Hanger, Inc. (NYSE:HNGR) Q1 2020 Earnings Conference Call May 8, 2020 8:30 AM ET
Company Participants
Seth Frank - Vice President of Treasury and Investor Relations
Vinit Asar - President and Chief Executive Officer
Thomas Kiraly - Executive Vice President and Chief Financial Officer
Conference Call Participants
Larry Solow - CJS Securities
Brian Tanquilut - Jefferies
Operator
Greetings and welcome to Hanger’s First Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. Today, we will have prepared remarks followed by Q&A period. Instructions for questions and answers will be provided after the formal presentation.
It is now my pleasure to introduce your host, Seth Frank, Vice President of Treasury and Investor Relations. Thank you. You may begin your conference.
Seth Frank
Good morning, thank you, welcome to Hanger’s first 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 statements 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 discussed today.
Those risks include, among others, matters we have identified in the forward-looking statements portion of our latest release and in our filings with the SEC. Hanger disclaims any obligation to update forward-looking information discussed on today’s call.
And with that, I’d like to hand the call over to Vinit Asar.
Vinit Asar
Thanks Seth. Good morning everyone and thank you all for joining us. Let me start by acknowledging what we have unfortunately, come to understand that life for all of us has been upended in different ways by the global pandemic, and things are and will remain different for a while.
For most people, there has been real pain, real loss, and a sense of uncertainty unlike anything we've experienced in our lifetimes. On behalf of Hanger, our hearts go out to all who have been impacted. As part of today's call, we want to help you understand the actions we have taken in response to the pandemic, our current view and how we will navigate through it, and what we hope will be a better future ahead for all of us.
We do believe it is important to first ground you with our first quarter results, which were impacted by COVID-19 and then set the stage for the remainder of the year. We entered 2020 on a strong footing. We returned to growth in 2019, reinitiated a successful acquisition program, and began to see promising stabilization in our therapeutic solutions business.
Indeed the year was off to a great start. We had a successful Hanger live event in Nashville in early February as we shared on our Q4 earnings call. We saw the benefits of the multi-year investments in Hanger’s core differentiators beginning to synergize and accelerate our position in the O&P industry.
Unfortunately, during the last two weeks of March, typically the busiest time of the quarter when we are delivering devices to patients we began to see a rapid uptick in cancellations of patient appointments. This was driven by the litany of social distancing measures implemented around the country to slow the spread of COVID-19 as shelter-in-place and related restrictions became more widespread.
As a result, our first quarter revenue and earnings were adversely impacted. Hanger’s first quarter net revenue of $233.7 million decreased $2.7 million, or 1.1% from the first quarter of last year, while adjusted EBITDA declined by 6.6 million in the first quarter, compared to the same period of 2019.
In our Patient Care segment, the primary factor affecting us was the large number of appointment cancellations during the last two weeks in March as mentioned earlier. The resulting decline of 3.2% in same clinic revenues was primarily due to COVID-19 related business disruption at a critical time in the quarter. The business slowdown has been highly variable by region
As you would expect, the New York metro area has been dramatically impacted, as was the Pacific Northwest and other COVID-19 hotspots around the country. Adjusted EBITDA declined more significantly due to our high fixed cost business model, highlighting the impact revenue fluctuations have on our earnings.
Additionally, the timing of COVID-19 related social distancing measures in March prevented us from making any meaningful adjustments to cost structure during the first quarter. In addition to the lower revenues, adjusted EBITDA was negatively impacted by an increase in bad debt expense in products and services attributable to expected higher future write-offs of customer accounts, and due primarily to the adverse economic impact of COVID-19.
For the first quarter, products and services revenue declined $2.3 million. The distribution business declined $1.5 million within the segment, most of which was driven by the slowdown of revenues during the last two weeks of March, due to COVID-19. Some of the decline in distribution was anticipated as we exited the distribution of off the shelf orthotics into certain third party channels that are non-core and unprofitable. This was an action we had shared with you during our Q4 2019 earnings call. Therapeutic solutions results were largely as anticipated.
Let me switch gears and take you through the actions we have taken to navigate this clearly difficult period we are all in. Beginning in late February and into early March we were mobilizing quickly to assess and plan for the potential impact that Coronavirus could have on our people and business as the situation escalated abroad and we began to hear early warnings from the U.S. public health officials.
