U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,June 30, 2022
(unaudited)
1. 1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
The consolidated financial statements include the accounts of U.S. Physical Therapy, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated.
The Company operates its business through 2 reportable business segments. The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. The Company’s physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.
During the 2021 year and the threesix months ended March 31,June 30, 2022, the Company completed the acquisitions of 4 multi-clinic practices and 2 industrial injury prevention businesses as detailed below.
Acquisition | | Date | | Acquired | | | Clinics | |
March 2022 Acquisition | | March 31, 2022 | | | 70 | % | | | 6 | |
December 2021 Acquisition | | December 31, 2021 | | | 75 | % | | | 3 | |
November 2021 Acquisition | | November 30, 2021 | | | 70 | % | | 0
| IIPS* | |
September 2021 Acquisition | | September 30, 2021 | | | 100 | % | | 0
| IIPS* | |
June 2021 Acquisition | | June 30, 2021 | | | 65 | % | | | 8 | |
March 2021 Acquisition | | March 31, 2021 | | | 70 | % | | | 6 | |
* | Industrial injury prevention services business |
As of March 31,June 30, 2022, the Company operated 601608 clinics in 39 states. The Company also manages physical therapy facilities for third parties, primarily hospital and physicians, with 3833 third-party facilities under management as of March 31,June 30, 2022.
During the six months ended June 30, 2022, the Company closed 3 clinics and sold 5 clinics.
Physical Therapy Operations
The physical therapy operations segment primarily operates through subsidiary clinic partnerships, in which the Company generally owns a 1% general partnership interest in all the Clinic Partnerships. Our limited partnership interests typicallygenerally range from 10%65% to 35%75% in the Clinic Partnerships. The managing therapist of each clinic owns, directly or indirectly, the remaining limited partnership interest in most of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, the Company operates some clinics, through wholly-owned subsidiaries, under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”).
The Company continues to seek to attract for employment physical therapists who have established relationships with physicians and other referral sources, by offering these therapists a competitive salary and incentives based on the profitability of the clinic that they manage. For multi-site clinic practices in which a controlling interest is acquired by the Company, the prior owners typically continue as employees to manage the clinic operations, retain a non-controlling ownership interest in the clinics and receive a competitive salary for managing the clinic operations. In addition, the Company has developed satellite clinic facilities as part of existing Clinic Partnerships and Wholly-Owned Facilities, with the result that a substantial number of Clinic Partnerships and Wholly-Owned Facilities operate more than 1 clinic location.
Clinic Partnerships
For non-acquired Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly or indirectly, are recorded within the balance sheets as non-controlling interest – permanent equity and within the income statements as net income attributable to non-controlling interest – permanent equity.
For acquired Clinic Partnerships with redeemable non-controlling interest, the earnings attributable to the redeemable non-controlling interest are recorded within the consolidated statements of income line item – net income attributable to non-controlling interest – redeemable non-controlling interest – temporary equity and the equity interest is recorded on the consolidated balance sheet as redeemable non-controlling interest – temporary equity. In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but charged directly to retained earnings and is included in the basic and diluted earnings per share calculation.
Wholly-Owned Facilities
For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the profit sharing therapists. The amount is expensed as compensation and included in operating cost – salaries and related costs. The respective liability is included in current liabilities – accrued expenses on the balance sheets.
Industrial Injury Prevention Services
Services provided in the industrial injury prevention services segment include onsite services for clients’ employees including injury prevention and rehabilitation, performance optimization, post offer employment testing, functional capacity evaluations, and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. The Company performs these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and certified athletic trainers.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q. However, the statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes this report contains all necessary adjustments (consisting only of normal recurring adjustments) to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. For further information regarding the Company’s accounting policies, please read the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 1, 2022.
The Company believes, and the Chief Executive Officer and Chief Financial Officer have certified, that the financial statements included in this report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented.
Operating results for the three and six months ended MarchJune 30 31,, 2022, are not necessarily indicative of the results the Company expects for the entire year.
In addition to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022, see Item 1A in Part II of this report.
Impact of COVID-19
Medicare Accelerated and Advance Payment Program (“MAAPP Funds”)
On March 27, 2020, in response to the COVID-19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provided waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19.
The CARES Act allowed for qualified healthcare providers to receive advanced payments under the MAAPP Funds during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. The Company applied for and received approval from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. The Company recorded the $14.1 million in advance payments received as a liability. During the three months ended March 31, 2021, the Company repaid the MAAPP Funds of $14.1 million rather than applying them to future services performed. During the threesix months ended March 31,June 30, 2022, and 2021, the Company did 0t record any income from payments under the CARES Act.
Significant Accounting Policies
Cash Equivalents
The Company maintains its cash and cash equivalents at financial institutions. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The combined account balances at several institutions typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related on deposits in excess of FDIC insurance coverage. Management believes that the risk is not significant.
Long-Lived Assets
Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for furniture and equipment range from three to eight years and for purchased software from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets, which is generally three to five years.
The Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence of certain events or circumstances which indicate that the amounts may be impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company did 0t note an impairment to long-lived assets during the three and six months ended MarchJune 30 31,, 2022.
Goodwill
Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of the acquired business assets, which include certain identifiable intangible assets. Historically, goodwill has been derived from acquisitions and, prior to 2009, from the purchase of some or all of a particular local management’s equity interest in an existing clinic. Effective January 1, 2009, if the purchase price of a non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.
Goodwill and other indefinite-lived intangible assets are not amortized but are instead subject to periodic impairment evaluations. The fair value of goodwill and other identifiable intangible assets with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events or conditions and are written down to fair value if considered impaired. These events or conditions include but are not limited to: a significant adverse change in the business environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge. The Company evaluates indefinite lived tradenames in conjunction with its annual goodwill impairment test.
The Company has a 2 operating segment business which is made up of various clinics within partnerships, and an industrial injury prevention services business. The partnerships are components of regions and are aggregated to the operating segment level for the purpose of determining the Company’s reporting units when performing its annual goodwill impairment test. In 2021 and 2020, there were 6 regions. In addition to the 6 regions, the impairment analysis included a separate analysis for the industrial injury prevention services business, as a separate reporting unit.
As part of the impairment analysis, the Company is first required to assess qualitatively if it can conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, the Company is then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. The Company considers both the income and market approach in determining the fair value of its reporting units when performing a quantitative analysis.
An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated fair value of the reporting unit. The evaluation of goodwill in 2021 and 2020 did not result in any goodwill amounts that were deemed impaired.
As part of the annual assessment, the Company evaluated whether events or circumstances indicated that it was more likely than not that the fair value of the reporting units were reduced below their carrying value as of December 31, 2021. As a result of the assessment, the Company determined that it was not more likely than not that goodwill and tradenames of the reporting units were impaired as of December 31, 2021.
The Company will continue to monitor for any triggering events or other indicators of impairment.
Redeemable Non-Controlling Interest
The non-controlling interests that are reflected as redeemable non-controlling interest in the consolidated financial statements consist of those that the owners and the Company have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met. The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements. The redemption rights can be triggered by the owner or the Company at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically three to five years, as defined in the limited partnership agreement. The redemption rights are not automatic or mandatory (even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemption rights have been satisfied.
On the date the Company acquires a controlling interest in a partnership, and the limited partnership agreement for such partnership contains redemption rights not under the control of the Company, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption – Redeemable non-controlling interest – temporary equity. Then, in each reporting period thereafter until it is purchased by the Company, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial carrying value, based on the predetermined formula defined in the respective limited partnership agreement. As a result, the value of the non-controlling interest is not adjusted below its initial carrying value. The Company records any adjustments in the redemption value, net of tax, directly to retained earnings and the adjustments are not reflected in the consolidated statements of income. Although the adjustments are not reflected in the consolidated statements of income, current accounting rules require that the Company reflects the adjustments, net of tax, in the earnings per share calculation. The amount of net income attributable to redeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statements of net income. Management believes the redemption value (i.e. the carrying amount) and fair value are the same.
Non-Controlling Interest
The Company recognizes non-controlling interest, in which the Company has no obligation but the right to purchase the non-controlling interest, as permanent equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interest is included in consolidated net income on the face of the statements of net income. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling equity investment on the deconsolidation date.
When the purchase price of a non-controlling interest by the Company exceeds the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital. Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner.
Revenue Recognition
Revenues are recognized in the period in which services are rendered. See Note 3- Revenue Recognition, for further discussion of revenue recognition.
Provision for Credit Losses
The Company determines provisions for credit losses based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in operating cost in the consolidated statements of net income. Net accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and provisions for credit losses, includes only those amounts the Company estimates to be collectible.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740, Income Taxes requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. The legislation had no effect on the Company’s deferred income taxes and current income taxes payable during the three and six months ended March 31,June 30, 2022.
The Company did 0t have any accrued interest or penalties associated with any unrecognized tax benefits 0r was any interest expense recognized during the three and six months ended March 31,June 30, 2022. The Company records any interest or penalties, if required, in interest and other expense, as appropriate.
Fair Value of Financial Instruments
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
Level 3 – Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
The carrying amounts reported in the balance sheets for cash and cash equivalents, contingent earn-out payments, accounts receivable, accounts payable and notes payable approximate their fair values due to the short-term maturity of these financial instruments. The carrying amount of the debt under the Third Amended and Restated Credit Agreement (as defined(defined as “Credit Agreement” in Note 9) approximates the fair value. The interest rate on the debt under the Third Amended and Restated Amended Credit Agreement is tied to the London Interbank OfferedSecured Overnight Financing Rate (“LIBOR”SOFR”). Provisions within the agreement currently provide the Company with the ability to replace LIBOR with a different reference rate in the event LIBOR ceases to exist.
