See notes to consolidated financial statements.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 2022
(unaudited)
| 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 2two 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 yearnine months ended September 30, 2022, and the six months ended June 30, 2022,2021 year, the Company completed the acquisitions of 4six multi-clinic practices and 2two industrial injury prevention businesses as detailed below.
Acquisition | | Date | | Acquired | | | Clinics | | | Date | | Acquired | | | Clinics | |
March 2022 Acquisition | | March 31, 2022 | | | 70 | % | | | 6 | | |
September 2022 Acquisition
| | | September 30, 2022 | | | 80 | %
| | | 2 | |
August 2022 Acquisition
| | | August 31, 2022 | | | 70 | %
| | | 6 | |
March 31, 2022 Acquisition
| | | March 31, 2022 | | | 70 | % | | | 6 | |
December 2021 Acquisition | | December 31, 2021 | | | 75 | % | | | 3 | | | December 31, 2021 | | | 75 | % | | | 3 | |
November 2021 Acquisition | | November 30, 2021 | | | 70 | % | | 0
| IIPS* | | | November 30, 2021 | | | 70 | % | |
| IIPS* | |
September 2021 Acquisition | | September 30, 2021 | | | 100 | % | | 0
| IIPS* | | | September 30, 2021 | | | 100 | % | |
| IIPS* | |
June 2021 Acquisition | | June 30, 2021 | | | 65 | % | | | 8 | | | June 30, 2021 | | | 65 | % | | | 8 | |
March 2021 Acquisition | | March 31, 2021 | | | 70 | % | | | 6 | | | March 31, 2021 | | | 70 | % | | | 6 | |
* | Industrial injury prevention services business |
As of JuneSeptember 30, 2022, the Company operated 608614 clinics in 3940 states. The Company also manages physical therapy facilities for third parties, primarily hospital and physicians, with 3340 third-party facilities under management as of JuneSeptember 30, 2022.
During the sixnine months ended JuneSeptember 30, 2022, the Company closed 3five clinics and sold 5five 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 the Clinic Partnerships. Our limited partnership interests generally range from 65% to 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 1one 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 sixnine months ended JuneSeptember 30, 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 six months ended 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 0not note an impairment to long-lived assets during the three and sixnine months ended JuneSeptember 30, 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 2two 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 6six regions. In addition to the 6six 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.
impairment as well as perform its annual assessment in the fourth quarter of 2022 to determine whether it is more likely than not that the fair value of the reporting units were reduced below their carrying value.
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 sixnine months ended JuneSeptember 30, 2022.
The Company did 0tnot have any accrued interest or penalties associated with any unrecognized tax benefits 0rnor was any interest expense recognized during the three and sixnine months ended JuneSeptember 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 (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 Secured Overnight Financing Rate (“SOFR”).
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 Level 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 10.49%11.36%. See Note 5 for the changes in the fair value of redeemable non-controlling interest. The put right increased $0.6decreased $0.8 million for the three months ended JuneSeptember 30, 2022 and was valued at $3.5$2.8 million on JuneSeptember 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 on September 30, 2022, was $5.9 million, of which 1.9 million has been included within Other current assets and $4.0 million has been included in Other assets in the accompanying Consolidated Balance Sheet. The impact of the interest rate swap on the accompanying Consolidated Statements of Comprehensive Income was an unrealized gain of $4.8 million, net of tax, for the 2022 Third Quarter.
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 2two 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, provisionallowance 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 JuneSeptember 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): 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 has elected to apply the amendments prospectively through December 31, 2022. Borrowings under the Third Amended and Restated Credit Agreement bear interest based on SOFR. The interest rate applicable to the Third Amended and Restated Credit Agreement is tied to SOFR.
3. REVENUE RECOGNITION
Categories
Revenues are recognized in the period in which services are rendered.
Net 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 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 collectible.
The following table details the revenue related to the various categories (in thousands):
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | | June 30, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
| Net patient revenue | | $ | 118,196 | | | $ | 113,238 | | | $ | 227,734 | | | $ | 212,492 | | | $ | 116,710 | | | $ | 112,327 | | | $ | 344,444 | | | $ | 324,819 | |
| Other revenue | | | 898 | | | | 918 | | | | 1,770 | | | | 1,464 | | | | 753 | | | | 759 | | | | 2,523 | | | | 2,222 | |
| Physical therapy operations | | $
| 119,094 | | | $
| 114,156 | | | $
| 229,504 | | | $
| 213,956 | | | $
| 117,463 | | | $
| 113,086 | | | $
| 346,967 | | | $
| 327,041 | |
| Management contract revenue | |
| 2,125 | | |
| 2,739 | | |
| 4,351 | | |
| 5,297 | | |
| 1,984 | | |
| 2,313 | | |
| 6,335 | | |
| 7,611 | |
| Industrial injury prevention services revenue | | | 19,437 | | | | 10,033 | | | | 38,505 | | | | 20,043 | | | | 20,155 | | | | 10,494 | | | | 58,660 | | | | 30,537 | |
| | | $ | 140,656 | | | $ | 126,928 | | | $ | 272,360 | | | $ | 239,296 | | |
Total revenue
| | | $ | 139,602 | | | $ | 125,893 | | | $ | 411,962 | | | $ | 365,189 | |
Medicare Reimbursement
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2017 through 2019, a 0.5% increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025 0no adjustment 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, the 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 reimbursement 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.
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 bewas 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 included a reduction in Medicare payment rates of approximately 3% in 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 next ten years and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. On April 1,In 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. The CARES Act suspended the 2% payment reduction to Medicare payments for dates of service from May 1, 2020, through December 31, 2020. The2020, and the Consolidated Appropriations Act, 2021 further suspended the 2% payment reduction untilthrough March 31, 2021. OnIn 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 endended 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’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’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 will determinedetermined the payment adjustment in 2021. For those therapist providers who actually participated in MIPS during 2019 and 2020, the resulting average payment adjustment in 2021 and 2022 was an increase of 1%. The 2023 adjustment for those therapist providers who participated in MIPS during 2021 is expected to remain at an average increase of 1%.
Under the Middle-Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceeded $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 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $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 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 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”) 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”) 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’s financial statements as of JuneSeptember 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 sixnine months ended JuneSeptember 30, 2022, and 2021, respectively, net patient revenue from Medicare was approximately $74.9$115.1 million and $62.1$98.3 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’s services or, in some instances, cover the Company’s operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on the Company’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’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-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% on JuneSeptember 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.
| 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 servicesIIPS 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 servicesthe IIPS segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.
At JuneOn September 30, 2022, we operated 608614 clinics in 3940 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 3340 such third-party facilities under management as of JuneSeptember 30, 2022.
During the 2021 year and for the sixnine months ended JuneSeptember 30, 2022, we completed the acquisitions of foursix multi-clinic practices and two industrial injury servicesIIPS businesses as detailed below.