At that time, what was about to actually unfold in the U.S. was still not clear. At Hanger, our initial and continuing response is the Hanger COVID-19 task force, which is comprised of executives with expertise in risk management, clinical operations, supply chain, and human resources.
In the ensuing days, during the second half of March, it became evident that the pandemic was beginning to impact our business, and with no viable clinical treatment, social distancing was the only way to mitigate viral spread. We acted expeditiously to ensure that the company would operate with continuity and would maintain necessary liquidity in the future.
There were two clear objectives that were front and center in what we needed to do. First, ensure the safety and continuity of care for our employees and patients. And second, ensure that we had adequate liquidity to get us through the impending downturn of the business as a result of COVID-19. By late March, we had initiated a number of cost reduction and project suspension plans for the second and third quarters of 2020.
I would summarize the primary actions as follows: A company-wide reduction of exempt employee salaries averaging 32% for a period of up to six months. Within these reductions, our senior leadership team and I took reduction in salaries ranging from approximately 47% to 100% for the same period of up to six months. I also note that our board of directors has also requested that they forego receiving their cash retainers from the company for the same period.
Other actions included the temporary elimination of any new headcount, temporary furloughs, and a decrease of non-exempt employee hours. We also reduced other operating expenses related to travel, professional fees, and other items. On the CapEx front, we suspended our supply chain and financial systems initiatives and have reduced other capital expenditures. This has clearly been painful.
We do not take any of these actions lightly to directly impact people's livelihoods and families during an intensely stressful time. However, I have to share with you that I could not be more proud of our organization and of every person at hanger who has risen to this challenge.
At the end of the day, while these are hard decisions with real near term consequences, the good news is that we intentionally chose a path that I believe leads us to a future where the company can not only survive, but thrive. So, while there is pain, it is shared, equitable and transparent. Throughout the decision making process and all these actions, we kept the two objectives mentioned earlier, clearly in front of us.
Outside of the cost containment measures we have taken, we are also actively monitoring elements of the CARES Act, which may provide Hanger some relief. At the outset, Hanger determined that as a public company, we would not qualify for the PPP forgivable loans intended for small businesses, and we did not apply for them.
Other elements of the CARES Act that we’d likely will benefit from include the payroll tax deferrals, lifting up the sequestration, modifications of the NOLs for federal tax purposes, and the provider Relief Fund payment, which was formula based allocation we received from HHS.
Operationally, communications to employees have been critically important during this process. Early on, we began a regular cadence of communications to our employees through various channels, including weekly video messages to our entire team. We've adopted the following three clear guiding principles: be safe, be kind, and be strong.
As an organization, Hanger is resilient. We help our patients overcome what can be unimaginable challenges after a loss of a limb, or loss or degradation of their muscular skeletal function. Challenges are what we do and Hanger is battle tested. We rebuilt the company beginning in 2015 to go the distance focused on the long-term to build scale, key expertise, document medical evidence for the value of our services, and ensure we brought in leadership at all levels across the organization with the experience and metal to rebuild successfully.
This human capital asset is an advantage today. And as we worked our way through these difficult times as a team during the 2015 to 2018 period, we are doing it again today and will do so for as long as the COVID-19 pandemic remains. We have made a variety of operational changes to ensure that during this period our people and patients are safe, and that we as health professionals ensure the continuity and quality of health care services we provide.
It is important to note that orthotic and prosthetic care is designated as an essential health care service under the Affordable Care Act. The O&P professional organizations have also highlighted this to the broader O&P industry. In addition, the World Health Organization in March of this year, identified that individuals with disabilities may be impacted more significantly by COVID-19.
In a published paper by the WHO, there was a call to take action and provide protective measures for all key stakeholders who support the disabled. Many of our patients faced with uncertainties during this time, are anxious to obtain necessary prosthetic and orthotic care so they can maintain the most basic life functions, many of us take for granted.
Some of the steps we as an organization have taken to ensure the safety of our patients and personnel are as follows: All of our employees have been instructed to follow CDC and WHO guidelines for prevention during the pandemic. Within our clinic operations, we also implemented mandatory training regarding prescriptive preventative safety measures and resources, including the reinforcement of facility cleaning guidelines, and instructions on reporting COVID-19 exposures.
