E. McHenry has been our Executive Vice President and Chief Financial Officer since October 2001 and our Secretary since 2004. From 1987 until he joined us in October 2001, Mr. McHenry served as Executive Vice President, Chief Financial Officer and Secretary of U.S. Vision, Inc., an optical company with 600 locations in 47 states. Prior to joining U.S. Vision, Inc., he was employed principally as a Senior Manager by the firms of Touche Ross & Co. (now Deloitte & Touche) and Main Hurdman (now KPMG LLP) from 1974 to 1987. Mr. McHenry is a Certified Public Accountant and received a Bachelor of Science degree in accounting from St. Joseph's University.

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Russell G. Allen joined us in March of 2011 as our Vice President and Treasurer. Mr. Allen joined Hanger from Lance, Inc., a publicly traded consumer products company located in Charlotte, North Carolina, where he served in a variety of positions from 2003 to 2011, including Vice President of Treasury and Planning, and Director of Financial Planning & Analysis and Investor Relations. From 1995 to 2002 Mr. Allen worked at Ford Motor Company in Dearborn, Michigan, where he held various roles of increasing responsibility as part of Ford's Finance Management Development Program. Mr. Allen is a Certified Public Accountant and received a Bachelor of Business Administration from Southern Arkansas University and a Masters of Business Administration from The University of Illinois.

Thomas E. Hartman has been our Vice President & General Counsel since June 2009. Mr. Hartman joined Hanger from Foley & Lardner, LLP where he was a partner in Foley's Business Law Department. Mr. Hartman's practice at Foley was focused on securities transactions, securities law compliance, mergers and acquisitions, and corporate governance. Prior to joining Foley in 1995, Mr. Hartman was a business law associate at Jones Day. Mr. Hartman received his J.D. from the University of Wisconsin in Madison, and a Bachelor of Science in Engineering (Industrial & Operations Engineering) from the University of Michigan in Ann Arbor.

Rebecca J. Hast has been President of Linkia, LLC since November 2005. Prior to joining Linkia, Ms. Hast was with United Health Group Incorporated, a healthcare company that offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services. Ms. Hast held a variety of positions from 1999 to 2004, leaving United Healthgroup as Senior Vice President, Account Development for the Dental Benefit Providers, a wholly owned subsidiary of United Healthgroup's Specialty Services Division (now Optum). Prior to joining United Healthgroup, Ms. Hast held management and leadership positions with Magellan Health Services, Inc., a specialty healthcare management company, and other healthcare insurance and services providers. Ms. Hast holds a Bachelor of Science degree from University of Pittsburgh.

Walt A. Meffert, Jr. joined Hanger as Vice President and Chief Information Officer in April 2010. Mr. Meffert was previously the Senior Vice President & Chief Technology Officer for Apria Healthcare from December 2008. Concurrently Mr. Meffert also served as Senior Vice President & Chief Information Officer for Coram, Inc. since November 2005. As the CTO/CIO at Apria Healthcare and Coram, Inc. he directed all production infrastructures and business applications supporting over 700 branches and five main business lines in addition to providing IT oversight and alignment for Apria's Global IT service delivery. Before joining Apria Healthcare/Coram Inc., Mr. Meffert Served as Senior Vice President & Chief Information Officer for NeighborCare. Mr. Meffert served as Chief Technology Officer for Register.com, a leading provider of global domain name registration and Internet services from November 2001 to April 2004; Vice President of Enterprise Application Engineering at the creative software development company, Macromedia from October 1999 to November 2001; Director of Electronic Commerce—Internet Center at Bell Atlantic from January 1998 to October 1999; various leadership positions at The General Electric Company including the leading of the Internet Consulting and Systems Integration teams from 1990 to 1998. Mr. Meffert is a graduate of the renowned GE Edison Engineer program. Mr. Meffert holds a Bachelor of Science degree in Computer Science from the University of Maryland, Baltimore County and a Master of Science in Computer Science degree from John Hopkins University.