Acquisition | | Date | | Acquired | | Clinics | | Date | | Acquired | | Clinics |
March 2022 Acquisition | | March 31, 2022 | | 70% | | 6 | |
September 2022 Acquisition | | | September 30, 2022 | | 80% | | 2 |
August 2022 Acquisition | | | August 31, 2022 | | 70% | | 6 |
March 31, 2022 | | | March 31, 2022 | | 70% | | 6 |
December 2021 Acquisition | | December 31, 2021 | | 75% | | 3 | | December 31, 2021 | | 75% | | 3 |
November 2021 Acquisition | | November 30, 2021 | | 70% | | IIPS* | | November 30, 2021 | | 70% | | IIPS |
September 2021 Acquisition | | September 30, 2021 | | 100% | | IIPS* | | September 30, 2021 | | 100% | | IIPS |
June 2021 Acquisition | | June 30, 2021 | | 65% | | 8 | | June 30, 2021 | | 65% | | 8 |
March 2021 Acquisition | | March 31, 2021 | | 70% | | 6 | | March 31, 2021 | | 70% | | 6 |
*Industrial injury prevention services business
During the sixnine months ended JuneSeptember 30, 2022, we closed threefive 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 servicesIIPS businesses, and to continue to support the growth of our existing businesses, which requires a talented workforce that can grow with us.workforce. As of JuneSeptember 30, 2022, we employed approximately 5,8096,046 people nationwide, of which approximately 3,1583,507 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 Second Quarter Compared to the 2021 Second Quarter Results
For the three months ended JuneSeptember 30, 2022 (“2022 SecondThird Quarter”), our net income attributable to our shareholders was $11.2$9.6 million as compared to $12.4$10.0 million for the three months ended JuneSeptember 30, 2021 (“2021 SecondThird Quarter”). In accordance with 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 $11.4$9.4 million, or $0.87$0.72 per diluted share, for the 2022 SecondThird Quarter, and $10.5$8.5 million, or $0.82$0.66 per diluted share, for the 2021 SecondThird Quarter. The 2022 Third Quarter included a change in the fair value of a contingent earn-out payment which had the effect of increasing net income by $1.5 million and included a gain on revaluation of a put-right liability which increased net income by $0.6 million, both net of tax.
For the 2022 Second Quarter, our Operating Results, a non-GAAP measure, was $11.7 million, or $0.90 per diluted share, the second highest quarterly amount in our Company’s history, as compared to $12.4 million, or $0.96 per diluted share, for the 2021 Second Quarter, the highest quarterly amount in our Company’s history.
For the six months ended June 30, 2022 (“2022 Six Months”),Nine Months, our net income attributable to our shareholders was $20.0 million and was $20.6$29.6 million for the six months ended June 30, 2022 (“Nine Months and $30.6 million for 2021 Six Months”).Nine Months. Inclusive of the charge for revaluation of non-controlling interest, net of taxes, the amount is $20.0$29.4 million, or $1.55$2.27 per diluted share, for the 2022 SixNine Months, and $13.3$21.8 million, or $1.03$1.69 per diluted share, for the 2021 SixNine Months. The 2022 Nine Months included a change in the fair value of a contingent earn-out payment which had the effect of increasing net income by $1.5 million, net of tax.
For the 2022 SixThird Quarter, our Operating Results, a non-GAAP measure, was $7.5 million, or $0.58 per diluted share, as compared to $10.0 million, or $0.78 per diluted share, for the 2021 Third Quarter.
For the 2022 Nine Months, our Operating Results, a non-GAAP measure, was $20.0$27.5 million, or $1.54$2.12 per diluted share, a decrease of 3.0%, as compared to $20.6$30.6 million, or $1.60$2.37 per diluted share, for the 2021 Second Quarter.Nine Months.
Operating Results, equals net income attributable to USPH shareholders per the consolidated statements of income less the change in the revaluation of the put-right liability and the change in the fair value of a contingent earn-out payment. In accordance with GAAP, the revaluation of redeemable non-controlling interest, net of tax, is included in the earnings per basic and diluted share calculation, although it is not included in net income but charged directly to retained earnings.
We believe providing Operating Results is useful to investors for comparing our 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 September 30, | |
| | | 2022 | | | 2021 | |
Computation of earnings per share - USPH shareholders: | | | | | | |
Net income attributable to USPH shareholders | | $ | 9,557
| | | $ | 10,009
| |
Charges to retained earnings: | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | (196 | ) | | | (2,070
| )
|
Tax effect at statutory rate (federal and state) of 25.55% | | | 50
| | | | 529
| |
| | | $ | 9,411
| | | $ | 8,468
| |
| | | | | | | | | |
| Earnings per share (basic and diluted) | | $ | 0.72
| | | $ | 0.66
| |
| | | | | | | | | |
| Adjustments: | | | | | | | | |
| Change in revaluation of put-right liability | | | (785 | ) | | | - | |
Change in fair value of contingent earn-out consideration
| | | (2,000
| )
| | | -
| |
| Revaluation of redeemable non-controlling interest | | | 196 | | | | 2,070
| |
| Tax effect at statutory rate (federal and state) | | | 661
| | | | (529 | )
|
| Operating Results (a non-GAAP measure) | | $ | 7,483
| | | $ | 10,009
| |
| | | | | | | | | |
| Basic and diluted Operating Results per share (a non-GAAP measure) | | $ | 0.58
| | | $ | 0.78
| |
| | | | | | | | | |
| Shares used in computation - basic and diluted | | | 13,001
| | | | 12,909
| |
| | | Six Months Ended June 30, | | | Nine Months Ended September 30, | |
| | | 2022 | | 2021 | | | 2022 | | 2021 | |
| Computation of earnings per share - USPH shareholders: | | | | | | | | | | |
| Net income attributable to USPH shareholders | | $ | 19,994 | | $ | 20,609 | | | $ | 29,551 | | $ | 30,618 | |
| Credit (charges) to retained earnings: | | | | | | | | | | |
| Revaluation of redeemable non-controlling interest | | 57 | | (9,819 | ) | | (193 | ) | | (11,889 | ) |
| Tax effect at statutory rate (federal and state) of 25.55% | | | (15 | ) | | | 2,508 | | | | 49 | | | 3,038 | |
| | | $ | 20,036 | | $ | 13,298 | | | $ | 29,407 | | $ | 21,767 | |
| | | | | | | | | | | |
| Earnings per share (basic and diluted) | | $ | 1.55 | | $ | 1.03 | | | $ | 2.27 | | $ | 1.69 | |
| | | | | | | | | | | |
| Adjustments: | | | | | | | | | | |
| Change in revaluation of put-right liability | | 14 | | - | | | (771 | ) | | - | |
| Change in fair value of contingent earn-out consideration | | | (2,000
| )
| | -
| |
| Revaluation of redeemable non-controlling interest | | (57 | ) | | 9,819 | | | 193 | | 11,889 | |
| Tax effect at statutory rate (federal and state) | | | 11 | | | (2,508 | ) | | | 659 | | | (3,038 | ) |
| Operating Results (a non-GAAP measure) | | $ | 20,004 | | $ | 20,609 | | | $ | 27,488 | | $ | 30,618 | |
| | | | | | | | | | | |
| Basic and diluted Operating Results per share (a non-GAAP measure) | | $ | 1.54 | | $ | 1.60 | | | $ | 2.12 | | $ | 2.37 | |
| | | | | | | | | | | |
| Shares used in computation - basic and diluted | | | 12,968 | | | 12,886 | | | | 12,979 | | | 12,894 | |
2022 Third Quarter Compared to the 2021 Third Quarter Results
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 June 30, | | | Three Months Ended September 30, | |
| | | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | | |
| Net operating revenue: | | | | | | | | | | |
| Physical therapy operations | | $ | 121,219 | | $ | 116,895 | | | $ | 119,447
| | $ | 115,399
| |
| Industrial injury prevention services | | | 19,437 | | | 10,033 | | | | 20,155