The redeemable non-controlling interest included on the consolidated balance sheets and the put right associated with the potential future purchase of the separate company in the November 2021 acquisition (as described in Note 2) are both marked to fair value on a recurring basis using levelLevel 3 inputs. The redemption value of redeemable non-controlling interests approximates the fair value. The put right associated with the potential future purchase of the separate company in the November 2021 acquisition is determined using a Monte Carlo simulation model utilizing unobservable inputs such as asset volatility and discount rates. The unobservable inputs in the valuation include asset volatility of 25% and a discount rate of 9.93%10.49%. See Note 5 for the changes in the fair value of redeemable non-controlling interest.
The put right decreased $603 thousandincreased $0.6 million for the three months ended March 31,June 30, 2022 and was valued at $2.9$3.5 million on March 31,June 30, 2022.
The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement. The carrying and fair value of the Company’s interest rate derivative as of June 30, 2022, was $0.5 million, which is included in current liabilities in the Company’s consolidated balance sheet. See Note 10 for changes in the fair value of the interest rate swap.
Segment Reporting
Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by chief operating decision makers in determining the allocation of resources and in assessing performance. The Company currently operates through 2 segments: physical therapy operations and industrial injury prevention services.
Use of Estimates
In preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to, goodwill impairment, tradenames and other intangible assets, allocations of purchase price, provision for credit losses, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates.
Self-Insurance Program
The Company utilizes a self-insurance plan for its employee group health insurance coverage administered by a third party. Predetermined loss limits have been arranged with an insurance company to minimize the Company’s maximum liability and cash outlay. Accrued expenses include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims. Management believes that the current accrued amounts are sufficient to pay claims arising from self-insurance claims incurred through March 31,June 30, 2022.
Restricted Stock
Restricted stock issued to employees and directors is subject to continued employment or continued service on the board, respectively. Generally, restrictions on the stock granted to employees lapse in equal annual installments on the following four anniversaries of the date of grant. For those shares granted to directors, the restrictions will lapse in equal quarterly installments during the first year after the date of grant. For those granted to officers, the restriction will lapse in equal quarterly installments during the four years following the date of grant. Compensation expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the vesting period. The Company recognizes any forfeitures as they occur. The restricted stock issued is included in basic and diluted shares for the earnings per share computation.
Recently Adopted Accounting Guidance
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)–Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and early adoption was permitted. The Company adopted this pronouncement as of January 1, 2021. The adoption of ASU 2020-06 did not have a material impact on the Company’s financial statements.
In August 2020, the FASB issued ASU 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. As part of this update, convertible instruments are to be included in diluted earnings per share using the if-converted method, rather than the treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive, regardless of whether the entity or the counterparty can choose between cash and share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy.
This pronouncement was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021.The Board specified that an entity should adopt the guidance at the beginning of its annual fiscal year. The Company adopted this pronouncement as of January 1, 2022. The use of either the modified retrospective or fully retrospective method of transition is permitted. The adoption of ASU 2020-06 did not have a material impact on the Company’s financial statements.
Recently Issued Accounting Guidance
In March 2020,, the FASB issued ASU 2020-04,, Reference Rate Reform (Topic 848)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The new guidance was effective upon issuance, and the Company is allowed to electhas elected to apply the amendments prospectively through December 31, 2022.2022. Borrowings under the Third Amended and Restated Credit Agreement bear interest based on LIBOR or an alternate base rate. Provisions withinSOFR. The interest rate applicable to the agreement currently provide the Company with the abilityThird Amended and Restated Credit Agreement is tied to replace LIBOR with a different reference rate in the event LIBOR ceases to exist.SOFR.
2. ACQUISITIONS OF BUSINESSES
On March 31, 2022, the Company acquired a 70% interest in a 6-clinic physical therapy practice in South Central Pennsylvania – Madden and Gilbert Physical Therapy, LLC.practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $11.5 million.million, of which $11.2 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 3.5% per annum and the principal and interest are payable on March 31, 2024.
The purchase price for the 2022 acquisition has been preliminarily allocated as follows (in thousands):
| | | Physical Therapy Operations | |
Cash paid, net of cash acquired | | $ | 11,242 | | | $ | 11,799 | |
Seller notes | | | 300 | | | | 374 | |
Contingent payments | | | | 100 | |
Total consideration | | $ | 11,542 | | | $ | 12,273 | |
| | | | | | | | |
Estimated fair value of net tangible assets acquired: | | | | | | | | |
Total current assets | | | $ | 466 | |
Total non-current assets | | $ | 300 | | | | 2,655 | |
Total liabilities | | | | (2,664 | ) |
Net tangible assets acquired | | | | 457 | |
Customer and referral relationships | | | 3,743 | | | | 3,742 | |
Non-compete agreements
| | | 247 | | | | 247 | |
Tradenames | | | 659 | | | | 659 | |
Goodwill | | | 11,539 | | | | 12,114 | |
Fair value of non-controlling interest (classified as redeemable non-controlling interest) | | | (4,946 | ) | | | (4,946 | ) |
| | $ | 11,542 | | | $ | 12,273 | |
On December 31, 2021, the Company acquired a 75% interest in a 3-clinic physical therapy practice with the practice founder retaining 25%. The purchase price for the 75% interest was approximately $3.7$3.6 million, of which $3.5$3.4 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on December 31, 2023.
On November 30, 2021, the Company acquired an approximate 70% interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The purchase price for the approximate 70% equity interest, not inclusive of a $2.0 million contingent payment, was approximately $63.2$65.2 million of which $62.2$60.7 million was paid in cash and $1.0 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest is payable on November 30, 2023. As part of the transaction, the Company also agreed to the potential future purchase of a separate company under the same ownership that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The current owners have the right to put this transaction to the Company in approximately five years, with such right having an initial fair value of $3.5 million value on December 31, 2021, as reflected on the Company’s consolidated balance sheet in Other long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in value reflected in the Company’s consolidated statement of income. The Company does not currently possess any of the controlling interests in this separate company, does not control this company through contract or governance rights and currently does not exercise significant influence over this separate company. Due to these reasons, and based on current accounting guidance, the Company did not consolidate the separate company through the variable interest or voting interest model. On March 31,June 30, 2022, the fair value of this put right was $2.9$3.5 million. The decreaseincrease was reflected in the consolidated statement of income in the line item - Gain– Loss on revaluation of put-right liability.
On September 30, 2021, the Company acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The Company acquired the company’s assets at a purchase price of approximately $3.3 million (which includes the obligation to pay an amount up to $0.6 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met) and contributed those assets to the industrial injury services business. The initial purchase price, not inclusive of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on September 30, 2023.
On June 30, 2021, the Company acquired a 65% interest in an 8-clinic physical therapy with the previous owners retaining 35%. The purchase price was approximately $10.3$10.7 million, of which $9.0$8.6 million was paid in cash, $1.0 million iswas payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable. The business criteria were met and accordingly $1.0 million was paid in July 2022. The note accrues interest at 3.25% per annum and the principal and interest are payable on June 30, 2023. Additionally, the Company has an obligation to pay an additional amount up to $0.8 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date.
On March 31, 2021, the Company acquired a 70% interest in a 5-clinic physical therapy practice with the previous owners retaining 30%. When acquired, the practice was developing a sixth clinic which has been completed. The purchase price for the 70% interest was approximately $12.0$11.6 million, of which $11.7$11.3 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on March 31, 2023.
The purchase price for the 2021 acquisitions has been preliminarily allocated as follows (in thousands):
| | | | | Physical Therapy | | | | | | | | | Physical Therapy | | | | |
| | IIPS* | | | Operations | | | Total | | | IIPS* | | | Operations | | | Total | |
Cash paid, net of cash acquired | | $ | 63,193 | | | $ | 23,544 | | | $ | 86,737 | | | $ | 63,193 | | | $ | 23,544 | | | $ | 86,737 | |
Seller notes | | | 1,250 | | | | 800 | | | | 2,050 | | | | 1,250 | | | | 800 | | | | 2,050 | |
Contingent payments | | | 2,520 | | | | 837 | | | | 3,357 | | | | 2,520 | | | | 837 | | | | 3,357 | |
Other payable | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,000 | | | | 1,000 | |
Seller put right | | | 3,522 | | | | 1,000 | | | | 4,522 | | | | 3,522 | | | | 0 | | | | 3,522 | |
Total consideration | | $ | 70,485 | | | $ | 26,181 | | | $ | 96,666 | | | $ | 70,485 | | | $ | 26,181 | | | $ | 96,666 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value of net tangible assets acquired: | | | | | | | | | | | | | | | | | | | | | | | | |
Total current assets | | $ | 5,588 | | | $ | 2,041 | | | $ | 7,629 | | | $ | 5,588 | | | $ | 1,891 | | | $ | 7,479 | |
Total non-current assets | | | 12,620 | | | | 7,153 | | | | 19,773 | | | | 12,620 | | | | 7,014 | | | | 19,634 | |
Total liabilities | | | (4,842 | ) | | | (8,413 | ) | | | (13,255 | ) | | | (4,842 | ) | | | (8,399 | ) | | | (13,241 | ) |
Net tangible assets acquired | | $ | 13,366 | | | $ | 781 | | | $ | 14,147 | | | $ | 13,366 | | | $ | 506 | | | $ | 13,872 | |
Customer and referral relationships | | | 21,127 | | | | 6,090 | | | | 27,217 | | | | 21,127 | | | | 7,969 | | | | 29,096 | |
Non-compete agreements | | | 500 | | | | 539 | | | | 1,039 | | | | 500 | | | | 415 | | | | 915 | |
Tradenames | | | 5,141 | | | | 1,762 | | | | 6,903 | | | | 5,141 | | | | 2,144 | | | | 7,285 | |
Goodwill | | | 58,257 | | | | 28,965 | | | | 87,222 | | | | 58,257 | | | | 27,103 | | | | 85,360 | |
Fair value of non-controlling interest (classified as redeemable non-controlling interest) | | | (27,906 | ) | | | (11,956 | ) | | | (39,862 | ) | | | (27,906 | ) | | | (11,956 | ) | | | (39,862 | ) |
| | $ | 70,485 | | | $ | 26,181 | | | $ | 96,666 | | | $ | 70,485 | | | $ | 26,181 | | | $ | 96,666 | |
* | Industrial injusry prevention services |
The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition.
