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Edited Transcript of HNGR.N earnings conference call or presentation 2-Mar-21 1:30pm GMT

·31 min read

Q4 2020 Hanger Inc Earnings Call AUSTIN Mar 2, 2021 (Thomson StreetEvents) -- Edited Transcript of Hanger Inc earnings conference call or presentation Tuesday, March 2, 2021 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Seth R. Frank Hanger, Inc. - VP of Treasury & IR * Thomas E. Kiraly Hanger, Inc. - CFO & Executive VP * Vinit K. Asar Hanger, Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Brian Gil Tanquilut Jefferies LLC, Research Division - Senior Equity/Stock Analyst * Lawrence Scott Solow CJS Securities, Inc. - Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to Hanger's Fourth Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. (Operator Instructions) It is now my pleasure to introduce your host, Seth Frank, Vice President of Treasury and Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Seth R. Frank, Hanger, Inc. - VP of Treasury & IR [2] -------------------------------------------------------------------------------- Good morning, and thank you. Welcome to Hanger's Fourth Quarter 2020 Earnings Conference Call. With us today are Vinit Asar, Hanger's President and Chief Executive Officer; and Thomas Kiraly, Executive Vice President and Chief Financial Officer. Some of the information discussed today will include forward-looking information in the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause Hanger's actual results to materially differ from those we discuss today. Those risks include, among others, matters we have identified in the forward-looking statement portion of our latest earnings release and in our filings with the SEC. Hanger disclaims any obligation to update forward-looking information discussed on this call. And now let's hand the call over to Vinit. -------------------------------------------------------------------------------- Vinit K. Asar, Hanger, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Seth, and good morning. Thank you all for joining Hanger's Fourth Quarter and Full Year 2020 Earnings Call. I hope you and yours are staying safe and healthy. We were pleased with our results in Q4. The resilience and determination of the communities we serve as well as the tenacity of our Hanger nationwide organization to meet the continuing needs of our patients and customers were significant factors in our success despite the national surge in COVID-19 cases in the fourth quarter. That said, COVID-19 continues to challenge our industry. We believe that a cohort of patients, particularly those most vulnerable to the virus, such as the elderly and those with chronic health issues may be delaying certain aspects of their orthotic and prosthetic care in deference to social distancing and other life priorities. So while we are pleased with our achievements, we remain cautious in the near-term until key public health considerations become clearer. Looking at our overall fourth quarter results. Net revenue totaled $277.3 million a decrease of 7.8% compared to the same period of 2019. Adjusted EBITDA was $35.5 million. These results are notable, particularly in light of the fact that we made the critical decision to bring back the organization to pre-pandemic staffing levels essentially intact. In October, we fully normalized base salaries, eliminated furloughs and returned hourly employees to full-time schedules. We took these actions because we remain convinced of the temporary nature of the pandemic-related business downturn. From a cash perspective, the results are quite remarkable. Across the entire company, we continue to make excellent progress on cash collections and managing our working capital needs. Looking at our business segments. In patient care, appointment volumes for Q4 were at 88% of the same period last year. This is an improvement compared to the 84% in the third quarter. So there is a recovery in place that did not go backwards despite the resurgence of infections during the quarter. From our perspective, O&P patients most vulnerable to a poor COVID outcome continue to be the most impacted by surges in infection rates and intensity of disease. Typically, these individuals suffer from chronic illnesses, including diabetes. In general, it appears these are the patients that are currently more reticent to come in for care. Conversely, the less vulnerable and higher mobility patients needing higher technology prosthetic and orthotic devices were less impacted and constituted more of the patient encounters during the fourth quarter. Prosthetic volumes overall did improve modestly from third quarter levels, driving a sequential improvement in segment revenue, excluding acquisitions. When compared to the fourth quarter 2019, prosthetics declined approximately 12%, driven primarily by lower mobility device volumes. Orthotic revenues continued to firm up as the year went on, and this was true in Q4. Orthotic revenues declined 8%, an improvement from third quarter levels. Customer orthotics performed relatively well, while off-the-shelf orthotics and shoes declined more than the category average. The Products & Services segment performed well in the fourth quarter as prior investments emerging strategic initiatives and the strength of our leadership all came together. Our enhanced value proposition and our ability to provide greater efficiencies to our core customers among the independent