Andrew C. Morton joined us as our Vice President Human Resources in June 2010. Prior to joining Hanger, Mr. Morton worked for Freescale Semiconductor since 2006 in two capacities; first as Vice President Talent and Corporate Services, and then Vice President Human Resources Supply Chain. From 1992 to 2006 Mr. Morton worked at IBM and held various global field and corporate HR executive roles of increasing responsibility across its software, hardware and sales businesses. Mr. Morton has a B.S. degree in Finance from the University of Colorado at Boulder, and an MBA

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from Syracuse University. In between degrees he worked for Baxter Healthcare in Finance roles from 1988 to 1989.

Kenneth W. Wilson has been President and Chief Operating Officer of Southern Prosthetic Supply (SPS) since September 2011. Mr. Wilson was previously employed by Cardinal Health Inc., the largest distributor of pharmaceuticals and medical products in the United States, for 22 years, serving as Senior Vice President/General Manager of its Ambulatory Care business from 2008 until September 2011, as Vice President/General Manager of its Onsite business from 2006 to 2008, and as Senior Vice President—Group Purchasing Accounts from 2004 to 2006. Prior to joining Cardinal Health, he worked at Allegiance Healthcare Corporation, a manufacturer of medical products, including surgical apparel and drapes, surgical instruments and respiratory care products. Allegiance Healthcare was a 1997 spin-off of Baxter Healthcare Corporation that was acquired by Cardinal Health in 1999. Mr. Wilson served Allegiance Healthcare as Head of Allegiance National Account and Health Systems from 2002 to 2004, and as Vice President—Health Systems from 1997-2002. From 1988 to 1997, Mr. Wilson was with Baxter Healthcare, a manufacturer of a wide variety of medical products across three divisions, including drugs and vaccines, dialysis equipment and intravenous (IV) supplies. Mr. Wilson left Baxter in 1997 as a Regional Director in Encinitas, California. Prior to joining Baxter, he also worked for PepsiCo, USA and Proctor & Gamble in a variety of sales roles. Mr. Wilson received his Bachelor of Science degree in Economics and Social Science from Davidson College in 1984. He has been married to wife Candace since 1989 and has 5 children.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed and traded on the New York Stock Exchange since December 15, 1998, under the symbol "HGR." The following table sets forth the high and low closing sale prices for the common stock for the periods indicated as reported on the New York Stock Exchange:

Holders

At March 28, 2014 there were approximately 212 holders of record of our 35,136,602 shares of outstanding common stock.

Dividend Policy

We have never paid cash dividends on our common stock and intend to continue this policy for the foreseeable future. We plan to retain earnings for use in our business. The terms of our credit agreements and certain other agreements limit the payment of dividends on our common stock and such agreements are expected to continue to limit the payment of dividends in the future.

Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent on our results of operations, financial condition, contractual and legal restrictions and any other factors deemed to be relevant.

Equity Compensation Plans

The following table sets forth information as of December 31, 2013 regarding our equity compensation plans:

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Sales of Unregistered Securities

During the year ended December 31, 2013, we sold no securities that were unregistered under the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

During the year ended December 31, 2013, we made no purchases of our common stock.

STOCK PERFORMANCE CHART

The annual changes in the cumulative total shareholder return on Hanger's common stock for the five-year period shown in the graph below are based on the assumption that $100 had been invested in Hanger common stock, the Russell 2000 Stock Index, the Standard & Poor's 500 Stock Index, the Standard & Poor's Small Cap 600 Stock Index, and the Standard & Poor's 500 Health Care Services Index on December 31, 2008, and that all quarterly dividends were reinvested at the average of the closing stock prices at the beginning and end of the quarter. The total cumulative dollar returns shown on the graph represent returns that such investments would have had on December 31, 2013.