Our clinics are not densely populated. We typically have approximately five employees and an average size clinic. So, social distancing, and the use of individual rooms to see patients, does not generally require extensive changes to our physical locations. They are relatively safe places for patient encounters. We procured, stocked, and fabricated personal protective equipment. Thanks to the productive work of our supply chain team. We leveraged our own fabrication capabilities to make reusable 3D printed custom masks for our clinicians.
In late March, we developed and then implemented plans to support clinical operations during the pandemic that included procedures to enable changes in weekly staffing and operating hours to respond to fluctuations in patient appointment volumes, while encouraging social distancing and patient and employee health.
From a patient perspective, we conducted a proactive outreach to Hanger Clinic patients across the country, performing thorough health and exposure risk screenings before in person appointments, rescheduling non-urgent appointments, and shifting in person appointments to remote consultations when appropriate. We have been taking advantage of telemedicine platforms to evaluate patients to determine whether they need to be seen in the office, as well as other Patient Support applications.
I am proud of what we have accomplished over the last 10 weeks. It is extraordinary to say the least. And I cannot thank our team enough for their support and their efforts. As a result of the difficult, but necessary corporate actions we have taken to lower costs and conserve cash, as well as the adjustments we have made to the operations we feel confident in our ability to navigate through the current situation, given what we know today.
In addition, and Tom will discuss this in more detail, we engaged early and regularly with our revolver lenders and recently secured the greater flexibility under our credit agreement. Our view at this time is that the sum total of these actions puts us in a position to remain adequately liquid throughout 2020 and in subsequent periods.
Through the month of April, as you would expect, the decline in business we saw in the last two weeks of March intensified. We delivered devices from WIP and worked down the inventory that was paused due to appointment cancellations in March. During the month of April, our appointment volumes were down approximately 40%, driven by the shelter-in-place and other social distancing measures implemented around the country to slow the spread of COVID-19.
At the end of April, approximately 27 of our 800 plus patient care clinics were temporarily closed and another 179 clinics were open either part time or by appointment only. These closures and adjusted hours were necessitated in large part by the shelter-in-place and other social distancing actions adopted locally in various parts of the country.
We will capture three full months of our cost savings initiatives in the second quarter, but do not expect the impact of the anticipated revenue decline to be fully offset. So, we will likely see earnings and cash flow declines in the second quarter. We believe the second quarter will likely be the most Second quarter for us this year.
We currently anticipate that the impact of COVID-19 will affect us for the remainder of the year and are focused on managing our liquidity through this period. On the other side of this, I am confident Hanger will emerge strong and well-positioned to grow picking up where we left off prior to this unfortunate situation.
The disruption in the demand for services and products Hanger provides is only temporary. We have all the necessary assets. And as I hope you can see, a resilient workforce and the important service we provide will be around for a long time. At the current time, we have paused our M&A program. The pandemic has been painful for the industry and in some parts of the country we have received requests from referral sources to pick up Patient Care where smaller, independent O&P providers have been unable to provide Patient Care.
When this is over, it is possible that we may see an increased interest on the part of the over 2,000 independent O&P clinics out there to leave independent practice for the more stable platform of Patient Care support that Hanger provides.
Now, let me turn the call over to Tom so he can go through the financials in more detail. Tom?
Thomas Kiraly
Good morning. As was the case for many companies, our plans and business trends were interrupted in late March, and events led us to quickly redirect our attention to a wholly different set of objectives than the ones that we had intended for 2020. In the first quarter, Hanger reported 5.3 million in adjusted EBITDA, [and] 233.7 million of revenue, which reflected decreases from the 11.9 million on adjusted EBITDA and 236.4 million in revenue we reported for the same period last year.
Our results for the quarter would have been markedly different where it not for two key items: Patient cancellations in late March associated with a virus spread and resulting governmental suppression measures, and an increase in bad debt expense associated with our expectation that degrading economic conditions resulting from the virus will have an adverse effect on our bad debt write-offs.
First, to provide you with more insight into the effects of patient cancellations, the COVID-19 virus has resulted in approximately a 40% decrease in our patient employment volumes commencing in late March and continuing through April. When reviewing the effects of these March cancellations on our prosthetic deliveries, it's important to bear in mind that it typically takes roughly 45 to 60 days between a patient receiving their initial evaluation and our ultimate delivery to them of a fabricated prosthetic device.