O&P providers and skilled nursing facilities drove these results. COVID-19 continued to create business challenges in products and services during 2020. For the fourth quarter, segment net revenues declined 7.2%, an improvement compared to the 9.7% decline in the third quarter, while adjusted EBITDA actually grew by $1 million year-over-year, a notable achievement for our team. Hanger's O&P distribution business continued to expand partnerships with large and small manufacturers, adding SKUs to our catalog and providing a unique one-stop shopping destination for independent O&P practices. The business has also positioned itself well as an essential partner for manufacturers seeking to maximize their impact with these independent O&P clinics. Our therapeutic solutions subsidiary is also pivoting during COVID. Skilled nursing facilities remain challenged, protecting their highly vulnerable populations, resulting in access to decision-makers being temporarily hampered. We pivoted to remote teaching and education for therapists, which has allowed us to ensure patients get access to the best possible rehabilitative services. As I consider the results we achieved in 2020, they are in retrospect, truly remarkable. COVID has been, I hope, a once-in-a-lifetime merciless adversary, it is brought unspeakable loss and suffering that would bring anyone to their breaking point. As if this was not enough, the economic and social hardships brought by this pandemic have been difficult to fathom. And of course, this all occurred against the backdrop in the U.S. of historic social unrest. The tale of 2020, where it began, how we ended the year and the manner in which we carry ourselves forward was a result, I believe, of the culture, values and purpose that Hanger employees bring to their professional lives every day. In addition, for years, we have executed on a comprehensive investment plan focused on differentiation. We have built clinical and business technology to support our teams, enabling them to increase their focus on patient care. This past year, we quickly innovated and adapted to remote work environments, incorporating PPE requirements and enhanced safety protocols in every clinic and office locations and countless other challenges. And this was done, I would remind you, while the entire workforce endured the challenges of a painful but necessary reduction in compensation. I know we did the right thing because we made a collective sacrifice under a common bond of understanding that we would come out of this on the other side together, intact and stronger. I could not be more proud of every one of our employees, and I thank them again for their commitment, leadership and sacrifice. So by no means were we lucky. We made good investments and wise decisions, and thus, our strength as an organization today is better than it has ever been based on our financials, corporate reputation and quality of care we provide. For 2020, our Net Promoter Score within patient care, a key process indicator for the company improved from 84 at the end of 2019 to 86. In contrast, our analysis of HCAP survey data from CMS of nearly 2,700 hospitals surveyed for 2020, showed a meaningful decline in NPS across a majority of facilities. This is understandable given the strains and demands of frontline workers doing their best under sometimes impossible conditions. That said, we take it as a point of pride that patient satisfaction improved at Hanger this past year. I believe the key reason for our continued upward trajectory is the commitment Hanger has made to our patients, referral partners and payers around evidence-driven care models and outcomes research. We could have sidelined this agenda in 2020. But instead, we doubled down. The pandemic showed us what we have always known that the rehabilitation-based medical services we provide, enabling mobility and human potential are absolutely essential and that O&P is a must have, not a nice to have in the health care value equation. Our virtual classroom programs enrolled over 5,000 attendees from over 460 health care organizations in order to ensure that our greater medical community, including our referral partners, stayed connected and engaged. Our investments in people are the most important allocations of capital we have. I was delighted on the heels of all we went through in 2020, that Hanger was recognized as one of America's best midsized employers in 2021 by Forbes Magazine. Hanger was selected through an independent nationwide survey of more than 50,000 American employees working for midsized to large-sized companies. This is a great way to start the year. Looking at 2021, we have a clear and focused set of priorities intended to build on these core strengths that will propel us to growth this year and in the years ahead. Our multiyear growth strategy consists of 4 pillars: ensuring we are the employer of choice in our industry; providing outcomes-based clinical care and improving the ease of doing business with us; all intended to achieve the fourth pillar, accelerating growth. In addition, during 2020, we implemented multiple programs to further enhance our commitment to diversity and inclusion. We initiated our corporate DNI pledge that includes a commitment to implementing a DNI employee council chaired by myself as well as affinity groups and awareness networks for underrepresent populations to lift up our organization and support the communities we represent and