The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (the "Exchange Act") or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
As of December 31, 2013

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this annual report on Form 10-K. The Consolidated Statement of Income and Comprehensive Income and Balance Sheet data for all periods presented is derived from the audited consolidated financial statements included elsewhere in this annual report on Form 10-K or in annual reports on Form 10-K for prior years on file with the Commission.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our results of operations and financial condition for the periods described below. This discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K. Our discussion of our results of operations and financial condition includes various forward-looking statements about, among other things, our markets, the demand for our products and services and our future results. These statements are based on our current expectations, which are inherently subject to risks and uncertainties. Our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements.

Overview

The goal of Hanger, Inc. ("Hanger" or the "Company") is to be the world's premier provider of services and products that enhance human physical capabilities. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, Hanger is steeped in 150 years of clinical excellence and innovation. We provide orthotic and prosthetic (O&P) patient care services, distribute O&P devices and components, manage O&P networks, and provide rehabilitative solutions to the broader post-acute market. We have two segments, Patient Care and Products & Services, which are summarized below. For further descriptions of our segments, see the Business Description section of Item 1of this Form 10-K.

Our Patient Care segment is comprised of Hanger Clinic, Cares, Dosteon, other O&P businesses and our contracting network management business. Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic patient care clinics in the United States and (ii) manage an O&P provider network that coordinates all aspects of O&P patient care for insurance companies. We operate in excess of 740 O&P patient care clinics located in 45 states and the District of Columbia.

Our Products & Services segment is comprised of our distribution business, one of the largest distributors of O&P products in the United States, and our rehabilitative solutions business. Our distribution business facilities in California, Florida, Georgia, Illinois, Pennsylvania and Texas allow us to deliver products to the vast majority of our distribution customers in the United States within two business days. Our rehabilitative solutions business develops specialized rehabilitation technologies and is a leading provider of evidence-based clinical programs for post-acute rehabilitation, serving more

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than 4,200 long-term care facilities and other sub-acute rehabilitation providers throughout the United States. This segment also develops neuromuscular technologies through independent research.

Results and Outlook

Net sales for the year ended December 31, 2013 increased by $72.0 million, or 7.4%, to $1,046.4 million from $974.4 million for the year ended December 31, 2012. The sales increase was principally the result of a $18.8 million, or 2.4%, increase in same center sales; a $51.2 million increase from acquired entities; and a $2.0 million, or 1.2%, increase in sales in the Products & Services segment.

Income from operations and Net income were $133.9 million and $63.6 million, respectively, in 2013 compared to $129.3 million and $63.7 million, respectively, in the prior year. Our cash flow from operations increased $5.0 million to $86.3 million in 2013, from $81.3 million in 2012, primarily from an increase in noncash charges on the income statement due both to the refinance and an increase in depreciation. As of December 31, 2013, $247.2 million, or 52.8%, of our total debt of $468.3 million was subject to variable interest rates. We had total liquidity of $181.3 million, comprised of $9.9 million of cash and $171.4 million available under our Revolving Credit Facility, net of $3.6 million in letters of credit at December 31, 2013. We believe that we have sufficient liquidity to conduct our normal operations and fund our acquisition plans through 2014.

We expect 2014 revenues of between $1.110 and $1.130 billion, resulting from 3% to 5% same center sales growth in our Patient Care Segment, and a slight decline in our Products & Services Segment sales. The decline in Products & Services Segment sales reflects the carry-over impact of a large one-time sale during 2013, continued acquisition of its O&P distribution customers by the Patient Care Segment, and increasing pressure on independent O&P customers resulting from continuing Medicare audits. We anticipate adjusted diluted earnings per share to rise 8% to 13% to between $2.10 and $2.20, excluding approximately $0.05 for training and implementation costs of Janus. The earnings growth includes an $11 million, or $0.19 per diluted share, investment the company is making in our back-office operations, including centralization of our billing and processing activities and improvements in our finance, accounting and information technology functions. Operational improvements and costs savings related to these investments are expected to be realized beginning in late 2014. We also are making investments in our financial reporting group, imbedding a finance group in our clinics and have allocated funds to develop an ERP strategy for the Company in 2014. Despite these significant investments, we anticipate maintaining our adjusted operating margins at a level similar to the prior year and generating cash flow from operations of between $90 and $100 million. We also plan to invest between $40 and $50 million in capital additions during the year. In the month of January 2014, we acquired O&P practices with annualized sales of approximately $20 million. In view of this level of acquisitions in January, our goal in 2014 is to acquire a total of $35 to $45 million of O&P annualized revenue.