Normally the last two weeks of March are important days as we deliver devices we have fabricated for patients seen during January and February. Because of patient appointment cancellations in late March, we experienced a significant increase in our clinic work in process balance. WIP reflects the capitalized amount of componentry, direct labor, and overheads, amounts that relate to devices that are being fabricated or have been fabricated, but remain on deliver.
Total WIP increased to 14.4 million for the first quarter, which was approximately 3 million over what we would consider a normal level. Within these WIP balances as of March 31 of this year, we had completed the undelivered prosthetic devices with a gross billing value of 9.6 million in our work-in-process.
It's important to note that we usually have some number of completed prosthetic devices in WIP at the end of a quarter, but believe that a billing value for approximately 4 million to 5 million would have been delivered in March were it not for the canceled patient appointments.
Likewise, we had similar delays in revenue associated with cancellations of appointments by orthotics patients, and carried an un-billed value of 9.1 million and completed orthotics, of which we believe we would have recognized a meaningful portion had we been able to conduct a normal level of patient appointments. This was the key factor that resulted in our reporting of a decrease in same clinic revenue of 3.2% during the quarter.
As you know, our business does benefit from the fact that patients do ultimately need their prosthetic and orthotic devices. So, we view these declines in patient appointments and deliveries as being temporary and the direct result of their personal caution in coming to our clinics, as a result of these shelter-in-place policies.
In a similar fashion, we also experienced a 4.5% decrease in revenue of our distribution services business during the quarter. We believe the majority of this decrease was the result of independent providers’ orthotics and prosthetics slowing their purchases of componentry, but to a lesser extent, these revenue decreases also related to our planned discontinuance of sales of low and orthotics to podiatrists.
Revenue in our therapeutic solutions business was 11.9 million and reflected a 757,000 or 6% declines compared with the first quarter of 2019. Well, this area of our business has been affected by changes and limitations imposed in skilled nursing facilities associated with the COVID-19. The majority of this decrease does relate to the past business trends we've discussed in prior calls.
In addition to the significant effects that the COVID-19 pandemic had on our first quarter revenues and related gross earnings contributions, it also played a key role in our significant increase in bad debt expense during the quarter. The bad debt expense of our products and services segment increased by 1.9 million in the quarter and the majority of this increase related to our assessment of the likelihood that we will incur increased write-offs of customer receivables in this segment of our business due to the nation's worsening employment and economic conditions.
In addition to the impact of the pandemic, the extent of this increase was also related to our implementation effective during the first quarter of ASC 326 financial instruments credit losses, also known as CECL. This accounting literature requires that we directly consider changes in current credit information in the establishment of our bad debt reserves. Between the substantial affect which the COVID-19 pandemic had on our revenues and the effects it had on our credit condition of our distribution services customers this virus has caused a clear change in the course of our financial performance, and our management focus during 2020.
As Vinit discussed, throughout March we undertook extensive planning and implemented broad cost reduction and liquidity enhancement measures with the aim of ensuring that Hanger would be proactively positioned to contend with the adverse effects this pandemic was likely to have on our business.
As he shared, this involved implementing immediate and comprehensive changes to our componentry purchases, compensation and staffing levels, other operating expenses, capital projects, and overall liquidity management. Excluding decreases in componentry costs, which shouldn't vary in a corresponding fashion with decreases in revenue, we currently estimate that these cost reductions will provide operating cost savings and the approximate range of 75 million to 80 million over the second and third quarters.
Additionally, we currently estimate that our capital expenditures for the full-year will be in the approximate range of 30 million to 35 million. This reflects a reduction of approximately 10 million to 15 million from the 45 million that we'd originally plan to expand. We are glad that we chose to take these actions proactively and decisively in the last weeks of March, as they positioned us well as the full effects of the pandemic unfolded.
Additionally, due to the uncertain effect that we believe the crisis could possibly have on the viability of our nation's financial institutions, and our access to borrowings under our revolving credit facility, we drew 79 million under our revolving credit facility and continue to carry these relatively higher revolver borrowings and the corresponding cash balance at this time.