For the 2022 and 2021 acquisitions, a majority of total current assets primarily represents accounts receivable. Total non-current assets are fixed assets and equipment used in the practice.
The purchase prices plus the fair value of the non-controlling interests for the acquisitions in 2021 were allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. trade names, referral relationships and non-compete agreements, and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values being recorded as goodwill.
For the acquisitions in 2021, the values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period was 13.8 years. For non-compete agreements, the weighted-average amortization period was 5.6 years at the end of the year. The values assigned to tradenames are tested annually for impairment.
The consideration paid for each of the acquisitions was derived through arm’s length negotiations. Funding for the cash portions was derived from proceeds from the Company’s revolving credit facility. The results of operations of the acquisitions have been included in the Company’s consolidated financial statements since their respective date of acquisition. Unaudited proforma consolidated financial information for the acquisitions in 2022 and 2021 have not been included, as the results, individually and in the aggregate, were not material to current operations.
The purchase price plus the fair value of the non-controlling interest for the acquisitions in 2022 and those acquired after March 31,June 30, 2021 was allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. tradenames, referral relationships and non-compete agreements, and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used on March 31,June 30, 2022 based on additional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimated valuation of the tangible assets acquired, the completion of the valuation of identifiable intangible assets and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to goodwill. The Company does not expect the adjustments to be material. The purchase price allocation for the March 2021 Acquisition hasand the June 2021 Acquisitions have been finalized. The Company continues to evaluate the components for the purchase price allocations for other acquisitions in 2021.
For the acquisitions in 2022, the values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment.
The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition.
3.3. REVENUE RECOGNITION
Categories
Revenues are recognized in the period in which services are rendered.
NetNet patient revenue consists of revenue for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenue (patient revenue less estimated contractual adjustments) is recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between us and the patient upon each patient visit. Generally, this occurs as the Company provides physical and occupational therapy services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience.
Management contract revenue, which is included in other revenue in the consolidated statements of net income, is derived from contractual arrangements whereby the Company manages a clinic owned by a third party. The Company does not have any ownership interest in these clinics. Typically, revenue is determined based on the number of visits conducted at the clinic and recognized at the point in time when services are performed. Costs, typically salaries for our employees, are recorded when incurred.
Revenue from the industrial injury prevention services segment, which is also included in other revenue in the consolidated statements of net income, is derived from onsite services the Company provides to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention services segment is recognized when obligations under the terms of the contract are satisfied. Revenue is recognized at an amount equal to the consideration the Company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period.
Additionally, other revenue includes services the Company provides on-site, such as schools, for physical or occupational therapy services, and fees from athletic trainers. Contract terms and rates are agreed to in advance between the Company and the third parties. Services are typically performed over the contract period and revenue is recorded at the point of service. If the services are paid in advance, revenue is recorded as a liability over the period of the agreement and recognized at the point in time, when the services are performed.
The Company determines credit losses based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in clinic operating cost in the statements of net income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and provision for credit losses, includes only those amounts the Company estimates to be collectiblcollectiblee..
The following table details the revenue related to the various categories (in thousands):
| | Three Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
Net patient revenue | | $ | 109,538 | | | $ | 99,254 | | | $ | 118,196 | | | $ | 113,238 | | | $ | 227,734 | | | $ | 212,492 | |
Other revenue
| | | 872 | | | | 546 | | | | 898 | | | | 918 | | | | 1,770 | | | | 1,464 | |
Physical therapy operations
| | $ | 110,410 | | | $ | 99,800 | | | $
| 119,094 | | | $
| 114,156 | | | $
| 229,504 | | | $
| 213,956 | |
Management contract revenue
| |
| 2,226 | | |
| 2,559 | | |
| 2,125 | | |
| 2,739 | | |
| 4,351 | | |
| 5,297 | |
Industrial injury prevention services revenue | | | 19,068 | | | | 10,009 | | | | 19,437 | | | | 10,033 | | | | 38,505 | | | | 20,043 | |
| | $ | 131,704 | | | $ | 112,368 | | | $ | 140,656 | | | $ | 126,928 | | | $ | 272,360 | | | $ | 239,296 | |
Medicare Reimbursement
TThe he Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2017 through 2019, a0.5% increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 20250adjustment is expected to be applied each year to the fee schedule payment rates, before applying the mandatory budget neutrality adjustment.
In the 2020 MPFS Final Rule, Thethe Centers for Medicare and Medicaid Services (“CMS”) revised coding, documentation guidelines, and increased the code values for office/outpatient evaluation and management (“E/M”) codes and cuts to other codes to maintain budget neutrality of the MPFS beginning in 2021. Under the 2021 MPFS Final Rule, CMS increased the values for the E/M office visit codes and made cuts to other specialty codes to maintain budget neutrality. As a result, CMS projected a 9% decrease in fee schedule payment rates for therapy services set to take effect in 2021. However, Congress intervened with passage of the Consolidated Appropriations Act, 2021 and reimbursementreimbursement for the codes applicable to physical/occupational therapy services provided by our clinics received an estimated 3.5% decrease in the aggregate in payment from Medicare in calendar year 2021 as compared to 2020.2020.
In the 2022 MPFS Final Rule published on November 2, 2021, there was to be an approximately 3.75% reduction to Medicare payments for physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by Congress in 2021 under the Consolidated Appropriations Act, 2021.However, this reduction was addressed in the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 Act”) signed into law on December 10, 2021. Based on various provisions in the 2021 Act, the Company now estimates that the Medicare rate reduction for the full year of 2022 will be approximately 0.75%. The 2021 Act did not address the 15% reduction in Medicare payments for services performed by a physical or occupational therapist assistant, which began on January 1, 2022.
In the 2023 MPFS Proposed Rule published on July 7, 2022, CMS proposed a 4.4% reduction in the Physician Fee Schedule conversion factor. In addition, the Consolidated Appropriations Act, 2021 includes reductionsincluded a reduction in Medicare payment rates of approximately 3% in each of calendar years 2023 and 2024,2024. These payment reductions are expected to take effect unless regulatory or Congressional action results in modifications to such rates as has occurred in 2021 and 2022.
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the nextten years and requires automatic reductions in federal spending by approximately $1.2$1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2% reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2% reductions to Medicare payments through fiscal year 2027. TheThe CARES Act suspended the 2%payment reduction to Medicare payments for dates of service from May 1, 2020, through December 31, 2020. The Consolidated Appropriations Act, 2021 further suspended the 2% payment reduction until March 31, 2021. On April 14, 2021, additional legislation was enacted that waived the 2% payment reduction for the remainder of calendar 2021. The 2021 Act, which was signed into law on December 10, 2021, included a three-month extension of the 2% sequester relief applied to all Medicare payments through March 31, 2022, followed by three months of 1% sequester relief through June 30, 2022. Sequester relief is scheduled to then end on June 30, 2022.
Beginning in 2021, payments to individual therapists (Physical/Occupational Therapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit Based Incentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Therapists eligible to participate in MIPS include only those therapists who are enrolled with Medicare as private practice providers, and does not include therapists in facility-based providers, such as our clinics enrolled as certified rehabilitation agencies. Less than 3% of the Company’s therapist providers currently participate in MIPS. Under the MIPS requirements, a provider’sprovider’s performance is assessed according to established performance standards each year and then is used to determine an adjustment factor that is applied to the professional’sprofessional’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 will determine the payment adjustment in 2021. For those therapist providers who actually participated in MIPS during 2019, the resulting average payment adjustment was an increase of 1%.
Under the Middle-Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceededexceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700$3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700$3,700 threshold is applied to the Occupational Therapy. The MACRA directed CMS to modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the $3,700$3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate.
The Bipartisan Budget Act of 2018 extends the targeted medical review indefinitely but reduces the threshold to $3,000$3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.
CMS adopted a multiple procedure payment reduction (“MPPR”(“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (“RVU”(“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50%.
Medicare claims for outpatient therapy services furnished by therapist assistants on or after January 1, 2020 must include a modifier indicating the service was furnished by a therapist assistant. Outpatient therapy services furnished on or after January 1, 2022, in whole or part by a therapist assistant are paid at an amount equal to 85% of the payment amount otherwise applicable for the service.
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that the Company is in compliance, in all material respects, with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Company’sCompany’s financial statements as of March 31,June 30, 2022. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. For the threesix months ended March 31,June 30, 2022, and 2021, respectively, net patient revenue from Medicare was approximately $35.6$74.9 million and $26.6$62.1 million, respectively.
Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, the Company may not continue to receive reimbursement rates from Medicare that sufficiently compensate us for the Company’sCompany’s services or, in some instances, cover the Company’sCompany’s operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on the Company’sCompany’s revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect the Company’sCompany’s business, financial condition and results of operations.
Contractual Allowances
Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third partythird-party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in Company clinics. The Company estimates contractual allowances based on its interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow the Company to provide the necessary detail and accuracy with its collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from the Company’s estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. The Company’s billing system does not capture the exact change in its contractual allowance reserve estimate from period to period in order to assess the accuracy of its revenues and hence its contractual allowance reserves. Management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, historically the difference between net revenues and corresponding cash collections has generally reflected a difference within approximately 1.0% to 1.5% of net revenue. Additionally, analysis of subsequent periods’ contractual write-offs on a payor basis reflects a difference within approximately 1.0% to 1.5% between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, the Company believes that a change in the contractual allowance reserve estimate would not likely be more than 1.0% to 1.5% at March 31,on June 30, 2022.