| | | 10,494
| |
| Total Company | | $ | 140,656 | | $ | 126,928 | | | $ | 139,602
| | $ | 125,893
| |
| | | | | | | | | | | |
| Gross profit: | | | | | | | | | | |
| Physical therapy operations | | $ | 26,698 | | $ | 31,761 | | | $ | 22,379
| | $ | 27,123
| |
| Industrial injury prevention services | | | 4,123 | | | 2,543 | | | | 4,405
| | | 2,676
| |
| Gross profit | | $ | 30,821 | | $ | 34,304 | | | $ | 26,784
| | $ | 29,799
| |
| | | | | | | | | | | |
| Total Assets: | | | | | | | | | | |
| Physical therapy operations | | $ | 414,172 | | $ | 545,449 | | | $ | 432,683 | | $ | 583,785 | |
| Industrial injury prevention services | | | 382,272 | | | 203,977 | | | | 367,025 | | | 46,313 | |
| Total Company | | $ | 796,444 | | $ | 749,426 | | | $ | 799,708 | | $ | 630,098 | |
Revenue
Reported total revenue for the 2022 SecondThird Quarter was $140.7$139.6 million, an increase of 10.8%10.9% as compared to $126.9$125.9 million for the 2021 SecondThird Quarter. See table below for a detail of reported total revenue (in thousands):
| | | Three Months Ended | | | Three Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
| Revenue related to Mature Clinics | | $ | 108,582 | | $ | 110,105 | | | $ | 106,485 | | | $ | 106,631 | |
| Revenue related to 2022 Clinic Additions | | 3,117 | | - | | | 3,707 | | | - | |
| Revenue related to 2021 Clinic Additions | | 6,191 | | 2,414 | | | 6,481 | | | 4,869 | |
| Revenue from clinics sold or closed in 2022 | | 306 | | 592 | | | 37 | | | 762 | |
| Revenue from clinics sold or closed in 2021 | | | - | | | 127 | | | | - | | | | 65 | |
| Net patient revenue from physical therapy operations | | 118,196 | | 113,238 | | | 116,710 | | | 112,327 | |
| Other revenue | | | 898 | | | 918 | | | | 753 | | | | 759 | |
| Revenue from physical therapy operations | | 119,094 | | 114,156 | | | 117,463 | | | 113,086 | |
| Revenue - Management contracts | | 2,125 | | 2,739 | | | 1,984 | | | 2,313 | |
| Revenue - Industrial injury prevention services | | | 19,437 | | | 10,033 | | | | 20,155 | | | | 10,494 | |
| Total Revenue | | $ | 140,656 | | $ | 126,928 | | |
| Total revenue | | | $ | 139,602 | | | $ | 125,893 | |
Revenue from physical therapy operations increased $4.9$4.4 million, or 4.3%3.9%, to $119.1$117.5 million for the 2022 SecondThird Quarter from $114.2$113.1 million for the 2021 SecondThird Quarter. Net patient revenue related to clinics opened or acquired prior to 2021 and still in operation on JuneSeptember 30, 2022 (“Mature Clinics”) decreased $1.5 million, or 1.4%, to $108.6 million for the 2022 Second Quarter compared to $110.1 million for the 2021 Second Quarter, due mostly to the decrease in average net patient revenue per visit.slightly. Visits for Mature Clinics (same store) for the 2022 SecondThird Quarter decreased slightly (0.2%)by 1.5% as compared to the 2021 Second Quarter.Third Quarter, while the net patient revenue per visit increased by 1.4%.
The average net patient revenue per visit was $103.18$104.01 for the 2022 SecondThird Quarter, as compared to $104.46a $1.08 per visit increase from $102.93 for the 2021 SecondThird Quarter. Total patient visits increased 5.7%2.8% to 1,145,5541,122,070 for the 2022 SecondThird Quarter from 1,084,0701,091,329 for the 2021 SecondThird 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.
Revenue from the industrial injury prevention services businessIIPS revenue was an all-time high and increased 93.7%92.1% to $19.4$20.2 million for the 2022 SecondThird Quarter as compared to $10.0$10.5 million for the 2021 SecondThird Quarter. Excluding $6.8 million of revenue related to the IIPS acquisition in November 2021 IIPS Acquisition, IIPS revenue increased 25.5%27.1% in the 2022 SecondThird Quarter as compared to the 2021 SecondThird Quarter.
Revenue from management contracts decreased 22.4% to $2.1was $2.0 million for the 2022 SecondThird Quarter as compared to $2.7$2.3 million for the 2021 SecondThird Quarter due to the termination of five management contracts.
Operating Cost
Total operating cost was $109.8$112.8 million for the 2022 SecondThird Quarter, or 78.1%80.8% of total revenue, as compared to $92.6$96.1 million, or 73.0%76.3% of total revenue, for the 2021 SecondThird Quarter. Operating cost related to Mature Clinics increased by $4.0$4.3 million, or 5.0%5.2%, for the 2022 SecondThird Quarter compared to the 2021 SecondThird Quarter. In addition, operating cost related to the IIPS business increased by $7.8$7.9 million of which $5.7$5.8 million related to our November 2021 IIPS acquisition. Physical therapy total operating costs were $81.09 per visit in the 2022 Second Quarter as compared to $76.50 per visit in the 2021 Second Quarter, an increase of 6.0%.Acquisition. See table below for a detail of operating cost (in thousands):
| | | Three Months Ended | | | Three Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| Operating cost related to Mature Clinics | | $ | 84,216 | | | $ | 80,205 | | | $ | 86,177
| | | $ | 81,911
| |
| Operating cost related to 2022 Clinic Additions | | 2,692 | | | - | | | 3,267
| | | - | |
| Operating cost related to 2021 Clinic Additions | | 5,996 | | | 2,063 | | | 5,366
| | | 3,748
| |
| Operating cost related to clinics sold or closed in 2022 | | 324 | | | 555 | | | 721
| | | 504
| |
| Operating cost related to clinics sold or closed in 2021 | | | - | | | | 107 | | | | -
| | | | 69
| |
| Operating cost related to physical therapy operations | | 92,898 | | | 82,930 | | | 95,531
| | | 86,232
| |
| Operating cost related to management contracts | | 1,622 | | | 2,203 | | | 1,537
| | | 2,044
| |
| Operating cost related to industrial injury prevention services | | | 15,315 | | | | 7,491 | | | | 15,750
| | | | 7,818
| |
| Total operating cost | | $ | 109,835 | | | $ | 92,624 | | | $ | 112,818
| | | $ | 96,094
| |
Each component of operating cost is discussed below:
Operating Cost—Salaries and Related Costs
Salaries and related costs, including physical therapy operations and the industrial injury prevention servicesIIPS business, was 56.8%58.6% of net revenue for the 2022 SecondThird Quarter versus 54.3%56.1% for the 2021 SecondThird Quarter. Salaries and related costs for the physical therapy operations was $66.7$68.4 million in the 2022 SecondThird Quarter, or 56.1%58.3% of physical therapy operations revenue, as compared to $60.6$62.5 million in the 2021 SecondThird Quarter, or 53.1%55.3% of physical therapy operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 SecondThird Quarter was $4.9$5.7 million related to 2022 and 2021 Clinic Additions. Adjusted for the salaries and related costs for clinics closed or sold in 2022 and 2021 of $0.2$0.1 million in the SecondThird Quarter and $0.4 million in 2021 SecondThird Quarter, salaries and related costs related to Mature Clinics increased by $2.7$2.9 million in the 2022 SecondThird Quarter compared to the 2021 SecondThird Quarter. Physical therapy total operating costs were $85.14 per visit in the 2022 Third Quarter as compared to $79.02 per visit in the 2021 Third Quarter, an increase of 7.7%. Physical therapy salaries and related costs were $58.29$60.99 per visit in the 2022 SecondThird Quarter as compared to $55.95$56.63 per visit in the SecondThird Quarter 2021, an increase of 4.2%. Salaries7.7%, The cost increases are primarily due to continuing labor rate pressures and related costs related to management contracts decreased by $0.4 million for the 2022 Second Quarter.inflationary economic environment.