serve. These programs are already underway. Hanger has also contributed funds to the Hanger Foundation, a 50(c3) funded by Hanger, its employees and other partners. The foundation announced the creation of the Hanger Foundation Diversity scholarship program to do its part to create a more inclusive O&P profession by attracting more diverse candidates to O&P graduate programs. Accelerating growth is where all of this comes together in the form of greater organic and inorganic opportunities. We continue to be encouraged that our differentiators focused on clinical outcomes and patient engagement, the strength of our relationships with our referral sources, payers and customers combined with the exceptional clinical talent we have assembled, has positioned us well. I expect that in 2021, we will continue to deploy capital towards our M&A program, targeting strategic acquisitions of O&P clinics. I was delighted by the successful Midwest acquisition of one of the best-known players in the private independent O&P world during 2020. This transaction and others like it will pay significant dividends to further our growth beyond what we generate internally. During the last 12 months, we've acquired 9 independent O&P businesses of varying sizes and are very pleased with the teams that have joined us as a result. As you can see, we are excited about Hanger's future and are grateful that we have been able to manage to the pandemic safely while further strengthening our commitment of empowering human potential together. Tom will now provide you more specific details on the numbers. Tom? -------------------------------------------------------------------------------- Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [4] -------------------------------------------------------------------------------- Thanks, Vinit, and good morning. 2020 was certainly a remarkable year we will all not soon forget. While we all faced our own challenges when reviewing Hanger's performance, I'd like to spend a few minutes discussing how the company's financial results reflect well and its inherent ability to successfully overcome adversity. From an operational and financial perspective, Hanger's results can be summarized in 3 specific ways: first, the company responded early and decisively at the onset of the COVID-19 pandemic and that provided it with the ability to get a head start and to confront the impact of the virus from a position of operational and financial preparedness; second, the company's response has enabled it to achieve financial results that reflected a sound underlying level of revenue and earnings despite the pandemic; and third, our focus on liquidity enabled Hanger to emerge in an even stronger position today than it was a year ago at this time. During the fourth quarter, the company produced $35.5 million in adjusted EBITDA on $277.3 million in net revenue. This reflected a $6.9 million decrease in adjusted EBITDA and a $23.6 million decrease in revenue as compared with the fourth quarter of 2019. This brought our results for the full year to an adjusted EBITDA level of $105.1 million and net revenues to just over $1 billion. As Vinit discussed, despite the resurgence of the virus in the fourth quarter, we did not experience a regression in patient encounters or same clinic volumes from the levels experienced in the third quarter, and this enabled the company's performance to exceed what was expected. In looking at this performance within our Patient Care segment, appointments reflected a 12% decrease during the quarter, which compared favorably with a 33% decrease in the second quarter and a 16% decrease in the third quarter. This drove a same-clinic revenue decline rate of 10.6%, which was generally consistent with the 10.3% we reported in the third quarter and is the approximate level we have experienced during the early weeks of 2021. For the year, our Patient Care segment experienced a 17% decline in patient appointments and an 11% decline in same-clinic revenue. After considering the favorable effect of acquisitions, reported revenue for the year declined by 8.2%. Despite this decrease in revenue due to the proactive measures taken within the Patient Care segment to pivot its operations and cost structure in response to the virus, it was able to produce a contribution margin of 17.6% during 2020, which was modestly lower than the 18.2% reported in 2019. When reviewing the Products & Services segment results for the quarter and the year, we believe they are truly remarkable under the circumstances. While revenues declined by 7.2% in the quarter and 11.9% on the year, adjusted EBITDA grew by $1 million in the fourth quarter as compared with the fourth quarter of 2019. And for the full year was $29.3 million was consistent with the level reported in 2019. In addition to the favorable effect of our cost reduction programs and results, this segment also benefited from a marked reduction in bad debt expense. Overall, due in part to the temporary $51 million reduction in personnel and other costs realized over the second and third quarters, the company's consolidated adjusted EBITDA of $105.1 million reflected a contribution margin of 10.5%, which was reasonably close to the 11.3% we reported in 2019. Due to the swift actions of our employees and the cost measures that were put in place, while 2020 reflected a decline from 2019, that decline was significantly moderated. Additionally, operating responses