Significant Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. 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. Our accounting policies are stated in Note B to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies are critical to

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understanding our results of operations and the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

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Revenue Recognition:    Revenues in the Company's Patient Care segment are derived from the sale of O&P devices and the maintenance and repair of existing devices. Revenues from maintenance and repairs are recognized when the service is provided. Revenues from the sale of devices are recorded when the patient has accepted and received the device and are recorded net of all known and estimated future contractual adjustments and discounts. Contractual adjustments and discounts are recorded as contra-revenue within net sales on the Consolidated Statement of Income and Comprehensive Income. Medicare and Medicaid regulations and the various agreements we have with other third-party payors under which these contractual adjustments and discounts are calculated are complex and are subject to interpretation. Therefore, the particular devices and related services authorized and provided, and the related reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and pay schedules, and contract renegotiations, occur frequently, necessitating regular review and assessment of the estimation process by management.

Reserves for future contractual adjustments and discounts are estimated utilizing historical trends for such adjustments and are monitored monthly. As of December 31, 2013 and 2012, the Company estimated future contractual adjustments and discounts of $20.6 million and $13.9 million, respectively. The increase in the estimate is primarily related to both revenue growth resulting from both same clinic sales growth and clinic acquisitions, and from changes in collection trends. Individual patients are generally responsible for deductibles and/or co-payments. The reserve for future contractual adjustments and discounts is reflected as a reduction of Net accounts receivable on the Company's Consolidated Balance Sheet.

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

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Net Accounts Receivable:    The Company reports accounts receivable at estimated net realizable amounts generated for products delivered and services rendered from federal, state, managed care health plans, commercial insurance companies and patients. Collections of these accounts receivable are the Company's primary source of cash and are critical to the Company's operating performance. The Company estimates uncollectible patient accounts primarily based upon its experience in historical collections from individual patients. Bad debt expense is reported within other operating expenses within the Consolidated Statement of Income and Comprehensive Income. At December 31, 2013 and 2012, net accounts receivable reflected an allowance for doubtful accounts of $10.0 million and $7.5 million, respectively.

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

In 2012, CMS began using recovery audit contractors ("RACs") to detect Medicare overpayments related to prosthetic devices not identified through existing claims review mechanisms. The RAC program relies on private companies to examine Medicare claims filed by healthcare providers. RACs perform post-delivery audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old. Claims review strategies used by RACs generally include a review of high dollar claims, including the fitting, assembling, and delivery of prosthetic devices. RACs are paid a contingency fee based on the overpayments they identify and collect. Claims identified as overpayments by RACs are subject to the Medicare appeals process. We expect that the RACs will continue to look closely at claims submitted in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict the results of any future RAC audits.

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Inventories:    Patient Care—Inventories at Hanger Clinics, Dosteon and Cares, which consists of raw materials, work-in-process and finished goods, amounted to $109.2 million and $98.3 million as of December 31, 2013 and 2012, respectively. Inventories in Hanger's Clinics, which amounted to $99.0 million and $86.9 million at December 31, 2013 and 2012, respectively, consist principally of raw materials and work-in-process inventory valued based on the gross profit method, which approximates lower of cost or market using the first-in first-out method. Inventories in the Dosteon business amounted to $8.9 million and $9.7 million at December 31, 2013 and 2012, respectively, consists principally of raw materials. As of December 31, 2013, the Dosteon inventories were valued at the lower of cost or market using the first-in first-out method based on a physical count as of December 31, 2013. As of December, 31, 2012, the Dosteon inventories were valued based on the gross profit method, which approximated lower of cost or market using the first-in first-out method.