A contract’s transaction price is allocated to each distinct performance obligation and recognized when, or as, the performance obligation is satisfied. To determine the transaction price, the Company includes the effects of any variable consideration, such as the probability of collecting that amount. The Company applies established rates to the services provided, and adjusts for the terms of payor contracts, as applicable. These contracted amounts are different from the Company’s established rates. The Company has established a “contractual allowance” for this difference. The allowance is based on the terms of payor contracts, historical and current reimbursement information and current experience with the clinic and partners. The Company’s established rates less the contractual allowance is the revenue that is recognized in the period in which the service is rendered. This revenue is deemed the transaction price and stated as “Net Patient Revenue” on the Company’s consolidated statements of income.
The Company’s performance obligations are satisfied at a point in time. After the clinic has provided services and satisfied its obligation to the customer for the reimbursement rates stipulated in the payor contracts (i.e. the transaction price), the Company recognizes the revenue, net of contractual allowances, in the period in which the services are rendered. The Company recognizes the full amount of revenue and reports the contractual allowances as a contra (or offset) revenue account to report a net revenue number based on the expected collections. collections.
4. EARNINGS PER SHARE
In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 5 – Redeemable Non-Controlling Interest), net of tax, charged directly to retained earnings is included in the earnings per basic and diluted share calculation. The following table provides a detail of the basic and diluted earnings per share computation (in thousands, except per share data).
| | Three Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
Computation of earnings per share - USPH shareholders: | | | | | | | | | | | | | | | | | | |
Net income attributable to USPH shareholders | | $ | 8,799 | | | $ | 8,173 | | | $ | 11,195 | | | $ | 12,436 | | | $ | 19,994 | | | $ | 20,609 | |
(Charges) credit to retained earnings: | | | | | | | | | | | | | | | | | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | (153 | ) | | | (7,270 | ) | | | 210 | | | | (2,549 | ) | | | 57 | | | | (9,819 | ) |
Tax effect at statutory rate (federal and state) of 25.55%
| | | 39 | | | | 1,857 | | | | (54 | ) | | | 651 | | | | (15 | ) | | | 2,508 | |
| | $ | 8,685 | | | $ | 2,760 | | | $ | 11,351 | | | $ | 10,538 | | | $ | 20,036 | | | $ | 13,298 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share (basic and diluted) | | $ | 0.67 | | | $ | 0.21 | | | $ | 0.87 | | | $ | 0.82 | | | $ | 1.55 | | | $ | 1.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Shares used in computation: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted earnings per share - weighted-average shares | | | 12,937 | | | | 12,870 | | | | 12,998 | | | | 12,902 | | | | 12,968 | | | | 12,886 | |
5. REDEEMABLE NON-CONTROLLING INTEREST
Since October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic business (referred to as “Therapy Practice”), these Acquisitions occur in a series of steps which are described below.
| 1. | Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity is owned by one or more individuals (the “Selling Shareholders”) most of whom are physical therapists that work in the Therapy Practice and provide physical therapy services to patients. |
| 2. | In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limited partnership (“NewCo”), in exchange for one hundred percent (100%) of the limited and general partnership interests in NewCo. Therefore, in this step, NewCo becomes a wholly-owned subsidiary of the Seller Entity. |
| 3. | The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (ranges from 50% to 90%) of the limited partnership interest and in all cases 100% of the general partnership interest in NewCo. The Company does not purchase 100% of the limited partnership interest because the Selling Shareholders, through the Seller Entity, want to maintain an ownership percentage. The consideration for the Acquisition is primarily payable in the form of cash at closing and a small, two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement does not contain any future earn-out or other contingent consideration that is payable to the Seller Entity or the Selling Shareholders. |
| 4. | The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo. |
| 5. | As noted above, the Company does not purchase 100% of the limited partnership interests in NewCo and the Seller Entity retains a portion of the limited partnership interest in NewCo (“Seller Entity Interest”). |
| 6. | In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”) with NewCo with an initial term that ranges from three to five years (the “Employment Term”), with automatic one-year renewals, unless employment is terminated prior to the end of the Employment Term. As a result, a Selling Shareholder becomes an employee (“Employed Selling Shareholder”) of NewCo. The employment of an Employed Selling Shareholder can be terminated by the Employed Selling Shareholder or NewCo, with or without cause, at any time. In a few situations, a Selling Shareholder does not become employed by NewCo and is not involved with NewCo following the closing; in those situations, such Selling Shareholders sell their entire ownership interest in the Seller Entity as of the closing of the Acquisition. |
| 7. | The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary and commensurate with his or her responsibilities based on other employees in similar capacities within NewCo, the Company and the industry. |
| 8. | The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). A Non-Compete Agreement is executed with the Selling Shareholders in all cases. That is, even if the Selling Shareholder does not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competing business during the Non-Compete Term. |
| 9. | The Non-Compete Term commences as of the date of the Acquisition and expires on the later of : |
| a. | Two years after the date an Employed Selling Shareholders’ employment is terminated (if the Selling Shareholder becomes an Employed Selling Shareholder) or |
| b. | Five to six years from the date of the Acquisition, as defined in the Non-Compete Agreement, regardless of whether the Selling Shareholder is employed by NewCo. |
| 10. | The Non-Compete Agreement applies to a restricted region which is defined as a defined mile radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in competing businesses or activities outside the defined mileage (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is not employed by NewCo immediately is permitted to engage in the competing business or activities outside the defined mileage. |
The Partnership Agreement contains provisions for the redemption of the Seller Entity Interest, either at the option of the Company (the “Call Right”) or at the option of the Seller Entity (the “Put Right”) as follows:
| a) | In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to a specified date (the “Specified Date”), the Seller Entity thereafter may have an irrevocable right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below. |
| b) | In the event that any Selling Shareholder is not employed by NewCo as of the Specified Date and the Company has not exercised its Call Right with respect to the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below. |
| c) | In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the Specified Date, the Seller Entity shall have the Put Right, and upon the exercise of the Put Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below. |
| a) | If any Selling Shareholder’s employment by NewCo is terminated prior to the Specified Date, the Company thereafter shall have an irrevocable right to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below. |
| b) | In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after Specified Date, the Company shall have the Call Right, and upon the exercise of the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below. |
| 3. | For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within NewCo.; Therefore, the undistributed earnings amount is small, if any. |
| 4. | The Purchase Price for the initial equity interest purchased by the Company is, in almost all cases, also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right and the Call Right noted above. |
| 5. | The Put Right and the Call Right do not have an expiration date, and the Seller Entity Interest is not required to be purchased by the Company or sold by the Seller Entity unless either the Put Right or the Call Right is exercised. |
| 6. | The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since the Company requires that such Selling Shareholders sell their entire ownership interest in the Seller Entity at the closing of the Acquisition. |
ProgressiveHealth Acquisition
On November 30, 2021, the Company acquired a majority interest in ProgressiveHealth Companies, LLC (“Progressive”), which owns a majority interest in certain subsidiaries (“Progressive Subsidiaries”) that operate in the industrial injury prevention and therapy services businesses. The Progressive transaction was completed in a series of steps which are described below.
| 1. | Prior to the acquisition, the Progressive Subsidiaries were owned by a legal entity (“Progressive Parent”) controlled by its individual owners (the “Selling“Progressive Selling Shareholders”), who work in and manage the Progressive business. |
| 2. | In conjunction with the acquisition, the Selling Shareholders caused the Progressive Parent to transfer its ownership of the Progressive Subsidiaries into a newly-formed limited liability company (“Progressive NewCo”), in exchange for one hundred percent (100%) of the membership interests in NewCo. Therefore, in this step, NewCo became wholly-owned by the Selling Shareholders. |
| 3. | The Company entered into an agreement (the “Purchase“Progressive Purchase Agreement”) to acquire from the Selling Shareholders a majority of the membership interest in NewCo. The consideration for the acquisition is primarily payable in the form of cash at closing, a relatively small portion paid in cash after the closing contingent on certain performance criteria, and a small note in lieu of an escrow (the “Purchase“Progressive Purchase Price”). |
| 4. | The Company and the Selling Shareholders also executed an operating agreement (the “Operating“Progressive Operating Agreement”) for NewCo that sets forth the rights and obligations of the members of NewCo. |
| 5. | As noted above, the Company did not purchase 100% of the membership interests in NewCo and the Selling Shareholders retained a portion of the membership interest in NewCo (“Progressive Selling Shareholders’ Interest”). |
| 6. | The Company and the Selling Shareholders executed a non-compete agreement (the “Non-Compete“Progressive Non-Compete Agreement”) which restricts the Selling Shareholders from competing for a specified period of time (the “Non-Compete“Progressive Non-Compete Term”). |
| 7. | The Non-Compete Term commences as of the date of the Acquisition and expires on the later of: |
| a. | Two years after the date a Selling Shareholder no longer is involved in the management of NewCo or |
| b. | Seven years from the date of the acquisition. |
| 8. | The Non-Compete Agreement applies to the entire United States. |
| 9. | The Put Right (as defined below) and the Call Right (as defined below) do not have an expiration date. |
The Operating Agreement contains provisions for the redemption of the Selling Shareholder’s Interest, either at the option of the Company (the “Call“Progressive Call Right”) or at the option of the Selling Shareholder (the “Put“Progressive Put Right”) as follows:
| a. | Each of the Selling Shareholders has the right to sell 30% of their respective residual interests on each of the 4th and 5th anniversaries of the acquisition closing, and then 10% on each of the 6th and 7th anniversaries |
| b. | In the event that any Selling Shareholder terminates his management relationship with NewCo for any reason on or after the seventh anniversary of the Closing Date, the Selling Shareholder has the Put Right, and upon the exercise of the Put Right, the Selling Shareholder’s Interest shall be redeemed by the Company at the purchase price described in “3” below. |
| a. | If any Selling Shareholder’s ceases to perform management services on behalf of NewCo, the Company thereafter shall have an irrevocable right to purchase from such Selling Shareholder his Interest, in each case at the purchase price described in “3” below. |
| 3. | For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within NewCo; therefore, the undistributed earnings amount is small, if any. |
| 4. | The Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right and the Call Right noted above. |
| 5. | The Put Right and the Call Right do not have an expiration date. |
Neither the Operating Agreement nor the Non-Compete Agreement contain any provision to escrow or “claw back” the equity interest in NewCo held by the Selling Shareholders, in the event of a breach of the operating agreement or non-compete terms, or the management services agreement pursuant to which the Selling Shareholders perform services on behalf of NewCo. The Company’s only recourse against the Selling Shareholder for breach of any of these agreements is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with a Selling Shareholder that would result in a forfeiture of the equity interest in NewCo held by a Selling Shareholder.
An Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and the Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do not contain any provision to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any portion of the Seller Entity Interest. The Company’s only recourse against the Employed Selling Shareholder for breach of either the Employment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with an Employed Selling Shareholder that would result in a forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest.
For the dates indicated, the following table details the changes in the carrying amount (fair value) of the redeemable non-controlling interest (in thousands) thousands):
| | Three Months Ended | | | Year Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | December 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
| | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 155,262 | | | $ | 132,340 | | | $ | 158,008 | | | $ | 138,924 | | | $ | 155,262 | | | $ | 132,340 | |
Operating results allocated to redeemable non-controlling interest partners | | | 2,557 | | | | 11,358 | | | | 2,626 | | | | 3,611 | | | | 5,183 | | | | 6,064 | |
Distributions to redeemable non-controlling interest partners | | | (2,403 | ) | | | (11,359 | ) | | | (2,328 | ) | | | (2,622 | ) | | | (4,731 | ) | | | (6,216 | ) |
Changes in the fair value of redeemable non-controlling interest | | | 153 | | | | 13,011 | | | | (210 | ) | | | 2,549 | | | | (57 | ) | | | 9,819 | |
Purchases of redeemable non-controlling interest | | | (2,457 | ) | | | (30,204 | ) | | | (7,138 | ) | | | (4,707 | ) | | | (9,596 | ) | | | (9,536 | ) |
Acquired interest | | | 4,946 | | | | 39,862 | | | | 0 | | | | 5,556 | | | | 4,946 | | | | 10,719 | |
Sales of redeemable non-controlling interest - temporary equity | | | 0 | | | | 982 | | | | 2,187 | | | | 0 | | | | 2,187 | | | | 319 | |
Notes receivable related to sales of redeemable non-controlling interest - temporary equity | | | 0 | | | | (914 | ) | | | (1,843 | ) | | | 0 | | | | (1,843 | ) | | | (287 | ) |
Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity | | | (50 | ) | | | 186 | | | | 98 | | | | 26 | | | | 49 | | | | 115 | |
Other
| | | 0 | | | | 0 | | |
Ending balance | | $ | 158,008 | | | $ | 155,262 | | | $ | 151,400 | | | $ | 143,337 | | | $ | 151,400 | | | $ | 143,337 | |
The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interest (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
| | | | | | |
Contractual time period has lapsed but holder’s employment has not terminated | | $ | 92,320 | | | $ | 80,781 | |
Contractual time period has not lapsed and holder’s employment has not terminated | | | 65,688 | | | | 74,481 | |
Holder’s employment has terminated and contractual time period has expired | | | 0 | | | | 0 | |
Holder’s employment has terminated and contractual time period has not expired | | | 0 | | | | 0 | |
| | $ | 158,008 | | | $ | 155,262 | |
| | Six Months Ended | |
| | June 30, 2022 | | | June 30, 2021 | |
| | | | | | |
Contractual time period has lapsed but holder’s employment has not terminated | | $ | 73,204 | | | $ | 73,915 | |
Contractual time period has not lapsed and holder’s employment has not terminated | | | 78,196 | | | | 69,422 | |
Holder’s employment has terminated and contractual time period has expired | | | 0 | | | | 0 | |
Holder’s employment has terminated and contractual time period has not expired | | | 0 | | | | 0 | |
| | $ | 151,400 | | | $ | 143,337 | |
6. GOODWILL
The changes in the carrying amount of goodwill consisted of the following (in thousands):
| | Three Months Ended | | | Year Ended | | | Six Months Ended | | | Year Ended | |
| | March 31, 2022 | | | December 31, 2021 | | | June 30, 2022 | | | December 31, 2021 | |
| | | | | | | | | | | | |
Beginning balance | | $ | 434,679 | | | $ | 345,646 | | | $ | 434,679 | | | $ | 345,646 | |
Goodwill acquired | | | 11,539 | | | | 89,746 | | | | 12,114 | | | | 89,746 | |
Goodwill adjustments for purchase price allocation of businesses acquired in prior year | | | (2,526 | ) | | | (713 | ) | | | (4,032 | ) | | | (713 | ) |
Ending balance | | $ | 443,692 | | | $ | 434,679 | | | $ | 442,761 | | | $ | 434,679 | |
7. INTANGIBLE ASSETS, NET
Intangible assets, net as of March 31, June 30,2022, and December 31,2021 consisted of the following (in thousands) thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Tradenames | | $ | 39,456 | | | $ | 38,790 | |
Customer and referral relationships, net of accumulated amortization of $19,959 and $17,762, respectively | | | 50,076 | | | | 45,643 | |
Non-compete agreements, net of accumulated amortization of $6,597 and $6,450, respectively | | | 2,014 | | | | 1,949 | |
| | $ | 91,546 | | | $ | 86,382 | |
| | June 30, 2022 | | | December 31, 2021 | |
Tradenames | | $ | 39,838 | | | $ | 38,790 | |
Customer and referral relationships, net of accumulated amortization of $20,772 and $17,762, respectively | | | 51,047 | | | | 45,643 | |
Non-compete agreements, net of accumulated amortization of $6,717 and $6,450, respectively | | | 1,770 | | | | 1,949 | |
| | $ | 92,655 | | | $ | 86,382 | |
Tradenames, referral relationships and non-compete agreements are related to the businesses acquired. The value assigned to tradenames has an indefinite life and is tested at least annually for impairment using the relief from royalty method in conjunction with the Company’s annual goodwill impairment test. The value assigned to referral relationships is being amortized over their respective estimated useful lives which range from six to fourteen years. Non-compete agreements are amortized over the respective term of the agreements which range from five to six years.
The following table details the amount of amortization expense recorded for intangible assets for the three months ended March 31, June 30,2022, and 2021 (in thousands) thousands):
| | Three Months Ended | | | Three Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
Customer and referral relationships | | $ | 2,050 | | | $ | 783 | | | $ | 1,339 | | | $ | 778 | | | $ | 3,011 | | | $ | 1,561 | |
Non-compete agreements | | | 147 | | | | 39 | | | | 120 | | | | 138 | | | | 267 | | | | 177 | |
| | $ | 2,197 | | | $ | 822 | | | $ | 1,459 | | | $ | 916 | | | $ | 3,278 | | | $ | 1,738 | |
Based on the balance of referral relationships and non-compete agreements as of March 31,June 30, 2022, the expected amount to be amortized in 2022 and thereafter by year is as follows (in thousands) thousands):
Customer and Referral Relationships | Customer and Referral Relationships | | | Non-Compete Agreements | | Customer and Referral Relationships | | | Non-Compete Agreements | |
Years | | Annual Amount | | | Years | | | Annual Amount | | | Annual Amount | | | Years | | | Annual Amount | |
Ending December 31, | | | | | Ending December 31, | | | | | | | | | Ending December 31, | | | | |
2022 (excluding the three months ended March 31, 2022) | | $ | 3,851 | | | 2022 (excluding the three months ended March 31, 2022) | | | $ | 413 | | |
2022 (excluding the six months ended June 30, 2022) | | | $ | 2,745 | | | 2022 (excluding the six months ended June 30, 2022) | | | $ | 267 | |
2023 | | $ | 5,200 | | | 2023 | | | $ | 494 | | | $ | 5,393 | | | 2023
| | | $ | 477 | |
2024 | | $ | 5,036 | | | 2024 | | | $ | 438 | | | $ | 5,228 | | | 2024
| | | $ | 421 | |
2025 | | $ | 4,892 | | | 2025 | | | $ | 371 | | | $ | 5,084 | | | 2025
| | | $ | 355 | |
2026 | | $ | 4,424 | | | 2026 | | | $ | 243 | | | $ | 4,616 | | | 2026
| | | $ | 216 | |
Thereafter | | $ | 26,673 | | | Thereafter | | | $ | 55 | | | $ | 27,981 | | | Thereafter | | | $ | 34 | |
8. ACCRUED EXPENSES
Accrued expenses as of March 31,June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | | | June 30, 2022 | | | December 31, 2021 | |
Salaries and related costs | | $ | 22,272 | | | $ | 23,569 | | | $ | 19,524 | | | $ | 23,569 | |
Credit balances due to patients and payors | | | 6,788 | | | | 6,649 | | | | 7,875 | | | | 6,649 | |
Group health insurance claims | | | 1,766 | | | | 1,984 | | | | 2,038 | | | | 1,984 | |
Closure costs | | | 379 | | | | 498 | | | | 285 | | | | 498 | |
Federal taxes payable | | | 3,590 | | | | 2,716 | | | | 1,754 | | | | 2,716 | |
Dividend payable to USPH shareholders
| | | 5,327 | | | | 0 | | |
Contingent payments related to acquisition
| | | 3,520 | | | | 1,000 | | | | 1,000 | | | | 1,000 | |
Settlement of a legal matter
| | | 0 | | | | 2,750 | | | | 0 | | | | 2,750 | |
Other | | | 7,479 | | | | 6,539 | | | | 8,770 | | | | 6,539 | |
Total | | $ | 51,121 | | | $ | 45,705 | | | $ | 41,246 | | | $ | 45,705 | |
In January 2022, to avoid the legal fees and discovery costs in defending a legal matter and the uncertainty of protracted litigation, the Company entered into a settlement agreement. The Company admitted no liability or wrongdoing. Under the terms of the settlement, the Company agreed to make payments which amounted to $2.75 million, of which $2.6 million was recorded as an expense in 2021.