we took to the pandemic did not reduce the company's capacity or otherwise harm its ability to return to normal levels of patient in customer volumes as the virus subsides in 2021. Those accomplishments in our revenue and earnings for 2020 tell only half the story. As we've discussed in prior calls, during the year, one of our most important objectives in response to the COVID-19 pandemic was to build liquidity. We're pleased to report that we achieved that objective. As of December 31, 2020, Hanger had $239.4 million in liquidity. This reflected an increase of $70.2 million or 41% over the level reported at December 31, 2019, and $107.6 million or 81% increase since March 31, 2020. The company benefited from $24 million in CARES Act funds during the year. While we did not include them in our reported adjusted EBITDA, they were a contributor to the company's liquidity position. In addition to the direct flow-through from earnings and the CARES Act funds, the company achieved substantial favorable changes in its working capital position during the year. When excluding cash, the current portion of debt and tax refunds receivable, the company's underlying working capital position reflected a decrease of $59.7 million as compared with the prior year-end. This favorable working capital change was the result of a multitude of factors with perhaps the most important contributing element being found in the company's increased collections and resulting reduction of accounts receivable. During the year through widespread revenue cycle management and collections initiatives, the company decreased its net accounts receivable by $30.8 million or 19%. This decrease reflected gains that were substantially in excess of the 8.8% effect of the company's net revenue decrease for the year. This favorable collections experience also resulted in a decline in Hanger's combined disallowance and patient nonpayment rate from 5.3% in 2019 to 4.5% in 2020 and resulted in a 6-day decrease in its days sales outstanding from 48 days down to just 42. These favorable changes directly contributed to the company's reporting of $155.6 million in operating cash flow during 2020, and they resulted in a reduction in net indebtedness to $365.9 million. This enabled Hanger to sustain a 3.5x leverage ratio despite the decrease in its reported adjusted EBITDA. Given this level of liquidity and net indebtedness, Hanger is in a stronger financial position today than it was a year ago at this time. As our revenues and adjusted EBITDA return to their normal run rate levels in a post-COVID environment, the company will find itself in a good position to continue its acquisition program in 2021 and to manage its leverage. I'll now provide a few comments on our capital expenditures before I turn to our outlook for 2021. During 2020, we expended $28.1 million in capital expenditures. These expenditures related to the purchase of property, plant and equipment, as well as therapeutic equipment. Of this amount, approximately $7.5 million related to the company's build-out of its new distribution facility in Alpharetta, Georgia. While we paused the key systems projects related to our supply chain initiative in 2020, we did continue and complete the construction of that facility. This has enabled us to spread out the investment over several years as opposed to the more concentrated approach we had originally planned for 2020. We currently estimate that we will expend $35 million in capital expenditures in 2021, inclusive of the capital portion of our supply chain initiative. We are currently in the process of resuming our work on the supply chain and financial systems project. And despite the 1-year pause, the company nevertheless benefited from approximately $4 million in savings during 2020 related to its supply chain initiative, primarily in the area of freight savings. Now I'll turn my commentary towards our overall outlook and key operating considerations for 2021. Obviously, I think we all recognize that a substantial amount of uncertainty and speculation remains about the course of COVID-19 and its lingering effects on our daily lives. While that uncertainty makes our ability to estimate our forward results exceedingly difficult, we nevertheless feel that providing you with insight into our best current thinking is warranted. The key premise behind our outlook is that COVID-19 will affect patient volumes at a similar rate as experienced in Q4, all the way through February. And then those effects will subside ratably through the end of June with normal patient volumes and growth resuming in the second half of 2021. We have incorporated modest favorable effects from pent-up demand in our forward view for the second half of the year. In addition to other factors, any further adverse delays in vaccinations or a continuing delay in the return of normal activities could adversely affect our outlook. If the resumption of normal business volumes is delayed, we nevertheless currently have confidence that there has been no material underlying change in the nature of our business or capacity that would adversely affect our ability to eventually return our revenue and adjusted EBITDA run rate to pre-COVID levels. With these considerations in mind, our current outlook for 2021 is that Hanger will produce net revenues in the range of $1.145 billion to $1.175 billion and adjusted EBITDA of $130 million to $135 million. Our outlook includes the benefit of