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Inventories in the Cares business amounted to $1.3 million and $1.7 million as of December 31, 2013 and 2012 respectively, consists principally of finished goods and are valued at the lower of cost or market using the first-in first-out method based on perpetual records.


Hanger Clinic and Dosteon do not maintain a perpetual inventory system. On October 31^st of each year the company performs an annual physical inventory of all inventories in Hanger Clinics. Dosteon counted its inventories on December 31, 2013 and October 31, 2012. The Company values the raw materials and work-in-process inventory counted at October 31 at lower of cost or market using the first-in first-out method. Hanger Clinic work-in-process inventory consists of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Material, labor and overhead costs are determined at the individual clinic or groups of clinics level. Adjustments to reconcile the Hanger Clinic and Dosteon physical inventory are treated as changes in accounting estimates and are recorded in the fourth quarter. The Company recorded fourth quarter adjustments of a decrease to inventory of $2.3 million, a decrease to inventory of $0.5 million and an increase to inventory of $2.3 million in 2013, 2012, and 2011, respectively.


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


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

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

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

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

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test as of October 1, 2013.


Definite-lived trade name intangible assets are amortized over their estimated period of benefit of approximately 1 to 3 years. Approximately $9.1 million of the value of trade names is identified as an indefinite-lived intangible asset within the Products & Services segment and its fair value is annually assessed for impairment in the Company's fiscal fourth quarter. The Company estimates fair value utilizing a relief-from-royalty method valuation model and the 2013 assessment estimated the fair value is greater than carrying value. However, due to a one-time sale during the third quarter, which was partially offset by the commencement of a long-term service agreement, the estimated fair value is not substantially in excess of the carrying value. A key assumption in the relief-from-royalty method is projected future revenue. If actual future revenues fall below projection, the estimated fair value could be significantly impacted.


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

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

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

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

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

Recently Issued Accounting Guidance

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

In February 2013, the FASB issued ASU 2013-2, "Other Comprehensive Income." This ASU amends ASC 220, "Comprehensive Income," and supersedes ASU 2011-05 "Presentation of Comprehensive Income" and ASU 2011-12 "Comprehensive Income," to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The standard does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the guidance requires an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The amendments in this ASU were effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted this guidance and its implementation did not have a material impact on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, "Income Taxes" that requires unrecognized tax benefits be classified as an offset to deferred tax assets to the extent of any net operating loss carryforwards, similar tax loss carryforwards, or tax credit carryforwards available at the reporting date in the applicable tax jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. An exception would apply if the tax law of the tax jurisdiction does not require the Company to use, and it does not intend to use, the deferred tax asset for such purpose. This guidance is effective for reporting periods beginning after December 15, 2013. The Company does not expect the adoption of these provisions to have a material effect on the consolidated financial statements.

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Results of Operations

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

Year ended December 31, 2013 compared with the year ended December 31, 2012

Net Sales.    Net sales for the year ended December 31, 2013 increased by $72.0 million, or 7.4%, to $1,046.4 million from $974.4 million last year. The sales increase was principally the result of a $18.8 million, or 2.4%, increase in same center sales; a $51.2 million increase from acquired entities; and a $2.0 million, or 1.2%, increase in sales of the Products & Services segment. The increase in same center sales of the Patient Care segment was principally due to an increase in volume as pricing was neutral to slightly negative due in part to the impact of sequestration on Medicare reimbursement. The sales increase in the Products & Services segment increased $2.0 million due to a $9.4 million sales increase at the ACP unit offset by a $7.4 million sales decline in our distribution business due principally to the impact of the acquisition of independent O&P providers, who were past customers of the distribution unit, and the negative impact of government audits on the purchase of high end devices.

Material Costs.    Material costs for the year ended December 31, 2013 were $319.0 million, an increase of $22.8 million, or 7.7%, over $296.2 million for the same period in the prior year. The increase was the result of the growth in sales and change of product mix. Material costs as a percentage of Net sales increased to 30.5% in 2013 from 30.4% in 2012.