Well, we believe these and other actions we’ve taken and positioned our operating structure is effectively as possible for decreases in our business volumes we were experiencing. We do nevertheless expect that our earnings in the coming quarters will be adversely affected by the pandemic. From a cash flow and liquidity perspective, we had a strong first quarter.
The company's collections improved over those [of the] first quarter of 2019, and our day sales outstanding decreased from 52 days to 50 days. This was the primary contributing factor to our $10.8 million increase in first quarter operating cash flows as compared to those of the first quarter of last year.
As of March 31, we had 131.8 million in total liquidity as compared to 115.3 million at the end of the first quarter of 2019. In early April, we did use 20 million in cash for the purposes of closing an important acquisition, for which we had a definitive agreements signed in early March.
Nevertheless, after considering these outlays the cost and liquidity measures we implemented in the late March, when coupled with collections of first quarter receivables, and benefits from certain aspects of the CARES Act, have enabled us to continue to maintain a satisfactory level of liquidity.
While we do anticipate that the adverse effects of the COVID-19 pandemic will result in decreases in our overall liquidity in coming quarters, we currently believe the operational and financial measures we've taken will enable us to maintain adequate liquidity balances throughout the crisis.
From an indebtedness perspective, due to the likely near-term effect, which this pandemic will have on our business volumes and adjusted EBITDA results, we do expect to report an increase in our leverage in coming quarters. As a result, in addition to the cost reduction measures we implemented in late March, we also commenced discussions regarding an amendment of our credit agreement with our evolving lenders during the first weeks of April.
Earlier this week, this process was successfully concluded, and the resulting amendment has increased the allowable levels of leverage that Hanger can carry under its credit agreement. And it's also incorporated to other computational changes to leverage that will position the company to maintain its covenant compliance, despite the currently anticipated disruptions that the COVID-19 pandemic will likely have on near term results.
In closing, while the COVID-19 pandemic has had and will continue to have an adverse effect on our 2020 results, we believe Hanger is well-positioned to manage through this public health crisis. We believe the operational, cost reduction, liquidity and indebtedness measures we've put in place during late March early April when coupled with the underlying essential nature of the healthcare services we provide our patients has put us in a position where these near term business volume pressures will be manageable.
Once this crisis subsides, we look forward to restoring the positive strategic and business momentum that we were clearly demonstrating as we entered the year.
With that, I'll turn the call back over to the operator to open it up for any questions that you may have.
Question-and-Answer Session
Operator
Yes, thank you. [Operator Instructions] And the first question comes from Larry Solow with CJS Securities.
Larry Solow
Good morning, guys. Good to hear your voice and I hope you and your families are hanging in there doing relatively well. Perhaps a couple of questions, obviously, it's, you know, unprecedented times and you guys are clearly reacting, doing the best you can and preserving cash and cost cuts, can you speak to, you know, a lot of the reasons why we like Hanger, the differentiation, you know, [indiscernible] of it, and a lot of programs that you've, you know, had ongoing that have, you know, obviously helped for the long term. How does a lot of this stuff, this process get impacted in the short-run? And, and that question also goes along the line with the supply chain improvements that you guys are putting through now. Did some of that stuff also get slowed or impacted.
Vinit Asar
Thanks, Larry. Thanks for the question. Appreciate it, and also hope you all are safe up there in the Northeast. So, in terms of the programs that we've put in place here over the last few years, you know, we, I think as Tom alluded to, we were feeling terrific about the impact of those programs as we began the year, you know, early January, late December, January, early February, because we could just sense the momentum that our business had. And you know, a lot of those programs combined the use of doing patient evaluation clinics, social media campaigns, outreach to patient to patients to bring them into our clinics.
And clearly that has slowed down because, you know, as I've mentioned in my comments, we're using a little more of the telehealth platforms, etc, to screen patients earlier. Some of the patient evaluation clinics that we had planned, you know, for this year, where we would bring in groups of patients together and show them the technology and show them different aspects of orthotic and prosthetic care are all on hold because of social distancing measures.
So, a lot of those programs are certainly on hold, but we are, you know, using social media and outreaches to patients, you know, during the year. So, we'll see how that proceeds, but certainly it is a different sort of approach to patient outreach than we had planned.
Tom you want to talk about the supply chain?