approximately $27 million in net revenues from the annualized effect of acquisitions completed in 2020 or closed prior to March 1 of this year. From a quarterly timing perspective, we believe that the first and second quarters will provide difficult year-over-year comparisons. The first quarter will be adversely affected due to the residual effects of the pandemic, the adverse weather as well as it being our normal seasonally lowest period of operations. The second quarter will likely be affected by the lingering transitional effects of COVID and due to the fact that we had a temporary benefit of $35 million in cost reductions, which aided our results in the second quarter of last year. With respect to the company's operating cash flow, it is important to recognize that the level we achieved in 2020 reflected a number of favorable factors that are not sustainable in 2021. As the company resumes its normal levels of operations, reinvestment in working capital will naturally occur. Accordingly, we believe our operating cash flow will be limited in 2021. It's also useful to note that our 2021 seasonal payment of incentive compensation and operations will reduce our liquidity levels in the first quarter as they do in every year. In closing, I believe Hanger and its employees evidenced something incredibly important in 2020. We demonstrated the ability to hit adversity head on and to manage through it, both from an operating and a cash flow perspective. We showed the company's inherent tenacity and resilience. These qualities have enabled Hanger to enter 2021 as a company that is stronger and better-positioned than it ever has been before. With that, I'll turn the call back over to the operator to open it up for any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Brian Tanquilut of Jefferies. -------------------------------------------------------------------------------- Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [2] -------------------------------------------------------------------------------- Congrats on a good year given all the circumstances. But Tom, I guess, as we think about guidance, I appreciate you taking the initiative of putting out guidance despite uncertainty. But as I think about the seasonality comments or the progression comments that you made, a couple of questions. Number one, you're expecting some inflection in volumes beginning -- or after February. And I know generally, you have pretty good visibility into your orders. So is that a good way to think about that? And then I guess, if you were just to ask you for percentages in terms of the breakdown between quarters of EBITDA, how should that look? Any color you can give on that. -------------------------------------------------------------------------------- Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [3] -------------------------------------------------------------------------------- Yes, Brian. So first of all, from the visibility standpoint, I would argue that we do have some visibility, but not as much as obviously anyone would like to have. We -- March is always traditionally the strongest month in the first quarter. We do have some good work in process levels, but it really is a bit of a bet on our part as to how this quarter pans out. And the hope that with all the vaccinations and positive effects occurring with COVID that we start to see at least some return to more of a normal environment. But again, it remains to be seen. From a standpoint of quarterization, really, what you're looking at is a very modest sort of performance in Q1 from a percentage standpoint. I would -- and then somewhat of a step-up in Q2, you start to look at what it means for the year. You could have 55%, 60% of the company's EBITDA in the second half of the year when you look within the numbers. -------------------------------------------------------------------------------- Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [4] -------------------------------------------------------------------------------- Got it. And then, Vinit, obviously, you're sitting on a lot of cash right now, significantly above what you normally would keep on the balance sheet. And how are you thinking about capital deployment of the M&A environment? And also, like just any changes to how you're doing M&A versus the historical Hanger approach? It looks like you had a pretty good acquisition in the Midwest that's more concentrated. If you don't mind just walking us through that. -------------------------------------------------------------------------------- Vinit K. Asar, Hanger, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Sure. Thanks, Brian. Look, our M&A program is pretty robust in the sense that, as I mentioned, throughout 2020, the pipeline is pretty solid. We get a lot of inbound inquiries. We've got a lot of conversations going on. And we're being very selective and who we're working with because we want to bring on the quality practice. And just to give you a sense of the landscape, the vast majority of the O&P businesses in the U.S. are very small-sized businesses. So we're being very selective in terms of who we speak with, who we're bringing on board. The conversations have been very robust, and there is a focus on M&A. As I mentioned in my prepared remarks, we brought in 9 businesses last year. And we feel pretty good about 2021 as well, given the nature of the conversations we're having. So we expect that trajectory to continue