9. NOTES PAYABLE AND AMENDED CREDIT AGREEMENT
Amounts outstanding under the Amended Credit Agreement (as defined below) and notes payable as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Credit Agreement average effective interest rate of 1.74% for March 31, 2022 and December 31, 2021, (inclusive of unused fee) | | $ | 118,000 | | | $ | 114,000 | |
Various notes payable with $4,927 plus accrued interest due in the next year, interest accrues in the range of 3.25% through 3.5% per annum | | | 4,927 | | | | 4,417 | |
| | $ | 122,927 | | | $ | 118,417 | |
Less current portion | | | (799 | ) | | | (830 | ) |
Long term portion | | $ | 122,128 | | | $ | 117,587 | |
Effective December 5,2013, the Company entered into an Amended and Restated Credit Agreement with a commitment for a $125.0$125.0 million revolving credit facility. This agreement was amended and/or restated in August 2015, January 2016, March 2017, November 2017, January and January 2021 (hereafter referred to as “Amended(“Amended Credit Agreement”). In November 2021, the Company exercised the accordion feature in the Amended Credit Agreement to increase the limit on the facility from $125.0 million to $150.0 million, with an updated accordion feature providing for additional capacity of 25.0 million, therefore increasing the availability up to $175.0 million.
TheOn June 17,2022, the Company entered into the Third Amended and Restated Credit Agreement is unsecured(the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and has loan covenants, including requirements that the Company comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceedslenders from the Amended Credit Agreement may be used for working capital, acquisitions, purchases of the Company’s common stock, dividend payments to the Company’s common stockholders, capital expenditures and other corporate purposes. The pricing grid is based on the Company’s consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.25% to 2.0% or the applicable spread over the Base Rate ranging from 0.1% to 1%. Fees under the Amended Credit Agreement include an unused commitment fee of 0.3% of the amount of funds outstanding under the Amended Credit Agreement.time-to-time party thereto.
The January 2021 amendment toAmounts outstanding under the Amended Credit Agreement allowsand Credit Agreement (as defined above) and notes payable as of June 30,2022 and December 31,2021 consisted of the cash and noncash consideration thatfollowing (in thousands):
| | June 30, 2022 | | | December 31, 2021 | |
| | Principal Amount | | | Unamortized discount and debt issuance cost | | | Net Debt | | | Principal Amount | | | Unamortized discount and debt issuance cost | | | Net Debt | |
Revolving Facilitiy | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 114,000 | | | $ | 0 | | | $ | 114,000 | |
Term Facility | | | 150,000 | | | | 2,027 | | | | 147,973 | | | | 0 | | | | 0 | | | | 0 | |
Other Debt | | | 5,696 | | | | 0 | | | | 5,696 | | | | 4,417 | | | | 0 | | | | 4,417 | |
Total Debt | | $ | 155,696 | | | $ | 2,027 | | | $ | 153,669 | | | $ | 118,417 | | | $ | 0 | | | $ | 118,417 | |
Less: Current portion of long-term debt | | | 5,188 | | | | 408 | | | $ | 4,780 | | | | 830 | | | | 0 | | | | 830 | |
Total long-term debt, net of current portion | | $ | 150,508 | | | $ | 1,619 | | | $ | 148,889 | | | $ | 117,587 | | | $ | 0 | | | $ | 117,587 | |
The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans were made available through the following facilities (collectively, the “Senior Credit Facilities”):
| 1) | Revolving Facility: $175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit for the issuance of standby letters of credit and a $15 million sublimit for swingline loans (each, a “Swingline Loan”). |
| 2) | Term Facility: $150 million term loan facility (the “Term Facility”). The Term Facility amortizes in quarterly installments of: (a) 0.625% in each of the firsttwo years, (b) 1.250% in the third and fourth year, and (c) 1.875% in the fifth year of the Credit Agreement. The remaining outstanding principal balance of all term loans is due on the maturity date. |
The proceeds of the Revolving Facility shall be used by the Company could pay with respectfor working capital and other general corporate purposes of the Company and its subsidiaries, including to fund future acquisitions permittedand invest in growth opportunities. The proceeds of the Term Facility were used by the Company to refinance the indebtedness outstanding under the Amended Credit Agreement, to $50,000,000pay fees and expenses incurred in connection with the transactions involving the loan facilities, for any fiscal year,working capital and the amountother general corporate purposes of the Company may pay in cash dividendsand its subsidiaries.
The Company is permitted to its shareholdersincrease the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed $50,000,000the sum of (i) $100 millionplus (ii) an unlimited additional amount, provided that (in the case of clause (ii)), after giving effect to such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0:1.0, and the aggregate amount of all incremental increases under the Revolving Facility does not exceed $50,000,000.
The interest rates per annum applicable to the Senior Credit Facilities (other than in respect of Swingline Loans) will be Term SOFR (as defined in the Credit Agreement) plus an applicable margin or, at the option of the Company, an alternate base rate plus an applicable margin. Each Swingline Loan shall bear interest at the base rate plus the applicable margin. The applicable margin for Term SOFR borrowings ranges from 1.50% to 2.25%, and the applicable margin for alternate base rate borrowings ranges from 0.50% to 1.25%, in each case, based on the Consolidated Leverage Ratio of the Company and its subsidiaries. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity.
The Company will also pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). Such unused fee will range between 0.25% and 0.35% per annum and is also based on the Consolidated Leverage Ratio of the Company and its subsidiaries. The Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any fiscal year. time without premium or penalty, subject to certain conditions.
The Amended Credit Agreement is unsecuredcontains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement includes certain financial covenants which include a consolidated fixed charge coverage ratiothe Consolidated Fixed Charge Coverage Ratio, and a consolidated leverage ratio,the Consolidated Leverage Ratio, as defined in the agreement.Credit Agreement. The Credit Agreement also contains customary events of default.
The Company’s obligations under the Credit Agreement are guaranteed by its wholly-owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by a perfected
first priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions.
As of March 31, 2022June ,30, $118.02022,$150.0 million was outstanding on the AmendedSenior Credit Agreement,Facilities, resulting in $32.0175.0 million million of availability. As of March 31, June 30,2022, the Company was in compliance with all of the covenants contained in the Amended Credit Agreement.
The Company generally enters into various notes payable as a means of financing a portion of its acquisitions and purchasing of non-controlling interests. In conjunction with these transactions in 2022 and 2021, the Company entered into notes payable in the aggregate amount of $4.9 million of which an aggregate principal payment of $0.8 million is due in 2022, $4.1$4.1 million is due in 2023. Interest accrues in the range of 3.25% to 3.50% per annum and is payable with each principal installment.
10.DERIVATIVE INSTRUMENTS
The Company is exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.
Subsequent aggregate annual paymentsInterest Rate Swap
In May 2022, the Company entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of principal required pursuantAmerica, N.A, which has a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, the Company receives 1-month SOFR, and pays a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on the Company’s consolidated leverage ratio.
In connection with the swap, no cash was exchanged between the Company and the counterparty.
The Company designated its interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the Amended Credit Agreementfair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.
The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income for the three months and outstanding notes payable at March 31,six months ended June 30, 2022 are as followspresented in the table below (in thousands):
During the twelve months ended March 31, 2022 | | $ | 799 | |
During the twelve months ended March 31, 2023 | | | 4,128 | |
During the twelve months ended March 31, 2025 | | | 118,000 | |
| | $ | 122,927 | |
| | Three Months Ended | | | For the Six Months Ended | |
| | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
Unrealized loss on cash flow hedge | | | (531 | ) | | | 0 | | | | (531 | ) | | | 0 | |
Tax effect at statutory rate (federal and state) of 25.55% | | | 136 | | | | 0 | | | | 136 | | | | 0 | |
Other Comprehensive loss | | $ | (395 | ) | | $ | 0 | | | $ | (395 | ) | | $ | 0 | |
The outstanding amount undervaluations of the Amended Credit Agreement facility (balanceCompany’s interest rate derivatives are measured as the present value of all expected future cash flows based on March 31, 2022SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement.
27 $118.0 million) matures on November 30, 2025.
The carrying and fair value of the Company’s interest rate derivatives (included in current liabilities) were as follows:
| | June 30, 2022 | | | June 30, 2021 | |
| | | | | | |
Interest rate swap | | $ | (531 | ) | | $ | 0 | |
10.11. LEASES
The Company has operating leases for its corporate offices and operating facilities. The Company determines if an arrangement is a lease at the inception of a contract. Effective January 1, 2019, right-of-useright- of-use assets and operating lease liabilities are included in the consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent net present value of the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the net present value of the fixed lease payments over the lease term. The Company’s operating lease terms are generally five years or less. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating fixed lease expense is recognized on a straight-line basis over the lease term.
In accordance with ASC 842, the Company records on its consolidated balance sheet leases with a term greater than 12 months. The Company has elected, in compliance with current accounting standards, not to record leases with an initial term of 12 months or less in the consolidated balance sheet. ASC 842 requires the separation of the fixed lease components from the variable lease components. The Company has elected the practical expedient to account for separate lease components of a contract as a single lease cost thus causing all fixed payments to be capitalized. Non-lease and variable cost components are not included in the measurement of the right-of-use assets or operating lease liabilities. The Company also elected the package of practical expedients permitted within ASC 842, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage are not included in the right-of-useright-of- use assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense.