Personnel Costs.    Personnel costs for the year ended December 31, 2013 increased by $34.4 million to $369.7 million from $335.3 million for the year ended December 31, 2012. The increase from prior year was primarily due to $21.5 million of personnel costs associated with acquired patient care clinics, $6.1 million in increased employee benefits and related taxes, $5.2 million impact from merit increases and the balance was due to additions to our infrastructure to support growth.

Other Operating Expenses.    Other operating expenses, which are comprised primarily of professional, office, bad debt, incentive compensation and reimbursable employee expenses, increased $7.4 million in 2013 to $186.3 million from $178.9 million for the year ended December 31, 2012. Bonus expense decreased by $6.3 million due to the impact of the fourth quarter results on the management and general bonus pool and the company realized savings of $4.7 million in general liability insurance, personal property and franchise tax and other expense. The remaining $18.4 million increase was comprised principally of $6.5 million in expenses related to acquisitions, $3.3 million in increased rent,

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$4.7 million increase in bad debts, $1.7 million in professional fees and a $1.9 million reduction of overhead capitalized into work in process. The remaining $0.3 million change was attributable to changes in other operating expenses. Other operating expenses as a percentage of net sales decreased to 17.8%.

Depreciation and Amortization.    Depreciation and amortization for the year ended December 31, 2013 was $37.5 million versus $34.7 million for the year ended December 31, 2012. The increase was principally due to a combination of the impact of acquisitions and a slightly higher rate of capital additions.

Income from Operations.    Income from operations increased $4.6 million to $133.9 million for the year ended December 31, 2013 compared to $129.3 million in the year ended December 31, 2012. The increase was primarily due to Patient Care Segment through increased sales both from the same center sales increase and acquisitions. The remaining increase was due to additional operating income in the Products & Services segment resulting from an increase in sales prices, implementation of strategies to reduce material costs and changes in sales mix. As a percentage of sales, Income from operations in 2013 decreased 0.4% from 13.2% to 12.8%.

Interest Expense.    Interest expense for the year ended December 31, 2013 decreased slightly to $26.5 million, compared to $31.2 million for the year ended December 31, 2012. The decrease resulted from the interest savings from the refinancing that occurred in the second quarter of 2013 as well as a reduction of outstanding borrowings.

Provision for Income Taxes.    An income tax provision of $37.2 million was recognized for the year ended December 31, 2013, compared to $34.5 million for the same period of the prior year. The increase in the income tax provision was primarily due to higher pre-tax earnings and less deferred tax discrete benefit items. Our effective tax rate was 36.9% and 35.1% for 2013 and 2012, respectively. The 2013 effective tax rate benefited 1.2% from current and prior period federal research and development credit claims, the release of a reserve for prior period federal research and development credit claims, the release of a portion of our valuation allowance, and prior period return to provision adjustments. The 2012 effective tax rate benefited 2.3% from prior period federal research and development credit claims filed in 2012, certain deferred tax asset rate changes, the release of a portion of our valuation allowance, and other nonrecurring discrete items.

Net Income.    Net income for the year ended December 31, 2013 remained consistent at $63.6 million, or $1.80 per diluted share, compared to net income of $63.7 million, or $1.83 per diluted share, for the year ended December 31, 2012, primarily due to increased Net sales and leveraged costs in 2013.

Year ended December 31, 2012 compared with the year ended December 31, 2011

Net Sales.    Net sales for the year ended December 31, 2012 increased by $66.6 million, or 7.3%, to $974.4 million from $907.8 million last year. The sales increase was principally the result of a $29.6 million, or 4.0%, increase in same center sales; a $30.2 million increase from acquired entities; and a $6.8 million, or 6.8%, increase in sales of the Distribution segment.

Material Costs.    Material costs for the year ended December 31, 2012 were $296.2 million, an increase of $26.0 million, or 9.6%, over $270.2 million for the same period in the prior year. The increase was the result of the growth in sales and change of product mix. Material costs as a percentage of net sales increased to 30.4% in 2012 from 29.8% in 2011.