Salaries and related costs for the industrial injury prevention servicesIIPS business was $11.6$12.1 million in the 2022 SecondThird Quarter, or 59.9% of industrial injury prevention servicesIIPS revenue, as compared to $6.2$6.3 million in the 2021 SecondThird Quarter, or 62.2%60.8% of industrial injury prevention servicesIIPS revenue.
Operating Cost—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs, including physical therapy operations and the IIPS business, was 20.2%21.3% of net revenue in the 2022 SecondThird Quarter versus 17.6%19.3% in the 2021 SecondThird Quarter. Rent, supplies, contract labor and other costs for the physical therapy operations was $24.7$25.7 million in the 2022 SecondThird Quarter, or 20.7%21.9% of physical therapy operations revenue, as compared to $20.9$22.4 million in the 2021 SecondThird Quarter, or 18.3%19.8% of physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 SecondThird Quarter was $2.7$2.8 million related to 2022 and 2021 Clinic Additions. Adjusted for the rent, supplies, contract labor and other costs for clinics related to the clinics closed or sold in 2022 and 2021 of $0.1$0.7 million in the 2022 SecondThird Quarter and $0.2 million in the 2021 SecondThird Quarter, rent, supplies, contract labor and other costs for Mature Clinics increased by $1.9$1.3 million in the 2022 SecondThird Quarter compared to the 2021 SecondThird Quarter. Rent, supplies, contract labor and other costs, related to management contracts decreased $0.1 million in the 2022 SecondThird Quarter.
Rent, supplies, contract labor and other costs for the industrial injury prevention servicesIIPS business was $3.5$3.7 million in the 2022 SecondThird Quarter, or 18.2%18.6% of industrial injury prevention servicesIIPS revenue, as compared to $1.2$1.4 million in the 2021 SecondThird Quarter, or 12.5%13.7% of net industrial injury prevention servicesIIPS revenue.
Operating Cost—Provision for Credit Losses
The provision for credit losses as a percentage of net revenue was 1.1%1.0% in the 2022 SecondThird Quarter and 1.1% for the comparable period in 2021.
Our provision for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 5.51%5.62% on JuneSeptember 30, 2022, as compared to 5.64% on December 31, 2021. Our days’ sales outstanding was 33were both 32 days on JuneSeptember 30, 2022, and 32 days on December 31, 2021.
Gross Profit
Gross profit for the 2022 SecondThird Quarter, was $30.8$26.8 million, a decrease of $3.5 million, or approximately 10.2%, as compared to $34.3$29.8 million for the 2021 SecondThird Quarter. The gross profit percentage was 21.9%19.2% of total revenue for the 2022 SecondThird Quarter as compared to 27.0%23.7% for the 2021 SecondThird Quarter. The gross profit percentage for our
physical therapy operations was 22.0%18.7% for the 2022 SecondThird Quarter as compared to 27.4%23.7% for the 2021 SecondThird Quarter. The gross profit percentage on management contracts was 23.7%22.5% for the 2022 SecondThird Quarter as compared to 19.6%11.6% for the 2021 SecondThird Quarter. The gross profit percentage for the industrial injury prevention services businessIIPS was 21.2%21.9% for the 2022 SecondThird Quarter as compared to 25.3%25.5% for the 2021 SecondThird Quarter. The IIPS margin in 2022 has been impacted by the lower margin profile of the Company’sour November 2021 IIPS acquisitionAcquisition. The table below details the gross profit (in thousands):
| | | Three Months Ended | | | Three Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| | | | | | | | | | | | | |
| Physical therapy operations | | $ | 26,196 | | | $ | 31,226 | | | $ | 21,932 | | | $ | 26,854 | |
| Management contracts | | 503 | | | 536 | | | 447 | | | 269 | |
| Industrial injury prevention services | | | 4,122 | | | | 2,542 | | | | 4,405 | | | | 2,676 | |
| Gross profit | | $ | 30,821 | | | $ | 34,304 | | | $ | 26,784 | | | $ | 29,799 | |
Corporate Office CostsCost
Corporate office costs were $10.7$11.9 million for the 2022 SecondThird Quarter compared to $12.1$12.9 million for the 2021 SecondThird Quarter. Corporate office costs were 7.6%8.5% of total revenue for the 2022 SecondThird Quarter as compared to 9.5%10.2% for the 2021 SecondThird Quarter. The decrease was primarily due to lower estimated bonus expense in the 2022 SecondThird Quarter compared tothan the 2021 SecondThird Quarter.
Operating Income
Operating income for the 2022 SecondThird Quarter was $20.1$14.9 million and $22.2$16.9 million for the 2021 SecondThird Quarter. Operating income as a percentage of total revenue was 14.3%10.7% for the 2022 SecondThird Quarter as compared to 17.5%13.4% for the 2021 SecondThird Quarter.
LossChange in fair value of contingent earn-out consideration
During the 2022 Third Quarter, the Company revalued contingent earn-out consideration related to an acquisition, resulting in the elimination of a previously booked liability of $2.0 million.
Equity in earnings of unconsolidated affiliate
Through a subsidiary, we have a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals. Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of September 30, 2022, is $12.0 million. For the 2022 Third Quarter, we recognized income of $0.3 million on this 49% joint venture.
Change in Revaluation of Put-Right Liability
The lossgain on revaluation of put-right liability was $617,000.$0.8 million for the 2022 Third Quarter. As part of the November 2021 IIPS business acquisition on November 30, 2021,Acquisition, we 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 owners have the right to put this transaction to us in approximately five years from November 2021, with such right having a $3.5$2.8 million value at Juneon September 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate.
Interest expense – debt and other, net
36For the 2022 Third Quarter, the interest expense on debt and other, primarily from our $150 million term loan entered into in June 2022, details of which are disclosed within LIQUIDITY AND CAPITAL RESOURCES below, amounted to $2.0 million. See discussion of Other Comprehensive Income below. Interest expense, primarily from the Company’s revolving line of credit, was $0.3 million for the 2021 Third Quarter.
Provision for Income Taxes
The provision for income tax was $4.2$3.2 million for the 2022 SecondThird Quarter and $4.6$3.8 million for the 2021 SecondThird Quarter. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.5%25.2% for the 2022 SecondThird Quarter and 26.9%27.6% for the 2021 SecondThird Quarter. See table below ($The current quarter included an adjustment to the tax provision based on revised estimates on certain non-deductible items (see computation of 2022 Nine Month tax rate in thousands):
next section). See table below detailing calculation of the provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):
| | | Three Months Ended | | | Three Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| Income before taxes | | $ | 19,495 | | $ | 22,039 | | | $ | 16,036 | | $ | 17,938 | |
| | | | | | | | | | | |
| Less: net income attributable to non-controlling interest: | | | | | | | | | | |
| Redeemable non-controlling interest - temporary equity | | (2,626 | ) | | (3,611 | ) | | (2,037 | ) | | (2,605 | ) |
| Non-controlling interest - permanent equity | | | (1,435 | ) | | | (1,425 | ) | | | (1,227 | ) | | | (1,509 | ) |
| | | $ | (4,061 | ) | | $ | (5,036 | ) | | $ | (3,264 | ) | | $ | (4,114 | ) |
| | | | | | | | | | | |
| Income before taxes less net income attributable to non-controlling interest | | $ | 15,434 | | $ | 17,003 | | | $ | 12,772 | | $ | 13,824 | |
| | | | | | | | | | | |
| Provision for income taxes | | $ | 4,239 | | $ | 4,567 | | | $ | 3,215 | | $ | 3,815 | |
| | | | | | | | | | | |
| Percentage | | | 27.5 | % | | | 26.9 | % | | | 25.2 | % | | | 27.6 | % |
Net Income Attributable to Non-controlling Interest
Net income attributable to redeemable non-controlling interest (temporary equity) was $2.0 million for the 2022 Third Quarter and $2.6 million for the 2022 Second Quarter and $3.6 million for the 2021 SecondThird Quarter. Net income attributable to non-controlling interest (permanent equity) was $1.4$1.2 million for the 2022 SecondThird Quarter and $1.5 million for the 2021 SecondThird Quarter.