in 2021 at this point. -------------------------------------------------------------------------------- Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [6] -------------------------------------------------------------------------------- Got it. And then last question for me. Obviously, COVID delayed some of your initiatives, whether it's the supply chain systems rollout or the ERP, is it safe to assume that all that goes full steam this year, and we should expect the benefits that you've outlined in the past once we get into 2022? -------------------------------------------------------------------------------- Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [7] -------------------------------------------------------------------------------- Yes. We are recommencing, as we described, both the supply chain and the financial systems projects. Fortunately, we did continue some critical ones last year and, in fact, have already been receiving the benefits from that into the tune of approximately $4 million in 2020. So those are going to continue in 2021 and obviously already demonstrate almost the lion's share of what we would expect out of the program. And from a capital standpoint, I think we've outlined it pretty extensively in the 10-K. But we've seen a nice moderation in terms of the amount of capital we put out where it won't be as dramatic as it was originally thought it might be. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- The next question is from Larry Solow of CJS Securities. -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [9] -------------------------------------------------------------------------------- And I echo Brian's comments, congrats on a tough environment, a very good year. Just a few follow-ups on the -- Tom, you mentioned some pent-up demand that you're -- assume you're building in some of that into your guidance. I think prosthetic declined 8% for the year. It doesn't seem like -- I don't think you're losing share. So how do you sort of -- I guess it's a balancing act between -- hopefully, some of that comes back in, and -- but you continue to have this sort of COVID at least the tail of it where some of these patients are not coming in. How do you balance that as you look out over the next few quarters? -------------------------------------------------------------------------------- Vinit K. Asar, Hanger, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- Sure. I can give you some color, Larry, on how we're thinking of the next few quarters, especially when it -- when we think about the pent-up demand. We certainly believe there's probably 3 buckets in terms of how to think of this pent-up demand. I'd say the one bucket is what I alluded to in my prepared remarks on. There's a cohort of patients that are like the lower mobility patients that have these other comorbidities, and they're electing to stay in and are reticent to come in for care. So our guess is that they will, over time, as they get vaccinated as the environment around them allows them to come in for care. They will come in for care that they haven't been coming in, in terms of getting their adjustments or their replacement devices. So I'd say that's one group of patients. Then there's another group of patients who I believe have these underlying conditions such as foot ulcers that they may not have taken care of their ulcerations through this period of the pandemic and that deteriorate -- that -- when that deteriorates, it could end up in amputations. So that in-home care that hasn't been given to these patients, these patients probably haven't moved around a lot either. So that also contributes to some pent-up demand. And last but not the least, there is this whole concept of the seesaw of the elective surgeries that they were on again and then off again and on again. So as these 3 buckets start clearing up, we should see some pent-up demand being released. Larry, we don't see that happening overnight. It will happen over time, but that's how we're thinking about, especially the second half of the year. -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [11] -------------------------------------------------------------------------------- Okay. And you guys mentioned -- I know in terms of -- on the acquisition front, I think in terms of guidance, I think it was $27 million included sort of in the 2021 revenue guidance. You completed, I think you spent like $30 million on acquisitions in '19 and $50 or so million last year, $25 million, I think, already this year. How do you view sort of the ramp in profit contributions? I know sometimes acquisitions, first take in about 12 months that before you sort of get to the full fruition of the profitability. With COVID sort of impacting a lot in 2020, is there sort of a tailwind that's been -- that you -- we may see over the next couple of years where you get benefit, even some acquisitions you did in '19 and in '20 as we look out over the next few quarters? -------------------------------------------------------------------------------- Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [12] -------------------------------------------------------------------------------- Yes. Larry, this is Tom. There is that ramp you're describing where it is somewhat depressed irrespective of COVID in the first year after an acquisition and then it gradually improves from there as that acquisition is fully integrated. I think it's important to point