Thomas Kiraly
Yeah, Larry, from the standpoint of a supply chain, we did pause, you know, the supply chain systems and financial systems project that involved the warehouse management system, as well as the underlying financial systems. Where we were though in construction of our new distribution facility in Alpharetta was we're well underway in Q1 and already, you know, committed in Q2. So, when you look at the 30 million to 35 million of capital expenditures, there's approximately 8 million in that number that really relates to the build out of that facility.
So, the company's actual underlying capital expenditures, you know, more of the routine capital expenditures have been cut into the low 20s. So, we're proceeding with that. We won't be able to operate it in the same efficient way as we will ultimately with that new system, but we are at a point where we feel that that part of this will go in. We are also going to benefit this year from an earlier savings, you know, from the freight. It's not going to be all of the savings because again, we don't have a system, but some of the pricing and some of the practices we've had on consignment are starting to pay back earlier than we anticipated.
So, some savings are coming into the numbers, all by it, they will, you know, probably be consumed by these overall COVID variances, but we'll see some of that. Some of the other savings, those associated with the system probably will be pushed out at least for a year given that we’ve paused the underlying technology. So, I'll pause there and see if there's any follow on question.
Vinit Asar
Hey, Larry, one thing I would add is, you know, during this period, what we are seeing is because of the network of clinics that we have, we are seeing some inbound calls from referral sources that in the past you know, we may not have had business with, but because some of the smaller O&P providers may not be able to deliver the care, we are seeing in-bound calls from hospitals and referral sources during this period because we do have operations either fully open or open by appointment only, and we're letting everybody know that we are available for care.
Larry Solow
Thank you.
Operator
Thank you. And the next question comes from Brian Tanquilut with Jefferies.
Brian Tanquilut
Hey, good morning, guys. Hope everyone's okay through all this. I guess, Vinit, my first question is for you. So where do you stand today? Obviously, there's a lot of disruption in the business, but as we think about 2021, you know, if you think about COVID potentially or likely normalize over the course of this year, how do you view the earnings power in the business for 2021 versus where you're sitting, let's just say sometime in February when you did the Hanger Live event here in Nashville?
Vinit Asar
Yes, great question, Brian. And, you know, it's almost like we've kind of lost a year, I think is how we're thinking about it, you know, because if you think about it, we are putting a lot of our investments in 2020 on hold, you know, and we're focusing on liquidity and employee safety and patient – you know the continuity of care this year. So, it's almost like we'll pick up assuming there is no resurgence in the pandemic, assuming there's no second or third wave that's – you know that substantially affects the country later this year or early next year, which again, is a big assumption. Then, it's like we almost skipped 2020 and we begin our growth plans in 2021 as if we were back in early 2020, if that makes sense.
Brian Tanquilut
No, that does. I guess that's the other point, right, I mean, it sounded like you guys were tracking pretty well, in January and February and I know we've had a lot of discussions in the past about reigniting growth in the business or accelerating growth, if you don't mind walking us through what you saw pre-COVID in terms of, you know, the trends and the growth rates that you were seeing in the different product lines, orthotics versus prosthetics?
Thomas Kiraly
Sure, Brian. So, first of all, I think if you go back to the comments about WIP and you were to go back into, you know, a number in terms of the unbilled, you'd find a pretty healthy same-clinic growth rate, you know, for the first quarter, you know, certainly well within the target range that we had thought was an attractive one for the year. Suddenly, when you look at the actual decline that occurred, the 3.2%, we had a very modest decline in prosthetics, only about 0.6%.
And so, when you consider the fact that we probably had about 500 devices that did not get delivered in the quarter because of the cancellation of patient appointments, prosthetics were growing in a pretty robust fashion. So, it was really confirming for us that all of the things that Vinit described, all of the things that our people were doing, were really working in a pretty profound way. You know, our goal will be, as Vinit described, as we emerge from this, to get back to business as quickly as we can to resume what we really see as an indication that Hanger has positioned itself successfully as it wanted to in terms of the medicine that it provides.
Brian Tanquilut
That makes a lot of sense. I guess Tom just to that point, if we think about, you know, a lot of the states are allowing the reopening of businesses, probably within the next few weeks, how are you thinking about the seasonality factor, I mean, because you've gotten WIP sitting there, you’ve got 500 devices that presumably you will be installing sometime in the second quarter, but obviously, you’re backlog is delayed a little bit with patients not coming in the door. So – you know so Q2, you see a drop, and then you see an acceleration in Q3? Or how are you thinking about the seasonality factor for the cadence of, you know, without numbers, obviously, the pickup in business over the course of this year?