Other Comprehensive Gain
We entered into an interest rate swap agreement in May 2022, Sixwhich has a $150 million notional value, a maturity date of June 30, 2027 and was effective on June 30, 2022. Beginning in July 2022, we pay a fixed rate of interest of 2.815% on a quarterly basis. The total interest rate in any period will also include an applicable margin based on our consolidated leverage ratio. Currently, our interest rate including the applicable margin is 4.665%. Unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. The fair value of the interest rate swap on September 30, 2022, was $5.9 million, of which $1.9 million has been included within Other current assets and $4.0 million has been included in Other assets in the accompanying Consolidated Balance Sheet. The impact of the interest rate swap on the accompanying Consolidated Statements of Comprehensive Income was an unrealized gain of $4.8 million, net of tax, for the 2022 Third Quarter.
2022 Nine Months Compared to 2021 SixNine Months Results
The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements (in thousands):
| | | Six Months Ended June 30, | | | Nine Months Ended September 30, | |
| | | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | | |
| Net operating revenue: | | | | | | | | | | |
| Physical therapy operations | | $ | 233,855 | | $ | 219,253 | | | $ | 353,302 | | $ | 334,652 | |
| Industrial injury prevention services | | | 38,505 | | | 20,043 | | | | 58,660 | | | 30,537 | |
| Total Company | | $ | 272,360 | | $ | 239,296 | | | $ | 411,962 | | $ | 365,189 | |
| | | | | | | | | | | |
| Gross profit: | | | | | | | | | | |
| Physical therapy operations | | $ | 49,135 | | $ | 54,935 | | | $ | 71,513 | | $ | 82,058 | |
| Industrial injury prevention services | | | 8,274 | | | 5,265 | | | | 12,680 | | | 7,941 | |
| Gross profit | | $ | 57,409 | | $ | 60,200 | | | $ | 84,193 | | $ | 89,999 | |
| | | | | | | | | | | |
| Total Assets: | | | | | | | | | | |
| Physical therapy operations | | $ | 414,172 | | $ | 545,449 | | | $ | 432,683 | | $ | 583,785 | |
| Industrial injury prevention services | | | 382,272 | | | 203,977 | | | | 367,025 | | | 46,313 | |
| Total Company | | $ | 796,444 | | $ | 749,426 | | | $ | 799,708 | | $ | 630,098 | |
Revenue
Reported total revenue for the 2022 SixNine Months was $272.4$412.0 million, an increase of 13.8%12.8% as compared to $239.3$365.2 million for the 2021 SixNine Months. See table below for a detail of reported total revenue (in thousands):
| | | For the Six Months Ended | | | For the Nine Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| Revenue related to Mature Clinics | | $ | 211,215 | | $ | 208,531 | | | $ | 317,514 | | $ | 314,969 | |
| Revenue related to 2022 Clinic Additions | | 3,312 | | - | | | 7,019 | | - | |
| Revenue related to 2021 Clinic Additions | | 12,346 | | 2,465 | | | 18,827 | | 7,334 | |
| Revenue from clinics sold or closed in 2022 | | 861 | | 1,104 | | | 1,084 | | 2,058 | |
| Revenue from clinics sold or closed in 2021 | | | - | | | 392 | | | | - | | | 458 | |
| Net patient revenue from physical therapy operations | | 227,734 | | 212,492 | | | 344,444 | | 324,819 | |
| Other revenue | | | 1,770 | | | 1,464 | | | | 2,523 | | | 2,222 | |
| Revenue from physical therapy operations | | 229,504 | | 213,956 | | | 346,967 | | 327,041 | |
| Revenue - Management contracts | | 4,351 | | 5,297 | | | 6,335 | | 7,611 | |
| Revenue - Industrial injury prevention services | | | 38,505 | | | 20,043 | | | | 58,660 | | | 30,537 | |
| Total Revenue | | $ | 272,360 | | $ | 239,296 | | |
| Total revenue | | | $ | 411,962 | | $ | 365,189 | |
Revenue from physical therapy operations increased $15.5$19.9 million, or 7.3%6.1%, to $229.5$347.0 million for the 2022 SixNine Months from $214.0$327.0 million for the 2021 SixNine Months.
The average net patient revenue per visit was $103.09$103.40 for the 2022 SixNine Months as compared to $104.58$104.00 for the 2021 SixNine Months. Total patient visits increased 8.7%6.7% to 2,209,0733,331,143 for the 2022 SixNine Months from 2,031,8583,123,187 for the 2021 SixNine Months. 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.
Net patient revenue related to Mature Clinics increased $2.7$2.5 million, or 1.3%0.8%, to $211.2$317.5 million for the 2022 SixNine Months compared to $208.5$315.0 million for the 2021 SixNine Months. Visits for Mature Clinics (same store) for the 2022 SixNine Months increased 3.0%1.5% as compared to the 2021 SixNine Months. The increase in visits was partially offset by a 0.7% reduction in the net patient revenue per visit.
Revenue from the industrial injury prevention38
IIPS services businessrevenue increased 92.1% to $38.5$58.7 million for the 2022 SixNine Months as compared to $20.0$30.5 million for the 2021 SixNine Months. Excluding $13.7$20.5 million of revenue related to the IIPS acquisition in November 2021 IIPS Acquisition, IIPS revenue increased 24.0%25.0% in the 2022 SixNine Months as compared to the 2021 SixNine Months.
Revenue from management contract revenue decreased 17.9%16.8% to $4.4$6.3 million for the 2022 SixNine Months as compared to $5.3$7.6 million for the 2021 SixNine Months due to the termination of certain management contracts.