For the three and six months ended March 31,June 30, 2022, the components of lease expense were as follows (in thousands):
| | Three Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
Operating lease cost | | $ | 8,404 | | | $ | 7,729 | | | $ | 8,700 | | | $ | 7,895 | | | $ | 17,104 | | | $ | 15,624 | |
Short-term lease cost | | | 321 | | | | 368 | | | | 259 | | | | 361 | | | | 580 | | | | 729 | |
Variable lease cost | | | 1,932 | | | | 1,611 | | | | 1,994 | | | | 1,628 | | | | 3,926 | | | | 3,239 | |
Total lease cost * | | $ | 10,657 | | | $ | 9,708 | | | $ | 10,953 | | | $ | 9,884 | | | $ | 21,610 | | | $ | 19,592 | |
*Sublease income was immaterial
Lease cost is reflected in the consolidated statement of net income in the line item – rent, supplies, contract labor and other.
Supplemental information related to leases was as follows (in thousands):
| | Three Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
| | | | | | | | | | | | | | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) | | $ | 8,617 | | | $ | 8,112 | | | $ | 8,940 | | | $ | 8,258 | | | $ | 17,557 | | | $ | 16,370 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands) | | $ | 6,011 | | | $ | 7,867 | | | $ | 15,595 | | | $ | 12,976 | | | $ | 21,606 | | | $ | 20,873 | |
The aggregate future lease payments for operating leases as of March 31,June 30, 2022 were as follows (in thousands):
Fiscal Year | | Amount | | | Amount | |
2022 (excluding the three months ended March 31, 2022) | | $ | 25,297 | | |
2022 (excluding the six months ended June 30, 2022) | | | $ | 17,829 | |
2023 | | | 28,724 | | | | 31,725 | |
2024 | | | 22,109 | | | | 25,292 | |
2025 | | | 14,808 | | | | 18,060 | |
2026 | | | 9,285 | | | | 11,613 | |
2027 and thereafter | | | 8,292 | | |
2027 and therafter | | | | 11,135 | |
Total lease payments | | $ | 108,515 | | | $ | 115,654 | |
Less: imputed interest | | | 5,728 | | | | 5,795 | |
Total operating lease liabilities | | $ | 102,787 | | | $ | 109,859 | |
Average lease terms and discount rates were as follows:
| | Three Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | |
Weighted-average remaining lease term - Operating leases | | 4.1 Years | | | 4.0 Years | | | 4.19 Years | | | 4.11 Years | | | 4.19 Years | | | 4.11 Years | |
| | | | | | | | | | | | | | | | | | |
Weighted-average discount rate - Operating leases | | | 2.70 | % | | | 3.0 | % | | | 2.48 | % | | | 3.0 | % | | | 2.48 | % | | | 3.0 | % |
11.12. SEGMENT INFORMATION
The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Also included in the physical therapy operations segment are revenues from management contract services and other services which include services the Company provides on-site, such as schools for athletic trainers.
The Company evaluates performance of the segments based on gross profit. The Company has provided additional information regarding its reportable segments which contributes to the understanding of the Company and provides useful information.
The following table summarizes selected financial data for the Company’s reportable segments.
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | Three Months Ended March 31, | | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | 2022 | | | 2021 | | | | | | | | | | | | | |
Net operating revenue: | | | | | | | | | | | | | | | | | | |
Physical therapy operations | | $ | 112,636 | | | $ | 102,359 | | | $ | 121,219 | | | $ | 116,895 | | | $ | 233,855 | | | $ | 219,253 | |
Industrial injury prevention services | | | 19,068 | | | | 10,009 | | | | 19,437 | | | | 10,033 | | | | 38,505 | | | | 20,043 | |
Total Company | | $ | 131,704 | | | $ | 112,368 | | | $ | 140,656 | | | $ | 126,928 | | | $ | 272,360 | | | $ | 239,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit: | | | | | | | | | | | | | | | | | | | | | | | | |
Physical therapy operations | | $ | 22,436 | | | $ | 23,174 | | | $ | 26,698 | | | $ | 31,761 | | | $ | 49,135 | | | $ | 54,935 | |
Industrial injury prevention services | | | 4,152 | | | | 2,722 | | | | 4,123 | | | | 2,543 | | | | 8,274 | | | | 5,265 | |
Gross profit | | $ | 26,588 | | | $ | 25,896 | | | $ | 30,821 | | | $ | 34,304 | | | $ | 57,409 | | | $ | 60,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Physical therapy operations | | $ | 608,240 | | | $ | 723,530 | | |
|
| | |
|
| | | $ | 414,172 | | | $ | 545,449 | |
Industrial injury prevention services | | | 155,623 | | | | 25,896 | | | |
| | | |
| | | | 382,272 | | | | 203,977 | |
Total Company | | $ | 763,863 | | | $ | 749,426 | | |
|
| | |
|
| | | $ | 796,444 | | | $ | 749,426 | |
12.13. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Through one of the subsidiaries, the Company has a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals. Since the Company is deemed to not have a controlling interest in the company,joint venture, the Company’s investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of March 31,June 30, 2022, is $12.4 million, of which $12.2 million related$12.3 million. For the six months ended June 30, 2022, the earnings amounted to$679 thousand and $548 thousand was distributed to the fair value at December 31, 2021. The $12.4 million includes earnings of $339 thousand less a distribution received of $132 thousand.Company.
13.14. COMMON STOCK
From September 2001 through December 31, 2008, the Board authorized the Company to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of the Company’s common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of its common stock (“March 2009 Authorization”). The Amended Credit Agreement permits share repurchases of up to $15,000,000, subject to compliance with covenants. The Company is required to retire shares purchased under the March 2009 Authorization.
Under the March 2009 Authorization, the Company has purchased a total of 859,499 shares. There is no expiration date for the share repurchase program. There are currently an additional estimated 150,830137,363 shares (based on the closing price of $99.45$109.20 on March 31,June 30, 2022) that may be purchased from time to time in the open market or private transactions depending on price, availability and the Company’s cash position. The Company did 0t purchase any shares of its common stock during the three and six months ended March 31,June 30, 2022.
14.15. RECLASSIFICATION OF PRIOR PERIOD PRESENTATION
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022 (“2021 Annual Report”); and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2021 Annual Report. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and in Part II, Item 1A. Risk Factors of this report.
References to “we,” “us,” “our” and the “Company” shall mean U.S. Physical Therapy, Inc. and its subsidiaries.
EXECUTIVE SUMMARY
Our Business
We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and rehabilitation of injured workers. We also operate an industrial injury prevention services (“IIPS”) business which includes onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments services.
Selected Operating and Financial Data
Our reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Our physical operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.
At March 31,June 30, 2022, we operated 601608 clinics in 39 states. In addition to our ownership and operation of outpatient physical therapy clinics, we also manage physical therapy facilities for third parties, such as physicians and hospitals, with 3833 such third-party facilities under management as of March 31,June 30, 2022.
During the 2021 year and threefor the six months ended March 31,June 30, 2022, we completed the acquisitions of four multi-clinic practices and two industrial injury services businesses as detailed below.
Acquisition | | Date | | Acquired | | Clinics |
March 2022 Acquisition | | March 31, 2022 | | 70% | | 6 |
December 2021 Acquisition | | December 31, 2021 | | 75% | | 3 |
November 2021 Acquisition | | November 30, 2021 | | 70% | | IIPS* |
September 2021 Acquisition | | September 30, 2021 | | 100% | | IIPS* |
June 2021 Acquisition | | June 30, 2021 | | 65% | | 8 |
March 2021 Acquisition | | March 31, 2021 | | 70% | | 6 |
*Industrial injury prevention services business
During the six months ended June 30, 2022, First Quarter, we closed twothree clinics and sold five clinics.
Employees
Our strategy is to acquire physical therapy practices, develop outpatient physical therapy clinics as satellites within existing partnerships, acquire industrial injury prevention services businesses, and to continue to support the growth of our existing businesses requires a talented workforce that can grow with us. As of March 31,June 30, 2022 we employed approximately 5,5195,809 people nationwide, of which approximately 3,0603,158 were full-time employees.
It is crucial that we continue to attract and retain top talent. To attract and retain talented employees, we strive to make our corporate office and all of our practices and businesses a diverse and healthy workplace, with opportunities for our employees to receive continuing education, skill development, encouragement to grow and develop their career, all supported by competitive compensation, incentives, and benefits. Our clinical professionals are all licensed and a vast majority have advanced degrees. Our operational leadership teams have long-standing relationships with local and regional universities, professional affiliations, and other applicable sources that provide our practices with a talent pipeline.
We provide competitive compensation and benefits programs to help meet our employees’ needs in the practices and communities in which they serve. These programs (which can vary by practice and employment classification) include incentive compensation plans, a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, education assistance, mental health, and other employee assistance benefits.
We invest resources to develop the talent needed to support our business strategy. Resources include a multitude of training and development programs delivered internally and externally, online and instructor-led, and on-the-job learning formats.
We expect to continue adding personnel in the future as we focus on potential acquisition targets and organic growth opportunities.
RESULTS OF OPERATIONS
Summary of 2022 FirstSecond Quarter Compared to the 2021 FirstSecond Quarter Results
For the three months ended March 31,June 30, 2022 (“2022 FirstSecond Quarter”), our net income attributable to our shareholders was $8.8$11.2 million as compared to $8.2$12.4 million for the three months ended March 31,June 30, 2021 (“2021 FirstSecond Quarter”). In accordance with current GAAP accounting guidance,Generally Accepted Accounting Principles (“GAAP”), the revaluation of redeemable non-controlling interest, net of taxes, is not included in net income but charged directly to retained earnings; however, the charge for this change is included in the earnings per basic and diluted share calculation. Inclusive of the charge for revaluation of non-controlling interest, net of taxes, the amount is $8.2$11.4 million, or $0.64$0.87 per diluted share, for the 2022 FirstSecond Quarter, and $2.8$10.5 million, or $0.21$0.82 per diluted share, for the 2021 FirstSecond Quarter.