Thomas Kiraly
Yes. So, I think, Vinit alluded to it, you know, we've been modeling a number of models, and we're – the model we're currently following does foresee more of an extended effect of the virus. We've set up our plans and our liquidity really for a one-year period, you know, for – so assuming COVID effects us primarily Q2 to a lesser extent Q3 and to even a lesser extent Q4.
And when you look at that, I think that overrides – that's going to override the natural seasonality that the business had, you know, where Q2 is obviously going to be the most difficult quarter with patient appointments down 40% in April, but our – you know our plans are and our belief is that we should start to see that subside as some of the patients return to more of a normal view and resume their normal trust, you know, that they can conduct their lives. We'd like to believe that our business volumes improve after that.
Brian Tanquilut
Yes, got it. And then, I really appreciate the extensive discussion you've put in the 10-Q on COVID and liquidity, but as we think about the bad debt reserves, reserves adjustment that you put in the quarter, I mean, do you think that will be a lasting adjustment that's more structural than not? Or is that a temporary thing that we should re-adjust at some point?
Thomas Kiraly
Well, I think what – I think when it came on, we had a number of customers, we had customer receivables in the distribution business from Q1 and Q4. We responded in the distribution business with major changes in Q1 to how we're staffing and how we're operating our credit policies, primarily in response to COVID.
Vinit will probably speak in a moment to how we think about our customers in distribution because we're certainly sensitive and want to help them through this without putting the company in financial risk. But we'd like to believe that the Q1 number is a bit of a high point and that through both the reduced volume that we have in that business, as well as the improved procedures, well, there could be some further risk of bad debt expense that won't be as extensive as you saw in Q1. Vinit?
Vinit Asar
Yes, Brian. I’ll just add a little bit, you know, our distribution business, you know, we’ve a lot of confidence in that business. The leadership is terrific and the way they're approaching their customers, it's a balance. The priority for the distribution business is to make sure we protect the AR that we have, the accounts receivable that we have, but the balance also is, you know, they're looking for those customers that have a strong – you know have strong business and have longevity.
So, we're trying to be flexible with some customers as well that we know will make it through this and will be long lasting customers for us as well. So, that's the balance the team is putting in, but a big focus on, you know, making sure that the AR is protected.
Brian Tanquilut
Got you. And then, I guess my last question is, Vinit, you’re at the company back through the last recession, how are you thinking about the – you know just the [defensive ability] of the business across your different service lines?
Vinit Asar
Sure, yes. I think I joined at the tail-end of that last recession, and, you know, in one way, this is a very different sort of – you know sort of period that the company will go through or the country will go through as well. But back in the 2007, 2008, 2009 period, even before I joined, as the country was going through a recession, it appeared that – you know that the business is somewhat recession proof in the sense that people do need their care and they will come in.
The difference now though, is that there are more patients, more customers that have these high deductible plans that have more out of pocket payments today than in 2008, 2009 periods. So, that's the one thing we're watching for. So, it may not be an apples-to-apples comparison, but in terms of managing through a recession, you know, our services and products will still be in demand.
Brian Tanquilut
Got it. Alright, thank you, guys.
Operator
Thank you.
Vinit Asar
Thank you, Brian.
Thomas Kiraly
Great. Thanks, Brian.
Operator
And as that does conclude the question and answer session, I would like to turn the call back over to Vinit Asar for any closing comments.
Vinit Asar
Great, thanks. You know, as you can all see, you know, we're focused on two things as the country navigates this pandemic. You know, first as we mentioned the safety and continuity of care for employees and patients. And second, you know, we're focused on ensuring we have the adequate liquidity to get us through the downturn of the business as a result of COVID-19.
And finally, as you’ve heard, even on this call, you know, we believe we have the right strategy in place, we have the right people in place, we have the right business model for when – you know when this does settle, you know, we'll pick up where we left off in terms of the growth trajectory we believe is ahead of us. So, I'll close by saying the same thing I say to all our employees on the calls during this time, you know, I say be safe, be kind and be strong. So, thank you all.
Operator
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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