out that we've been doing around this level of acquisitions each year for the last several years. And so some of that ramp up already was occurring for the cohort, that was the 2019 cohort and 2020, and certainly, there's a little bit of that ramp in 2021 from the 2020 cohort. And then that portion of the $27 million that has occurred in Q1 would be pretty modest in contribution this year. I wouldn't characterize it as an excessive amount of overall pickup then in earnings, just that it kind of layers into the company's earnings naturally as we go. And then I do want to go back to my response to an earlier analyst question regarding quarterization, I had sort of cited 60% in the second half. And that's typically normal. I would actually argue that in 2021, it's going to be closer to 70% in the second half, when you look at the effects of the first half, just to make sure we have that clarification. I don't know. Does that answer your question, Larry, on the M&A? -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [13] -------------------------------------------------------------------------------- Yes. No, absolutely, it does. Absolutely. And obviously, you're really expect to hit a back-end loaded year. Just another couple of quickies. I saw in the MD&A, you mentioned that there are a couple or several larger-sized independent O&P providers who were having some financial struggles during 2020, which is not a surprise. And I think it caused you to maybe interrupt or even stop distributing some products to them. Sort of a two-pronged question there. Is there any real significant impact on the distribution products and services as you go forward? And is there -- and how do you think, is there any benefit with the shakeout of some of your competitors as you look out in terms of operations and in terms of maybe potential acquisitions? -------------------------------------------------------------------------------- Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [14] -------------------------------------------------------------------------------- Yes. First of all, in terms of that reference in the MD&A, that gets to some of the customers of the distribution business in 2019, where we'd had some bad debts and some difficulty with them. And there was just a few customers that were having some difficulty during that year that we chose to part ways with during that year. But I wouldn't characterize it as large providers overall in the industry or that it's indicative of an overall trend. And then I'll turn it to Vinit to just add more color to that. -------------------------------------------------------------------------------- Vinit K. Asar, Hanger, Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Yes, Larry, we've been obviously having conversations with most of the independent providers from a distribution perspective and also from a potential M&A perspective. And we feel that the conversations have been very productive in the sense that we're being -- we can get to see how strong these providers are. I think a lot of assistance they got from the government, whether it's the PPE loans or the Medicare payments that they received did help these providers. When we engage in conversations with these providers, it's more about looking for the stronger providers to come on board to propel us into further growth as opposed to be looking for the weaker providers to come on board. So that's the conversations we're having. We're just, again, pleased with the businesses we brought on board last year. Every single one of them was solid with solid management teams, and that's the focus we have in our M&A program. It's pretty selective. -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [16] -------------------------------------------------------------------------------- Okay. And then just last question maybe for Tom. Obviously, 2020 was a fabulous year for operating and free cash flow, especially as we look back what we thought it was going to be during April and May. You mentioned -- I understand the benefits of '20, and obviously, there's going to be some drop in '21. You mentioned sort of operating cash flow would be relatively -- I don't know what the word was, but it sounded like it's going to drop significantly. I know you don't guide to this number, but can you give us an idea of what it might be? -------------------------------------------------------------------------------- Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [17] -------------------------------------------------------------------------------- Certainly. So if you take the $156 million of operating cash flow last year, $24 million of that came from the CARES Act funds, and then there was another $60 million that came from our reduction in working capital. So we won't have that $84 million in 2021 to assist the company in its operating cash flow. So if you were to go to a normal year being in, call it, the $70 million to $80 million operating cash flow area, the company will have a greater majority of that $60 million that it will likely have to reinvest in working capital as the company's revenues and overall business profile returns to normal. So you could go ahead and look at that number as a very important number in your calculation. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- This concludes our question-and-answer session and today's conference. Thank you for attending the presentation. You may now disconnect.