Operating Cost
Total operating cost was $215.0$327.8 million for the 2022 SixNine Months, or 78.9%79.6% of total revenue, as compared to $179.1$275.2 million, or 74.8%75.4% of total revenue, for the 2021 SixNine Months. Operating cost related to Mature Clinics increased by $10.1$15.9 million for the 2022 SixNine Months compared to the 2021 SixNine Months. In addition, operating cost related to the industrial injury prevention servicesIIPS business increased by $15.5$23.4 million of which $11.3$17.0 million related to the recentNovember 2021 IIPS acquisition.Acquisition. See table below for a detail of operating cost (in thousands):
| | | Six Months Ended | | | Nine Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| Operating cost related to Mature Clinics | | $ | 166,468 | | | $ | 156,321 | | | $ | 253,899 | | | $ | 237,982 | |
| Operating cost related to 2022 Clinic Additions | | 3,083 | | | - | | | 6,271 | | | - | |
| Operating cost related to 2021 Clinic Additions | | 11,466 | | | 2,128 | | | 15,393 | | | 5,877 | |
| Operating cost related to clinics sold or closed in 2022 | | 251 | | | 979 | | | 1,233 | | | 1,733 | |
| Operating cost related to clinics sold or closed in 2021 | | | | | | | 442 | | | | 2 | | | | 510 | |
| Operating cost related to physical therapy operations | | 181,268 | | | 159,870 | | | 276,798 | | | 246,102 | |
| Operating cost related to management contracts | | 3,453 | | | 4,448 | | | 4,991 | | | 6,492 | |
| Operating cost related to industrial injury prevention services | | | 30,230 | | | | 14,778 | | | | 45,980 | | | | 22,596 | |
| Total operating cost | | $ | 214,951 | | | $ | 179,096 | | | $ | 327,769 | | | $ | 275,190 | |
Each component of operating cost is discussed below:
Operating Cost—Salaries and Related Costs
Salaries and related costs, including physical therapy operations and the industrial injury prevention servicesIIPS business, was 56.9%57.5% of net revenue for the 2022 SixNine Months versus 55.4%55.6% for the 2021 SixNine Months. Salaries and related costs for the physical therapy operations was $129.2$197.7 million in the 2022 SixNine Months, or 56.3%57.0% of physical therapy operations revenue, as compared to $116.2$178.6 million in the 2021 SixNine Months, or 54.3%54.6% of physical therapy operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 SixNine Months was $8.1$13.8 million related to 2022 and 2021 Clinic Additions. Adjusted for the salaries and related costs for clinics closed or sold in 2022 and 2021 of $0.1$0.8 million in the 2022 SixNine Months and $0.9$1.4 million in 2021 SixNine Months, salaries and related costs related to Mature Clinics increased by $6.6$9.7 million in the 2022 SixNine Months compared to the 2021 SixNine Months. Salaries and related costs related to management contracts decreased by $0.8$1.3 million for the 2022 SixNine Months. As previously mentioned, the Company is experiencing pressure on labor rates and other costs due to the inflationary economic environment.
Salaries and related costs for the industrial injury prevention servicesIIPS business was $22.7$34.8 million in the 2022 SixNine Months, or 59.0%59.3% of industrial injury prevention servicesIIPS revenue, as compared to $12.5$18.8 million in the 2021 SixNine Months, or 62.3%61.8% of industrial injury prevention servicesIIPS revenue.
Operating Cost—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention servicesIIPS business, was 20.9%21.0% of net revenue in the 2022 SixNine Months versus 18.3%18.6% in the 2021 SixNine Months. Rent, supplies, contract labor and other costs for the physical therapy operations was $49.3$75.0 million in the 2022 SixNine Months, or 21.5%21.6% of physical therapy operations revenue, as compared to $41.0$63.5 million in the 2021 SixNine Months, or 19.2%19.4% of physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 SixNine Months was $4.7$7.5 million related to 2022 and 2021 Clinic Additions. Adjusted for the rent, supplies, contract labor and other costs for clinics related to the clinics closed or sold in 2022 and 2021 of $0.3$0.4 million in the 2022 SixNine Months and $0.5$0.8 million in the 2021 SixNine Months, rent, supplies, contract labor and other costs for Mature Clinics increased by $4.6$6.4 million in the 2022 SixNine Months compared to the 2021 SixNine Months. Rent, supplies, contract labor and other costs, related to management contracts decreased $0.2 million in the 2022 SixNine Months.
Rent, supplies, contract labor and other costs for the industrial injury prevention servicesIIPS business was $7.4$11.1 million in the 2022 SixNine Months, or 19.1%18.9% of industrial injury prevention servicesIIPS revenue, as compared to $2.3$3.7 million in the 2021 SixNine Months, or 11.4%12.2% of net industrial injury prevention servicesIIPS revenue.
Operating Cost—Provision for Credit Losses
The provision for credit losses as a percentage of net revenue was 1.0% in the 2022 Second QuarterNine Months and 1.1% for the comparable period in 2021.
Our provision for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 5.51% at June5.62% on September 30, 2022, as compared to 5.64% at December 31, 2021. Our days’ sales outstanding was 33were 32 days at JuneSeptember 30, 2022 and 32 days at December 31, 2021.
Gross Profit
Gross profit for the 2022 SixNine Months was $57.4$84.2 million, a decrease of $2.8$5.8 million, or approximately 4.6%6.5%, as compared to $60.2$90.0 million for the 2021 SixNine Months. The gross profit percentage was 21.1%20.4% of total revenue for the 2022 SixNine Months as compared to 25.2%24.6% for the 2021 SixNine Months. The gross profit percentage for our physical therapy operations was 21.0%20.2% for the 2022 SixNine Months as compared to 25.3%24.7% for the 2021 SixNine Months. The gross profit percentage on management contracts was 20.6%21.2% for the 2022 SixNine Months as compared to 16.0%14.7% for the 2021 SixNine Months. The gross profit percentage for industrial injury prevention servicesthe IIPS business was 21.5%21.6% for the 2022 SixNine Months as compared to 26.3%26.0% for the 2021 SixNine Months. The IIPS margin in 2022 has been impacted by the lower margin profile of our November 2021 IIPS acquisition.Acquisition. The table below details the gross profit (in thousands):
| | | Six Months Ended | | | Nine Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| | | | | | | | | | | | | |
| Physical therapy operations | | $ | 48,236 | | | $ | 54,086 | | | $ | 70,169 | | | $ | 80,939 | |
| Management contracts | | 898 | | | 849 | | | 1,344 | | | 1,119 | |
| Industrial injury prevention services | | | 8,275 | | | | 5,265 | | | | 12,680 | | | | 7,941 | |
| Gross profit | | $ | 57,409 | | | $ | 60,200 | | | $ | 84,193 | | | $ | 89,999 | |
Corporate Office CostsCost
Corporate office costs were $22.3$34.2 million for the 2022 SixNine Months compared to $22.9$35.8 million for the 2021 SixNine Months. Corporate office costs were 8.2%8.3% of total revenue for the 2022 SixNine Months as compared to 9.6%9.8% for the 2021 SixNine Months. The decrease was primarily due to lower estimated bonus expense in the 2022 SixNine Months than the 2021 SixNine Months.
Operating Income
Operating income for the 2022 SixNine Months were $35.1was $50.0 million and $37.3$54.2 million for 2021 SixNine Months. Operating income as a percentage of total revenue was 12.9%12.1% for the 2022 SixNine Months as compared to 15.6%14.8% for the 2021 SixNine Months.
LossEquity in earnings of unconsolidated affiliate
Through a subsidiary, we have a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals. Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of September 30, 2022, is $12.0 million. For the 2022 Nine Months, we recognized income of $1.0 million on this 49% joint venture.
Change in fair value of contingent earn-out consideration
During the 2022 Nine Months, the Company revalued contingent earn-out consideration related to an acquisition, resulting in the elimination of a previously booked liability of $2.0 million.
Change in Revaluation of Put-Right Liability
The lossFor the 2022 Nine Months, we recorded a gain on the revaluation of the put-right liability was $14,000.of $0.8 million. As part of the November 2021 IIPS business acquisition on November 30, 2021,Acquisition, we 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 owners have the right to put this transaction to us in approximately five years, with such right having a $3.5$2.8 million value at Juneon September 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate.
Interest expense – debt and other, net
For the 2022 Nine Months, the interest expense on debt and other, primarily from our $150 million term loan entered into in June 2022, details of which are disclosed withing LIQUIDITY AND CAPITAL RESOURCES, amounted to $3.5 million. See discussion of Other Comprehensive Income below. Interest expense, primarily from the Company’s revolving line of credit was $0.8 million for the 2021 Nine Months.
Provision for Income Taxes
The provision for income tax was $7.7$11.0 million for the 2022 SixNine Months and $7.5$11.3 million for the 2021 SixNine Months. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.9%27.0% for both the 2022 SixNine Months and 26.7% for the 2021 SixNine Months. See table below detailing calculation of the provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):
| | | Six Months Ended | | | For the Nine Months Ended | |
| | | June 30, 2022 | | June 30, 2021 | | | September 30, 2022 | | September 30, 2021 | |
| Income before taxes | | $ | 34,975 | | $ | 36,869 | | | $ | 51,011 | | | $ | 54,807 | |
| | | | | | | | | | | | | | |
| Less: net income attributable to non-controlling interest: | | | | | | | | | | | | | |
| Redeemable non-controlling interest - temporary equity | | (5,183 | ) | | (6,064 | ) | | | (7,220 | ) | | | (8,669 | ) |
| Non-controlling interest - permanent equity | | | (2,061 | ) | | | (2,685 | ) | | | (3,288 | ) | | | (4,194 | ) |
| | | $ | (7,244 | ) | | $ | (8,749 | ) | | $ | (10,508 | ) | | $ | (12,863 | ) |
| | | | | | | | | | | | | | |
| Income before taxes less net income attributable to non-controlling interest | | $ | 27,731 | | $ | 28,120 | | |
| Income before taxes less net income attributable to non controlling interest | | | $ | 40,503 | | | $ | 41,944 | |
| | | | | | | | | | | | | | |
| Provision for income taxes | | $ | 7,737 | | $ | 7,511 | | | $ | 10,952 | | | $ | 11,326 | |
| | | | | | | | | | | | | | |
| Percentage | | | 27.9 | % | | | 26.7 | % | | | 27.0 | % | | | 27.0 | % |
Net Income Attributable to Non-controlling Interest
Net income attributable to redeemable non-controlling interest (temporary equity) was $5.2$7.2 million for the 2022 SixNine Months and $6.1$8.7 million for the 2021 SixNine Months. Net income attributable to non-controlling interest (permanent equity) was $2.1$3.3 million for the 2022 SixNine Months and $2.7$4.2 million for the 2021 SixNine Months.
Other Comprehensive LossIncome
Concurrently with the Credit Agreement (as defined below), we entered into an interest rate swap agreement in May 2022, which has a $150 million notional value, a maturity date of June 30, 2027 and was effective on June 30, 2022. Beginning in July 2022, we pay 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 our consolidated leverage ratio. Currently, our interest rate including the applicable margin is 4.665%. Unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. The fair value of the interest rate swap at June 30, 2022, was $0.5 million, which has been included within current liabilities in the accompanying Consolidated Balance Sheet. The impact of the interest rate swap (described within LIQUIDITY AND CAPITAL RESOURCES below) on the accompanying Consolidated StatementStatements of Comprehensive Income for the three and six months ended June 30, 2022 was an unrealized lossgain of $0.4$4.4 million, net of tax.tax, for the 2022 Nine Months.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. At JuneOn September 30, 2022 and December 31, 2021, we had $48.6$37.9 million and $28.6 million, respectively, in cash. We believe that our cash and cash equivalents and availability under our Credit Facilities are sufficient to fund the working capital needs of our operating subsidiaries through at least JuneSeptember 30, 2023.
Cash and cash equivalents increased by $20.4$9.4 million from December 31, 2021 to JuneSeptember 30, 2022. During the 2022 SixNine Months, $27.5$41.2 million was provided by operations and $211.0$36.0 million, net of payments, from proceeds on our Amended Credit Agreement (described below). The major uses of cash for investing and financing activities included: payments on our Revolving Facility ($175.0 million), distributions to non-controlling interests inclusive of those classified as redeemable non-controlling interest ($7.211.8 million), dividends paid to our shareholders ($10.716.0 million), purchase of business and non-controlling interest ($20.432.9 million), and purchase of fixed assets ($4.67.3 million).
On June 17, 2022, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and the lenders from time-to-time party thereto.others.
The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans will be 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 first two 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 us for working capital and other general corporate purposes of the Company and its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by us to refinance the indebtedness outstanding under the Second Amended and Restated Credit Agreement, to pay fees and expenses incurred in connection with the loan facilities transactions, for working capital and other general corporate purposes of our Company and its subsidiaries.
We will be permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $100 million plus (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 agreement plus an applicable margin or, at our option, an alternate base rate plus an applicable margin. Currently, our interest rate including the applicable margin is 4.665%. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity.
We 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”). The CompanyWe 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 time without premium or penalty, subject to certain conditions.
The Credit Agreement contains 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 the Consolidated Fixed Charge Coverage Ratio and the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary events of default.
Our obligations under the Credit Agreement are guaranteed by its wholly-ownedwholly owned material domestic subsidiaries (each, a “Guarantor”), and theour 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 theour Company and each Guarantor, subject to certain exceptions.
In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which has a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, we make interest payments based on the 1-month SOFR rate (“variable rate payment”) and receive or pay the differential between the variable rate payment and the fixed 2.815% SOFR rate on a monthly basis. Also included in the total interest payment in any period is an applicable margin based on our consolidated leverage ratio.
We designated the interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.
On JuneSeptember 30, 2022, $150.0 million was outstanding on the Term Loan and the Revolving Facility remains available resulting in $175.0 million of availability. As of JuneSeptember 30, 2022, we were in compliance with all of the covenants thereunder. Through the date of this report, we have drawn $5.0 million on the Revolving Facility.
On March 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $11.5 million, of which $11.2 million was paid in cash and $0.3 million is 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.
On August 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $3.5 million, of which $3.3 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on August 31, 2024.
On September 30, 2022, we acquired an 80% interest in a two-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $4.2 million, of which $3.9 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on September 30, 2024.
On December 31, 2021, we acquired a 75% interest in a three-clinic physical therapy practice with the practice founder retaining 25%. The purchase price for the 75% interest was approximately $3.7 million, of which $3.5 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, we acquired an approximate 70% interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The initial purchase price for the 70% equity interest, not inclusive of the $2.0 million contingent payment in conjunction with the acquisition if specified future operational objectives are met, was approximately $63.2 million, of which $62.2 million was paid in cash, and $1.0 million is in the form of a note payable. The note accrues interest at 3.25% and the principal and interest is payable on November 30, 2023. The business generates approximately $27.0 million in annual revenue at a margin of approximately 20%. As part of the transaction, we also agreed to the 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 us in approximately five years, with such put right having an initial $3.5 million fair value on June 30, 2022, as reflected on the Company’sour 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 fair value reflected in the Company’sour consolidated statement of income.
On September 30, 2021, the Companywe acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The business generates more than $2.0 million in annual revenue. We 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 industrial injury prevention servicesour IIPS subsidiary. 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 Companywe acquired a 65% interest in an eight-clinic physical therapy practice with the practice founders retaining 35%. The purchase price was approximately $10.3 million, of which $9.0 million was paid in cash, $1.0 million was 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 haswe have 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 CompanyWe 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 five-clinic physical therapy practice with the practice founders 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 million, of which $11.7 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.
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 Medicare Accelerated and Advance Payment Program (“MAAPP Funds”) during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. The CompanyWe applied for and received approval from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. TWehe Company recorded the $14.1 million in advance payments received as a liability. During the 2021 First Quarter, the Companywe repaid the MAAPP Funds of $14.1 million rather than applying them to future services performed.
Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have from time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and financing. Any large acquisition would likely require financing.
We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting payor credentialing approval initially may be delayed for a relatively short transition period. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the accounts receivable has been outstanding for at least 120 days.
We generally enter into various notes payable as a means of financing our acquisitions. Our outstanding notes payable as of JuneSeptember 30, 2022 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interest that occurred in 2018 through JuneSeptember 2022. Typically, the notes are payable over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 5.5% per annum, subject to adjustment. At JuneSeptember 30, 2022, the balance on these notes payable was $5.7$5.5 million. In addition, we assumed leases with remaining terms of 1 month to 6 years for the operating facilities.
In conjunction with the above-mentioned acquisitions, in the event that a limited minority partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition date, we have agreed to certain contractual provisions which enable such minority partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.
As of JuneSeptember 30, 2022, we have accrued $7.9 million related to credit balances due to patients and payors. This amount is expected to be paid in the next twelve months.
From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). Our Amended Credit Agreement permits share repurchases of up to $15,000,000, subject to compliance with covenants. We are required to retire shares purchased under the March 2009 Authorization.
There is no expiration date for the share repurchase program. As of JuneSeptember 30, 2022, there are currently an additional estimated 137,363 shares197,316 (based on the closing price of $109.20$76.02 on JuneSeptember 30, 2022) that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during the sixnine months ended JuneSeptember 30, 2022.
FACTORS AFFECTING FUTURE RESULTS
The risks related to our business and operations include:
the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19 and its variants, for which the total financial magnitude cannot be currently estimated;
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients;
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
the impact of COVID-19 related vaccination and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations;
changes as the result of government enacted national healthcare reform;
business and regulatory conditions including federal and state regulations;| • | business and regulatory conditions including federal and state regulations; |
governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs;
revenue and earnings expectations;
some of our acquisition agreements contain contingent consideration, the value of which may impact future financial results;
one of our acquisition agreements includes a Put Right for a potential purchase of a company and we may or may not have the capital necessary to satisfy this obligation;
legal actions, which could subject us to increased operating costs and uninsured liabilities;
general economic conditions, including but not limited to inflationary and recessionary periods;
availability and cost of qualified physical therapists;
personnel productivity and hiring, training and retaining key personnel;
competitive environment in the industrial injury prevention servicesIIPS business, which could result in the termination or nonrenewal of contractual service arrangements and other adverse financial consequences for that service line;
acquisitions, and the successful integration of the operations of the acquired businesses;
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests);
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
maintaining clients for which we perform management and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;
maintaining adequate internal controls;
our business depends upon hiring, training and retaining qualified personnel;
maintaining necessary insurance coverage;
availability, terms, and use of capital; and
weather and other seasonal factors.
In addition to the above, see Risk Factors in Part 2I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and the additional risk factor below:
Our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing, and our ability to operate our business.
We have outstanding debt obligations that could adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. We cannot assure that additional financing will be available to us on favorable terms when required, or at all.
Our loan agreements contain certain restrictions and requirements that among other things:
require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;
limit our future ability to refinance our indebtedness on terms acceptable to us or at all;
limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and
impose on us financial and operational restrictions.
Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in our Annual Report on Form 10-K filed on March 1, 2022. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.
If we fail to satisfy our debt service obligations or the other restrictions and requirements in our loan agreements, we could be in default. Unless cured or waived, a default would permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.
Our outstanding loans bear interest at variable rates. In response to the variable rates, we entered into entered into an interest rate swap agreement. See above for further discussionPart II – Item 1A of this swap agreement.report.
Forward-Looking Statements
We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to the risks listed above.
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
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.
In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, which has a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, we receive 1-month SOFR, and pay a fixed rate of interest of 2.815% plus an additional margin on a quarterly basis. The total interest rate in any period will also include an applicable margin based on our Consolidated Leverage Ratio.
We designated the interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.
| ITEM 4. | CONTROLS AND PROCEDURES. |
| (a) | Evaluation of Disclosure Controls and Procedures |
As of the end of the period covered by this report, the Company’s management completed an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded (i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure and (ii) that our disclosure controls and procedures are effective.
| (b) | Changes in Internal Control over Financial Reporting |
There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
We are a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of our business. We cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future that may, either individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, and liquidity.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. We have been a defendant in these cases in the past and may be named as a defendant in similar cases from time to time in the future.
Our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing, and our ability to operate our business.
We have outstanding debt obligations that could adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. We cannot provide assurances that additional financing will be available to us on favorable terms when required, or at all.
Our loan agreements contain certain restrictions and requirements that among other things:
require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;
limit our future ability to refinance our indebtedness on terms acceptable to us or at all;
limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and
impose on us financial and operational restrictions.
Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021, filed on March 1, 2022. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.
If we fail to satisfy our debt service obligations or the other restrictions and requirements in our loan agreements, we could be in default. Unless cured or waived, a default would permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.
Our outstanding loans bear interest at variable rates. In response to the variable rates, we entered into an interest rate swap agreement. We are 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 our variable-rate borrowing. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks. In May 2022, we entered into an interest rate swap agreement. See aboveagreement to manage these risks. While intended to reduce the effects of fluctuations in these prices and rates, these transactions may limit our potential gains or expose us to losses. If our counterparties to such transactions or the sponsors fail to honor their obligations due to financial distress, we would be exposed to potential losses or the inability to recover anticipated gains from these transactions.
Our business depends upon hiring, training and retaining qualified employees.
Our workforce costs represent our largest operating expense, and our ability to meet our labor needs while controlling labor costs is subject to numerous external factors, including market pressures with respect to prevailing wage rates and unemployment levels. We compete with rehabilitation companies and other businesses for further discussionmany of this swap agreement.our clinical and non-clinical employees, and turnover in these positions can lead to increased training and retention costs, particularly in a competitive labor market. We cannot be assured that we can continue to hire, train and retain qualified employees at current wage rates since we operate in a competitive labor market, and there are currently significant inflationary and other pressures on wages. If we are unable to hire, properly train and retain qualified employees, we could experience higher employment costs and reduced revenues, which could adversely affect our earnings.
Some of our acquisition agreements contain contingent consideration, the value of which may impact future financial results.
Some of our acquisition agreements include contingent earn-out consideration, the fair value of which is estimated as of the acquisition date based on the present value of the expected contingent payments as determined using weighted probabilities of possible future payments. These fair value estimates contain unobservable inputs and estimates that could materially differ from the actual future results. The fair value of the contingent earn-out consideration could increase or decrease as applicable. Changes in the fair value of contingent earn-outs will be reflected in our results of operations in the period in which they are recognized, the amount of which may be material and cause volatility in our operating results.
One of our acquisition agreements contains a Put Right related to a potential future purchase of a majority Interest In a separate company.
One of our acquisition agreements includes a Put Right for the potential future purchase of a majority interest in a separate company at a purchase price which is derived based on a specified multiple of the separate company’s historical earnings. The exercise of the Put Right is outside of our control. In the event the Put Right is triggered, we are required to purchase the aforementioned equity interest at the calculated purchase price described above. The resulting purchase price may be greater than the fair value of such equity interests at the time, and we may or may not have the capital necessary to satisfy such contractual purchase obligation, in which case we could be in breach.
Exhibit Number | Description |
| |
10.1+
| Third Amended and Restated Credit Agreement dated as of June 17, 2022 among the Company, as the borrower, and Bank of America, N.A., as Administrative Agent, Regions Capital Markets as Syndication Agent, BofA Securities Inc. and Regions Capital Markets as Joint Load Arrangers, BofA Securities Inc., as Sole Bookrunner and the lenders named therein. [incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 10-Q filed with the SEC on June 21, 2022.] |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
| | U.S. PHYSICAL THERAPY, INC. |
| | | |
Date: AugustNovember 8, 2022 | By: | /s/ CAREY HENDRICKSON |
| | | Carey Hendrickson |
| | | Chief Financial Officer |
| | | (Principal financial and accounting officer) |
| | |
49