Personnel Costs.    Personnel costs for the year ended December 31, 2012 increased by $13.8 million to $335.3 million from $321.5 million for the year ended December 31, 2011. The increase from prior year was primarily due to $10.2 million of personnel costs associated with acquired patient care clinics, and other increases in salary expense, commissions and benefits.

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Other Operating Expenses.    Other operating expenses, which are comprised primarily of professional, office, bad debt, incentive compensation and reimbursable employee expenses, increased $9.8 million in 2012 to $178.9 million from $169.1 million for the year ended December 31, 2011. The increase was attributable to $4.2 million related to acquisitions, $3.3 million in incentive compensation and $2.2 million in professional fees, respectively. The remainder is attributable to other operating expenses. Other operating expenses as a percentage of net sales decreased slightly to 18.4%.

Relocation Expenses.    During 2011, we completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas, which began in 2010. During the year ended December 31, 2012, we incurred no relocation costs compared to $1.2 million incurred in 2011.

Acquisition Expenses.    During 2012, we acquired eighteen companies, consisting of 59 patient care clinics, and incurred $1.2 million of non-recurring costs related to these acquisitions, an increase of $0.4 million compared to the $0.8 million of acquisition related costs we incurred in 2011 to acquire eight companies that consisted of 21 patient care clinics.

Depreciation and Amortization.    Depreciation and amortization for the year ended December 31, 2012 was $34.7 million versus $31.0 million for the year ended December 31, 2011. The increase was commensurate with the increase in capital expenditures in 2012.

Income from Operations.    Income from operations increased $13.3 million to $129.3 million for the year ended December 31, 2012 compared to $116.0 million in the year ended December 31, 2011. The increase was primarily due to the Patient Care segment as fixed costs were leveraged over increased sales. The remaining increase was due to $5.9 million of additional operating income in the Distribution segment resulting from an increase in sales prices, implementation of cost management strategies and changes in sales mix. As a percentage of sales, income from operations in 2012 increased 0.4% from 12.8% to 13.2%.

Interest Expense.    Interest expense for the year ended December 31, 2012 decreased slightly to $31.2 million, compared to $31.8 million for the year ended December 31, 2011, primarily due to a lower average term loan balance resulting from scheduled repayments, offset by increases in seller notes resulting from the 2012 acquisitions.

Provision for Income Taxes.    An income tax provision of $34.5 million was recognized for the year ended December 31, 2012, compared to $29.7 million for the same period of the prior year. The increase in the income tax provision was primarily due to higher pre-tax earnings. Our effective tax rate was 35.1% and 35.3% for 2012 and 2011, respectively. The 2012 effective tax rate benefited 2.3% from prior period federal research and development credit claims filed in 2012, certain deferred tax asset rate changes, the release of a portion of our valuation allowance, and other nonrecurring discrete items. The 2011 effective tax rate benefited 2.5% from the realization of certain state tax benefits and other nonrecurring discrete items.

Net Income.    Net income for the year ended December 31, 2012 increased to $63.7 million, or $1.83 per diluted share, compared to net income of $54.5 million, or $1.59 per diluted share, for the year ended December 31, 2011, primarily due to increased net sales and leveraged costs in 2012.

Financial Condition, Liquidity and Capital Resources

Cash Flows

Our working capital at December 31, 2013 was $267.1 million, compared to $251.5 million and $240.6 million for the years ended December 31, 2012 and 2011, respectively. The increase in working capital was primarily due to an increase in inventories, accounts receivable and other current assets. The increases are primarily due to the organic growth of the business, acquisitions completed in

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2013and 2012 and the impact of Medicare related audits on our accounts receivables. Days sales outstanding ("DSO"), which is the number of days between the billing for our O&P services and the date of our receipt of payment thereof, for the year ended December 31, 2013 increased to 65 days, compared to 60 days in 2012 and 56 days in 2011 for the same period. The increase in DSO was primarily due to the increase in fourth quarter sales, the impact of the previously mentioned Medicare audits and an increase in accounts receivable related to fourth quarter acquisitions. Net cash provided by operating activities increased $5.0 million to $86.3 million for the year ended December 31, 2013, compared to $81.3 million in 2012 and $61.8 million in 2011. The increase in cash provided by operating activities in the current year resulted primarily from an increase in noncash charges on the income statement due both to the refinance and an increase in depreciation.