For the 2022 FirstSecond Quarter, our Operating Results, were $8.7a non-GAAP measure, was $11.7 million, or $0.67$0.90 per diluted share, an increase of 2.0%,the second highest quarterly amount in our Company’s history, as compared to $8.2$12.4 million, or $0.64$0.96 per diluted share, for the 2021 First Quarter. Operating Results, a non-GAAP measure, equalsSecond Quarter, the highest quarterly amount in our Company’s history.
For the six months ended June 30, 2022 (“2022 Six Months”), our net income attributable to our shareholders perwas $20.0 million and was $20.6 million for the consolidated statements of income, less the gain on the revaluationsix months ended June 30, 2022 (“2021 Six Months”). Inclusive of the put-right liability. In accordance with GAAP, thecharge for revaluation of redeemable non-controlling interest, net of tax,taxes, the amount is included in the earnings$20.0 million, or $1.55 per basic and diluted share, calculation, although it is not included in net income but charged directlyfor the 2022 Six Months, and $13.3 million, or $1.03 per diluted share, for the 2021 Six Months.
For the 2022 Six Months, our Operating Results, a non-GAAP measure, was $20.0 million, or $1.54 per diluted share, a decrease of 3.0%, as compared to retained earnings. See table on page 30.$20.6 million, or $1.60 per diluted share, for the 2021 Second Quarter.
We believe providing Operating Results is useful to investors for comparing the Company’sour period-to-period results and for comparing with other similar businesses since most do not have redeemable instruments and therefore have different equity structures. We use Operating Results, which eliminates certain items described above that can be subject to volatility and unusual costs, as one of the principal measures to evaluate and monitor financial performance.
Operating Results is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.
The following tables provide detail of the diluted earnings per share computation and reconcile net income attributable to our shareholders calculated in accordance with GAAP to Operating Results (in thousands, except per share data):
| | Three Months Ended June 30, | |
| | 2022 | | | 2021 | |
Computation of earnings per share - USPH shareholders: | | | | | | |
Net income attributable to USPH shareholders | | $ | 11,195 | | | $ | 12,436 | |
Credit (charges) to retained earnings: | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | 210 | | | | (2,549 | ) |
Tax effect at statutory rate (federal and state) of 25.55% | | | (54 | ) | | | 651 | |
| | $ | 11,351 | | | $ | 10,538 | |
| | | | | | | | |
Earnings per share (basic and diluted) | | $ | 0.87 | | | $ | 0.82 | |
| | | | | | | | |
Adjustments: | | | | | | | | |
Change in revaluation of put-right liability | | | 617 | | | | - | |
Revaluation of redeemable non-controlling interest | | | (210 | ) | | | 2,549 | |
Tax effect at statutory rate (federal and state) | | | (104 | ) | | | (651 | ) |
Operating Results (a non-GAAP measure) | | $ | 11,654 | | | $ | 12,436 | |
| | | | | | | | |
Basic and diluted Operating Results per share (a non-GAAP measure) | | $ | 0.90 | | | $ | 0.96 | |
| | | | | | | | |
Shares used in computation - basic and diluted | | | 12,998 | | | | 12,902 | |
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Computation of earnings per share - USPH shareholders: | | | | |
Net income attributable to USPH shareholders | | $ | 8,799 | | | $ | 8,173 | |
Credit (charges) to retained earnings: | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | (153 | ) | | | (7,270 | ) |
Tax effect at statutory rate (federal and state) of 25.55% | | | 39 | | | | 1,857 | |
| | $ | 8,685 | | | $ | 2,760 | |
| | | | | | | | |
Earnings per share (basic and diluted) | | $ | 0.67 | | | $ | 0.21 | |
| | | | | | | | |
Adjustments: | | | | | | | | |
Gain on revaluation of put-right liability | | | (603 | ) | | | - | |
Revaluation of redeemable non-controlling interest | | | 153 | | | | 7,270 | |
Tax effect at statutory rate (federal and state) | | | 115 | | | | (1,857 | ) |
Operating Results (a non-GAAP measure) | | $ | 8,350 | | | $ | 8,173 | |
| | | | | | | | |
Basic and diluted Operating Results per share (a non-GAAP measure) | | $ | 0.65 | | | $ | 0.64 | |
| | | | | | | | |
Shares used in computation - basic and diluted | | | 12,937 | | | | 12,870 | |
| | Six Months Ended June 30, | |
| | 2022 | | | 2021 | |
Computation of earnings per share - USPH shareholders: | | | | | | |
Net income attributable to USPH shareholders | | $ | 19,994 | | | $ | 20,609 | |
Credit (charges) to retained earnings: | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | 57 | | | | (9,819 | ) |
Tax effect at statutory rate (federal and state) of 25.55% | | | (15 | ) | | | 2,508 | |
| | $ | 20,036 | | | $ | 13,298 | |
| | | | | | | | |
Earnings per share (basic and diluted) | | $ | 1.55 | | | $ | 1.03 | |
| | | | | | | | |
Adjustments: | | | | | | | | |
Change in revaluation of put-right liability | | | 14 | | | | - | |
Revaluation of redeemable non-controlling interest | | | (57 | ) | | | 9,819 | |
Tax effect at statutory rate (federal and state) | | | 11 | | | | (2,508 | ) |
Operating Results (a non-GAAP measure) | | $ | 20,004 | | | $ | 20,609 | |
| | | | | | | | |
Basic and diluted Operating Results per share (a non-GAAP measure) | | $ | 1.54 | | | $ | 1.60 | |
| | | | | | | | |
Shares used in computation - basic and diluted | | | 12,968 | | | | 12,886 | |
33
The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements (in thousands):
| | Three Months Ended March 31, | | | Three Months Ended June 30, | |
| | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | |
Net operating revenue: | | | | | | | | | | |
Physical therapy operations | | $ | 112,636 | | $ | 102,359 | | | $ | 121,219 | | $ | 116,895 | |
Industrial injury prevention services | | | 19,068 | | | 10,009 | | | | 19,437 | | | 10,033 | |
Total Company | | $ | 131,704 | | $ | 112,368 | | | $ | 140,656 | | $ | 126,928 | |
| | | | | | | | | | |
Gross profit: | | | | | | | | | | |
Physical therapy operations | | $ | 22,436 | | $ | 23,174 | | | $ | 26,698 | | $ | 31,761 | |
Industrial injury prevention services | | | 4,152 | | | 2,722 | | | | 4,123 | | | 2,543 | |
Gross profit | | $ | 26,588 | | $ | 25,896 | | | $ | 30,821 | | $ | 34,304 | |
| | | | | | | | | | |
Total Assets: | | | | | | | | | | |
Physical therapy operations | | $ | 608,240 | | $ | 723,530 | | | $ | 414,172 | | $ | 545,449 | |
Industrial injury prevention services | | | 155,623 | | | 25,896 | | | | 382,272 | | | 203,977 | |
Total Company | | $ | 763,863 | | $ | 749,426 | | | $ | 796,444 | | $ | 749,426 | |
Revenue
Reported total revenue for the 2022 FirstSecond Quarter was $131.7$140.7 million, an increase of 17.2%10.8% as compared to $112.4$126.9 million for the 2021 FirstSecond Quarter. See table below for a detail of reported total revenue (in thousands):
| | Three Months Ended | | | Three Months Ended | |
| | March 31, 2022 | | March 31, 2021 | | | June 30, 2022 | | June 30, 2021 | |
Revenue related to Mature Clinics | | $ | 102,321 | | $ | 98,649 | | | $ | 108,582 | | $ | 110,105 | |
Revenue related to 2022 Clinic Additions | | 195 | | - | | | 3,117 | | - | |
Revenue related to 2021 Clinic Additions | | 6,823 | | 149 | | | 6,191 | | 2,414 | |
Revenue from clinics sold or closed in 2022 | | 199 | | 190 | | | 306 | | 592 | |
Revenue from clinics sold or closed in 2021 | | | - | | | 266 | | | | - | | | 127 | |
Net patient revenue from physical therapy operations | | 109,538 | | 99,254 | | | 118,196 | | 113,238 | |
Other revenue | | | 872 | | | 546 | | | | 898 | | | 918 | |
Revenue from physical therapy operations | | 110,410 | | 99,800 | | | 119,094 | | 114,156 | |
Management contract revenue | | 2,226 | | 2,559 | | |
Industrial injury prevention services | | | 19,068 | | | 10,009 | | |
Revenue - Management contracts | | | 2,125 | | 2,739 | |
Revenue - Industrial injury prevention services | | | | 19,437 | | | 10,033 | |
Total Revenue | | $ | 131,704 | | $ | 112,368 | | | $ | 140,656 | | $ | 126,928 | |
Revenue from physical therapy operations increased $10.6$4.9 million, or 10.5%4.3%, to $110.4$119.1 million for the 2022 FirstSecond Quarter from $99.8$114.2 million for the 2021 FirstSecond Quarter. Net patient revenue related to clinics opened or acquired prior to 2021 and still in operation at March 31,on June 30, 2022 (“Mature Clinics”) increased $3.7decreased $1.5 million, or 3.7%1.4%, to $102.3$108.6 million for the 2022 FirstSecond Quarter compared to $98.6$110.1 million for the 2021 FirstSecond Quarter, due mostly to the decrease in average net patient revenue per visit. Visits for Mature Clinics (same store) for the 2022 Second Quarter decreased slightly (0.2%) as compared to the 2021 Second Quarter.
The average net patient revenue per visit was $103.00$103.18 for the 2022 FirstSecond Quarter as compared to $104.72$104.46 for the 2021 FirstSecond Quarter. Total patient visits increased 12.2%5.7% to 1,063,5191,145,554 for the 2022 FirstSecond Quarter from 947,7881,084,070 for the 2021 FirstSecond Quarter. Net patient revenue is based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenue is determined after contractual and other adjustments relating to patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.
Visits for Mature Clinics (same store) for the 2022 First Quarter increased 5.9% as compared to the 2021 First Quarter.34