Net cash used in investing activities was $35.9 million, $99.1 million, and $46.9 million for the years ended December 31, 2013, 2012, and 2011 respectively. In 2013, 2012, and 2011, we invested $38.4 million, $33.2 million, and $28.7 million, respectively, in improvements to our patient care clinics, capitalized costs and license fees related to the implementation of the Janus billing system, upgrades to our computer hardware and software, and purchases of equipment leased to third parties by our Products & Services segment. In 2013, we acquired nine O&P companies, operating a total of 18 patient care clinics, at an aggregate purchase price of $14.1 million. In 2012, we acquired eighteen O&P companies, operating a total of 59 patient care clinics, at an aggregate purchase price of $83.1 million. In 2011, we acquired eight O&P companies, operating a total of 21 patient care clinics, at an aggregate purchase price of $24.9 million. Additionally, in 2012, we restricted $3.1 million of cash in order to eliminate letters of credit obligations under our revolving credit agreement.

Net cash (used in)/provided by financing activities was $(59.7) million, $(6.0) million, and $(8.3) million for the years ended December 31, 2013, 2012 and 2011, respectively. During 2013 we: (i) borrowed $225.0 million related to term loan borrowings under our credit facilities ("Term Loans"); (ii) repaid $296.1 million related to term loan borrowings under our credit facilities ("Term Loans"); (iii) borrowed $249.0 million under our revolving credit facility; (iv) repaid $224.0 million under the revolving credit facility; (v) made $12.4 million of required repayments of promissory notes issued in connection with acquisitions ("Seller Notes"); and (vi) received net $0.1 million of proceeds from employee stock compensation plan. During 2012 we: (i) repaid $3.7 million related to term loan borrowings under our credit facilities ("Term Loans") (ii) made $5.3 million of scheduled repayments of promissory notes we issued in connection with acquisitions ("Seller Notes"); (iii) made $0.7 million of scheduled payments of capital lease obligations; (iv) received $1.5 million in tax benefits associated with stock based compensation; and (iv) received net $2.2 million of proceeds from employee stock compensation plans. During 2011 we: (i) borrowed and repaid $10.0 million under our revolving credit facility; (ii) made $4.2 million of scheduled repayments of Seller Notes; (iii) repaid $3.0 million related to Term Loans; incurred $4.2 million of financing costs related to the repricing of our debt in the first quarter of 2011; and (iv) received net $0.6 million of proceeds from employee stock compensation plans.

General

We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources of liquidity, including borrowings available under the Revolving Credit Facility and Term Loan, will be sufficient for at least the next twelve months to fund anticipated capital expenditures and make required payments of principal and interest on our debt, including payments due on our outstanding debt. We manage our interest rate risk through a portfolio hedging strategy by partially offsetting our borrowings subject to variable interest rates with cash equivalents which receive variable interest income. We would consider entering into interest rate derivatives to hedge our variable interest rate exposure depending on the nature of the interest rate environment in the future. For further information regarding our outstanding debt, see Note G. As of

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December 31, 2013, $247.2 million, or 52.8%, of our total debt of $468.3 million was subject to variable interest rates. As of December 31, 2013, we had access to funds totaling $181.3 million, comprised of $9.9 million of cash and cash equivalents and $171.4 million available under the Revolving Credit Facility. Availability under the Revolving Credit Facility is net of $3.6 million of outstanding letters of credit. We believe that we have sufficient liquidity to conduct our normal operations and fund our acquisition plan in 2014.

Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2013: