UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~June 30, 2022~~March 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____TO _____

COMMISSION FILE NUMBER 1-11151

U.S. PHYSICAL THERAPY, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA		76-0364866
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

1300 WEST SAM HOUSTON PARKWAY SOUTH, SUITE 300, HOUSTON, TEXAS		77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	USPH	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 13(a) of the Exchange Act. ☐

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

As of ~~August 8, 2022,~~May 5, 2023 the number of shares outstanding (issued less treasury stock) of the registrant’s common stock, par value $.01 per share, was: ~~13,004,245.~~13,062,583.

ITEM 1.

FINANCIAL STATEMENTS.

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	June 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
ASSETS	(unaudited)						(unaudited)
Current assets:
Cash and cash equivalents	$	48,572		$	28,567		$	32,605		$	31,594
Patient accounts receivable, less allowance for credit losses of $2,948 and $2,768, respectively		50,549			46,272
Patient accounts receivable, less allowance for credit losses of $2,674 and $2,829, respectively								56,647			51,934
Accounts receivable - other		18,915			16,144			17,816			16,671
Other current assets		3,810			4,183			10,726			11,067
Total current assets		121,846			95,166			117,794			111,266
Fixed assets:
Furniture and equipment		60,379			58,743			63,139			62,074
Leasehold improvements		41,038			39,194			43,525			42,877
Fixed assets, gross		101,417			97,937			106,664			104,951
Less accumulated depreciation and amortization		77,188			74,958			82,026			80,203
Fixed assets, net		24,229			22,979			24,638			24,748
Operating lease right-of-use assets		101,274			96,427			100,604			103,004
Investment in unconsolidated affiliate		12,346			12,215			12,160			12,131
Goodwill		442,761			434,679			501,347			494,101
Other identifiable intangible assets, net		92,655			86,382			108,991			108,755
Other assets		1,333			1,578			2,593			4,149
Total assets	$	796,444		$	749,426		$	868,127		$	858,154
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST
Current liabilities:
Accounts payable - trade	$	3,793		$	3,268		$	4,233		$	3,300
Accounts payable - due to seller of acquired business		3,203			3,203			-			3,204
Accrued expenses		41,246			45,705			45,220			37,413
Current portion of operating lease liabilities		32,083			30,475			33,650			33,709
Current portion of term loan and notes payable		4,780			830			7,730			7,863
Total current liabilities		85,105			83,481			90,833			85,489
Notes payable, net of current portion		4,258			3,587			2,583			1,913
Revolving line of credit		0			114,000			38,000			31,000
Term Loan, net of current portion and deferred financing costs		144,631			0			142,098			142,918
Deferred taxes		19,483			14,385			21,524			21,303
Operating lease liabilities, net of current portion		77,776			74,185			75,460			77,934
Other long-term liabilities		4,858			7,345			13,870			13,029
Total liabilities		336,111			296,983			384,368			373,586

Redeemable non-controlling interest - temporary equity		151,400			155,262			164,283			167,515

Commitments and Contingencies

U.S. Physical Therapy, Inc. (“USPH”) shareholders’ equity:
Preferred stock, $0.01 par value, 500,000 shares authorized, 0 shares issued and outstanding		0			0
Common stock, $0.01 par value, 20,000,000 shares authorized, 15,218,982 and 15,126,160 shares issued, respectively		152			151
Preferred stock, $0.01 par value, 500,000 shares authorized, no shares issued and outstanding								-			-
Common stock, $0.01 par value, 20,000,000 shares authorized, 15,277,320 and 15,216,326 shares issued, respectively								152			152
Additional paid-in capital		106,801			102,688			112,123			110,317
Accumulated other comprehensive loss		(395	)		0
Accumulated other comprehensive gain								2,651			4,004
Retained earnings		232,247			224,395			234,760			232,948
Treasury stock at cost, 2,214,737 shares		(31,628	)		(31,628	)		(31,628	)		(31,628	)
Total USPH shareholders’ equity		307,177			295,606			318,058			315,793
Non-controlling interest - permanent equity		1,756			1,575			1,418			1,260
Total USPH shareholders’ equity and non-controlling interest - permanent equity		308,933			297,181			319,476			317,053
Total liabilities, redeemable non-controlling interest,
USPH shareholders’ equity and non-controlling interest - permanent equity	$	796,444		$	749,426
Total liabilities, redeemable non-controlling interest, USPH shareholders’ equity and non-controlling interest - permanent equity							$	868,127		$	858,154

See notes to unaudited consolidated financial statements.

Index

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OFNET INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

	Three Months Ended
	March 31, 2023			March 31, 2022

Net patient revenue	$	126,581		$	109,538
Other revenue		21,928			22,166
Net revenue		148,509			131,704
Operating cost:
Salaries and related costs		86,040			75,149
Rent, supplies, contract labor and other		30,100			28,662
Provision for credit losses		1,512			1,305
Total operating cost		117,652			105,116

Gross profit		30,857			26,588

Corporate office costs		13,859			11,556
Operating income		16,998			15,032

Other income and expense:
Relief Funds		467			-
Change in fair value of contingent earn-out consideration		(698	)		-
Equity in earnings of unconsolidated affiliate		274			339
Interest and other income, net		64			46
Change in revaluation of put-right liability		(149	)		603
Interest expense - debt and other		(2,560	)		(540	)
Total other income and expense		(2,602	)		448
Income before taxes		14,396			15,480

Provision for income taxes		2,969			3,498

Net income		11,427			11,982

Less: net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity		(2,720	)		(2,557	)
Non-controlling interest - permanent equity		(1,297	)		(626	)
		(4,017	)		(3,183	)

Net income attributable to USPH shareholders	$	7,410		$	8,799

Basic and diluted earnings per share attributable to USPH shareholders	$	0.58		$	0.67

Shares used in computation - basic and diluted		13,025			12,937

Dividends declared per common share	$	0.43		$	0.41

See notes to unaudited consolidated financial statements.

Index

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

~~(unaudited)~~

Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30,2022 June 30, 2021

Net patient revenue $ 118,196 $ 113,238 $ 227,734 $ 212,492
Other revenue 22,460 13,690 44,626 26,804
Net revenue 140,656 126,928 272,360 239,296
Operating cost:
Salaries and related costs 79,939 68,866 155,088 132,681
Rent, supplies, contract labor and other 28,345 22,394 57,007 43,851
Provision for credit losses 1,551 1,364 2,856 2,564
Total operating cost 109,835 92,624 214,951 179,096

Gross profit 30,821 34,304 57,409 60,200

Corporate office costs 10,741 12,074 22,297 22,948
Operating income 20,080 22,230 35,112 37,252

Other income and expense
Equity in earnings of unconsolidated affiliate 340 0 679 0
Interest and other income, net 679 46 725 100
Loss on revaluation of put-right liability (617 ) 0 (14 ) 0
Interest expense - debt and other (987 ) (237 ) (1,527 ) (483 )
Total other income and expense (585 ) (191 ) (137 ) (383 )
Income before taxes 19,495 22,039 34,975 36,869
Provision for income taxes 4,239 4,567 7,737 7,511

Net income
15,256
17,472
27,238
29,358

Less: net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity (2,626 ) (3,611 ) (5,183 ) (6,064 )
Non-controlling interest - permanent equity (1,435 ) (1,425 ) (2,061 ) (2,685 )

(4,061 )
(5,036 )
(7,244 )
(8,749 )

Net income attributable to USPH shareholders $ 11,195 $ 12,436 $ 19,994 $ 20,609

Basic and diluted earnings per share attributable to USPH shareholders $ 0.87 $ 0.82 $ 1.55 $ 1.03

Shares used in computation - basic and diluted 12,998 12,902 12,968 12,886

Dividends declared per common share $ 0.41 $ 0.35 $ 0.82 $ 0.70

	Three Months Ended
	March 31, 2023			March 31, 2022

Net income	$	11,427		$	11,982
Other comprehensive loss
Unrealized loss on cash flow hedge		(1,817	)		-
Tax effect at statutory rate (federal and state)		464			-
Comprehensive income	$	10,074		$	11,982

Comprehensive income attributable to non-controlling interest		(4,017	)		(3,183	)
Comprehensive income attributable to USPH shareholders	$	6,057		$	8,799

See notes to unaudited consolidated financial statements.

Index

~~U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF~~ ~~COMPREHENSIVE INCOME~~

~~(IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~(unaudited)~~

Three Months Ended For the Six Months Ended
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021

Net income $ 15,256 $ 17,472 $ 27,238 $ 29,358
Other comprehensive loss
Unrealized loss on cash flow hedge (531 ) 0 (531 ) 0
Tax effect at statutory rate (federal and state) of 25.55%
136 0 136 0
Comprehensive income $ 14,861 $ 17,472 $ 26,843 $ 29,358

Comprehensive income attributable to non-controlling interest (4,061 ) (5,036 ) (7,244 ) (8,749 )
Comprehensive income attributable to USPH shareholders $ 10,800 $ 12,436 $ 19,599 $ 20,609

~~Index~~

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

~~(unaudited)~~

	Six Months Ended						Three Months Ended
	June 30, 2022			June 30, 2021			March 31, 2023			March 31, 2022
OPERATING ACTIVITIES
Net income including non-controlling interest and earnings from unconsolidated affiliates, net	$	27,238		$	29,358
Net income including non-controlling interest							$	11,427		$	11,982
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
Depreciation and amortization		7,298			5,484			3,788			3,824
Provision for credit losses		2,856			2,564			1,512			1,305
Equity-based awards compensation expense		3,660			3,405			1,806			1,846
Deferred income taxes		4,307			3,160			221			2,132
Loss on revaluation of put-right liability		14			0
(Gain) loss on sale of clinics and fixed assets		(614	)		106
Change in revaluation of put-right liability								149			(603	)
Change in fair value of contingent earn-out consideration								698			-
Earnings in unconsolidated affiliate		(679	)		0			(274	)		(339	)
Other								125			93
Changes in operating assets and liabilities:
Increase in patient accounts receivable		(7,459	)		(5,325	)		(5,999	)		(4,676	)
(Increase) decrease in accounts receivable - other		(2,862	)		129
(Increase) decrease in other assets		230			(255	)
Decrease in accounts payable and accrued expenses		(3,891	)		(3,672	)
(Decrease) increase in other long-term liabilities		(2,587	)		602
Increase in accounts receivable - other								(796	)		(2,145	)
Increase (decrease) in other assets								1,897			(735	)
(Decrease ) increase in accounts payable and accrued expenses								(1,846	)		1,445
Decrease in other long-term liabilities								(1,359	)		(2,480	)
Net cash provided by operating activities		27,511			35,556			11,349			11,649

INVESTING ACTIVITIES
Purchase of fixed assets		(4,569	)		(3,301	)		(2,059	)		(2,528	)
Purchase of majority interest in businesses, net of cash acquired		(11,799	)		(20,402	)		(5,796	)		(11,242	)
Purchase of redeemable non-controlling interest, temporary equity		(8,648	)		(9,536	)		(5,178	)		(2,211	)
Purchase of non-controlling interest, permanent equity		(156	)		0
Proceeds on sales of partnership interest, clinics and fixed assets		740			(168	)
Purchase of non controlling interest-permanent								-			(99	)
Proceeds on sale of partnership interest - redeemable non-controlling interest								107			4
Distributions from unconsolidated affiliate		548			0			245			132
Proceeds on sales of redeemable non-controlling interest-temporary		344			32
Net cash used in investing activities		(23,540	)		(33,375	)		(12,681	)		(15,944	)

FINANCING ACTIVITIES
Distributions to non-controlling interest, permanent and temporary equity		(7,202	)		(9,398	)		(3,297	)		(3,711	)
Cash dividends paid to shareholders		(10,659	)		(9,028	)
Proceeds from revolving line of credit		61,000			128,000			7,000			35,000
Proceeds from term loan		150,000			0			-			(31,000	)
Payments on revolving line of credit		(175,000	)		(106,000	)
Payments on term loan								(938	)		-
Principal payments on notes payable		(338	)		(4,207	)		(422	)		(332	)
(Payment) receipt of Medicare Accelerated and Advance Funds		0			(14,054	)
Payment of deferred financing costs		(1,779	)		0
Other		12			7
Net cash used in financing activities		16,034			(14,680	)
Net cash provided by (used in) financing activities								2,343			(43	)

Net decrease in cash and cash equivalents		20,005			(12,499	)
Net increase (decrease) in cash and cash equivalents								1,011			(4,338	)
Cash and cash equivalents - beginning of period		28,567			32,918			31,594			28,567
Cash and cash equivalents - end of period	$	48,572		$	20,419		$	32,605		$	24,229

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes	$	4,524		$	6,967		$	442		$	81
Interest paid	$	1,319		$	741			1,377			525
Non-cash investing and financing transactions during the period:
Purchase of businesses - seller financing portion	$	374		$	550			360			300
Purchase of businesses - contingent consideration	$	0		$	1,000
Notes payable related to purchase of redeemable non-controlling interest, temporary equity	$	948		$	0			611			246
Notes payable due to purchase of non-controlling interest, permanent equity	$	296		$	0
Notes receivable related to sale of partnership interest	$	0		$	287
Notes payable related to purchase of non-controlling interest, permanent equity								-			296
Notes receivable related to sale of partnership interest - redeemable non-controlling interest	$	1,476		$	0			532			-
Dividends payable to USPH shareholders							$	5,617		$	5,327

See notes to unaudited consolidated financial statements.

Index

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY~~EQUITY~~

(IN THOUSANDS)

~~(unaudited)~~

	U.S.Physical Therapy, Inc.
	Common Stock				Additional		Accumulated Other			Retained			Treasury Stock						Total Shareholders’			Non-Controlling
	Shares		Amount		Paid-In Capital		Comprehensive Gain			Earnings			Shares			Amount			Equity			Interests			Total

Balance December 31, 2022		15,216		152	$	110,317		4,004		$	232,948			(2,215	)	$	(31,628	)	$	315,793		$	1,260		$	317,053
Issuance of restricted stock, net of cancellations		61		-		-		-			-			-			-			-			-			-
Revaluation of redeemable non-controlling interest, net of tax		-		-		-		-			(119	)		-			-			(119	)		-			(119	)
Compensation expense - equity-based awards		-		-		1,806		-			-			-			-			1,806			-			1,806
Dividends payable to USPH shareholders		-		-		-		-			(5,617	)		-			-			(5,617	)		-			(5,617	)
Distributions to non-controlling interest partners - permanent equity		-		-		-		-			-			-			-			-			(1,139	)		(1,139	)
Deferred taxes related to redeemable non-controlling interest - temporary equity		-		-		-		-			137			-			-			137			-			137
Other		-		-		-		-			1			-			-			1			-			1
Net income attributable to non-controlling interest - permanent equity		-		-		-		-			-			-			-			-			1,297			1,297
Net income attributable to USPH shareholders		-		-		-		-			7,410			-			-			7,410			-			7,410
Other comprehensive gain		-		-		-		(1,353	)		-			-			-			(1,353	)		-			(1,353	)
Balance March 31, 2023		15,277		152	$	112,123	$	2,651		$	234,760			(2,215	)	$	(31,628	)	$	318,058		$	1,418		$	319,476

	U.S.Physical Therapy, Inc.																												U.S.Physical Therapy, Inc.
	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock						Total Shareholders’ Equity			Non-Controlling Interests			Total			Common Stock				Additional			Retained			Treasury Stock						Total Shareholders’			Non-Controlling
For the three months ended June 30, 2022	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Shares			Amount			Total Shareholders’ Equity			Non-Controlling Interests			Total
Balance March 31, 2022	$	15,206		151	$	105,205			0		$	227,243			(2,215	)	$	(31,628	)	$	300,971		$	1,245		$	302,216
																													Shares		Amount		Paid-In Capital			Earnings			Shares			Amount			Equity			Interests			Total
Balance December 31, 2021																													$	15,126	$	151	$	102,688		$	224,395			(2,215	)	$	(31,628	)	$	295,606		$	1,575		$	297,181
Issuance of restricted stock, net of cancellations		13		1		0			0			0			0			0			1			0			1			80		-		-			-			-			-			-			-			-
Revaluation of redeemable non-controlling interest, net of tax		0		0		0			0			116			0			0			116			0			116			-		-		-			(113	)		-			-			(113	)		-			(113	)
Compensation expense - equity-based awards		-		0		1,814			0			0			-			0			1,814			0			1,814			-		-		1,846			-			-			-			1,846			-			1,846
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans		-		0		1			0			0			-			0			1			0			1			-		-		706			-			-			-			706			-			706
Purchase of partnership interests - non-controlling interest		-		0		(219	)		0			0			-			0			(219	)		239			20			-		-		(46	)		-			-			-			(46	)		(334	)		(380	)
Dividends paid to USPH shareholders		-		0		0			0			(5,332	)		-			0			(5,332	)		0			(5,332	)
Sale of non-controlling interest, net of purchases and tax																														-		-		-			-			-			-			-			-			-
Dividends payable to USPH shareholders																														-		-		-			(5,327	)		-			-			(5,327	)		-			(5,327	)
Distributions to non-controlling interest partners - permanent equity		-		0		0			0			0			-			0			0			(1,163	)		(1,163	)		-		-		-			-			-			-			-			(1,308	)		(1,308	)
Deferred taxes related to redeeemable non-controlling interest - temporary equity		-		0		0			0			(1,486	)		-			0			(1,486	)		0			(1,486	)
Other		-		0		0			0			511			-			0			511			0			511			-		-		11			(511	)		-			-			(500	)		686			186
Net income attributable to non-controlling interest - permanent equity		-		0		0			0			0			-			0			0			1,435			1,435			-		-		-			-			-			-			-			626			626
Net income attributable to USPH shareholders		-		0		0			0			11,195			-			0			11,195			0			11,195			-		-		-			8,799			-			-			8,799			-			8,799
Other comprehensive loss		-		0		0			(395	)		0			-			0			(395	)		0			(395	)
Balance June 30, 2022		15,219		152	$	106,801		$	(395	)	$	232,247			(2,215	)	$	(31,628	)	$	307,177		$	1,756		$	308,933
Balance March 31, 2022																														15,206		151	$	105,205		$	227,243			(2,215	)	$	(31,628	)	$	300,971		$	1,245		$	302,216

U.S.Physical Therapy, Inc.
Common Stock
Additional
Paid-In Capital

Accumulated Other
Comprehensive Loss

Retained
Earnings
Treasury Stock
Total Shareholders’
Equity

Non-Controlling
Interests
Total
For the six months ended June 30, 2022 Shares Amount Shares Amount
Balance December 31, 2021 $ 15,126 151 $ 102,688 0 $ 224,395 (2,215 ) $ (31,628 ) $ 295,606 $ 1,575 $ 297,181
Issuance of restricted stock, net of cancellations 93 1 0 0 0 0 0 1 0 1
Revaluation of redeemable non-controlling interest, net of tax - 0 0 0 3 - 0 3 0 3
Compensation expense - equity-based awards - 0 3,660 0 0 - 0 3,660 0 3,660
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - 0 707 0 0 - 0 707 0 707
Purchase of partnership interests - non-controlling interest - 0 (265 ) 0 0 - 0 (265 ) (95 ) (360 )
Dividends paid to USPH shareholders - 0 0 0 (10,659 ) - 0 (10,659 ) 0 (10,659 )
Distributions to non-controlling interest partners - permanent equity - 0 0 0 0 - 0 0 (2,471 ) (2,471 )
Deferred taxes related to redeeemable non-controlling interest - temporary equity - 0 0 0 (1,486 ) - 0 (1,486 ) 0 (1,486 )
Other - 0 11 0 0 - 0 11 686 697
Net income attributable to non-controlling interest - permanent equity - 0 0 0 0 - 0 0 2,061 2,061
Net income attributable to USPH shareholders - 0 0 0 19,994 - 0 19,994 0 19,994
Other comprehensive loss - 0 0 (395 ) 0 - 0 (395 ) 0 (395 )
Balance June 30, 2022 15,219 152 $ 106,801 $ (395 ) $ 232,247 (2,215 ) $ (31,628 ) $ 307,177 $ 1,756 $ 308,933

U.S.Physical Therapy, Inc.
Common Stock
Additional
Paid-In Capital

Accumulated Other
Comprehensive Loss

Retained
Earnings
Treasury Stock
Total Shareholders’
Equity

Non-Controlling
Interests
Total
For the three months ended June 30, 2021 Shares Amount Shares Amount
Balance March 31, 2021 15,111 151 $ 97,286 $ 0 $ 210,375 (2,215 ) $ (31,628 ) $ 276,184 $ 1,057 $ 277,241
Issuance of restricted stock, net of cancellations 10 0 0 0 0 0 0 0 0 0
Revaluation of redeemable non-controlling interest, net of tax 0 0 0 0 (1,897 ) 0 0 (1,897 ) 0 (1,897 )
Compensation expense - equity-based awards - 0 1,754 0 0 - 0 1,754 0 1,754
Dividends paid to USPT shareholders - 0 0 0 (4,514 ) - 0 (4,514 ) 0 (4,514 )
Distributions to non-controlling interest partners - permanent equity - 0 0 0 0 - 0 0 (1,510 ) (1,510 )
Other - 0 (1 ) 0 (114 ) - 0 (115 ) (9 ) (124 )
Net income attributable to non-controlling interest - permanent equity - 0 0 0 0 - 0 0 1,425 1,425
Net income attributable to USPH shareholders - 0 0 0 12,436 - 0 12,436 0 12,436
Balance June 30, 2021 15,121 151 $ 99,039 $ 0 $ 216,286 (2,215 ) $ (31,628 ) $ 283,848 $ 963 $ 284,811

U.S.Physical Therapy, Inc.
Common Stock
Additional
Paid-In Capital

Accumulated Other
Comprehensive Loss

Retained
Earnings
Treasury Stock
Total Shareholders’
Equity

Non-Controlling
Interests
Total
For the six months ended June 30, 2021 Shares Amount Shares Amount
Balance December 31, 2020 15,065 151 $ 95,622 $ 0 $ 212,015 (2,215 ) $ (31,628 ) $ 276,160 $ 1,470 $ 277,630
Issuance of restricted stock, net of cancellations 56 0 0 0 0 0 0 0 0 0
Revaluation of redeemable non-controlling interest, net of tax - 0 0 0 (7,310 ) - 0 (7,310 ) 0 (7,310 )
Compensation expense - equity-based awards - 0 3,403 0 0 - 0 3,403 0 3,403
Dividends paid to USPT shareholders - 0 0 0 (9,028 ) - 0 (9,028 ) 0 (9,028 )
Distributions to non-controlling interest partners - permanent equity - 0 0 0 0 - 0 0 (3,182 ) (3,182 )
Short swing profit settlement - 0 13 0 0 - 0 13 0 13
Other - 0 1 0 0 - 0 1 (10 ) (9 )
Net income attributable to non-controlling interest - permanent equity - 0 0 0 0 - 0 0 2,685 2,685
Net income attributable to USPH shareholders - 0 0 0 20,609 - 0 20,609 0 20,609
Balance June 30, 2021 15,121 151 $ 99,039 $ 0 $ 216,286 (2,215 ) $ (31,628 ) $ 283,848 $ 963 $ 284,811

See notes to unaudited consolidated financial statements.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~June 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~~segments: (a) physical therapy operations segment, and ~~the~~(b) 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 (“IIP”) services segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.

During the ~~2021 year and the six~~three months ended ~~June 30,~~March 31, 2023 and year-ended December 31, 2022, the Company completed the acquisitions of 4the following single and multi-clinic practices ~~and 2 industrial injury prevention businesses as~~ detailed below.

Acquisition
Date Acquired Clinics
March 2022 Acquisition
March 31, 2022
70
%
6
December 2021 Acquisition
December 31, 2021
75
%
3
November 2021 Acquisition
November 30, 2021
70
%
0
IIPS*
September 2021 Acquisition
September 30, 2021
100
%
0
IIPS*
June 2021 Acquisition
June 30, 2021
65
%
8
March 2021 Acquisition
March 31, 2021
70
%
6

*	~~Industrial injury prevention services business~~

Acquisition	Date	% Interest Acquired	Number of Clinics
February 2023 Acquisition	February 28, 2023	80%	1
November 2022 Acquisition	November 30, 2022	80%	13
October 2022 Acquisition	October 31, 2022	60%	14
September 2022 Acquisition	September 30, 2022	80%	2
August 2022 Acquisition	August 31, 2022	70%	6
March 2022 Acquisition	March 31, 2022	70%	6

As of ~~June 30~~March 31, 2023, ~~2022,~~ the Company operated ~~608~~647 clinics in 3940 states. The Company also manages physical therapy facilities for third parties, primarily ~~hospital~~hospitals and physicians, with 3335 third-party facilities under management as of ~~June 30~~March 31, 2023~~, 2022.~~.

During the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, the Company closed ~~3 clinics and sold 5 clinics.~~one clinic.

~~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 1 clinic location.

~~Index~~

~~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.~~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~~These unaudited consolidated financial statements should be read in conjunction with the Company’s ~~accounting policies, please read the~~ audited consolidated financial statements ~~included in~~and related notes on the Company’s Annual Report on Form 10-K10-K for the year ended December 31, ~~2021~~2022 (“Annual Report on Form 10-K”) filed with the Securities and Exchange Commission on ~~March 1, 2022~~.February 28, 2023.

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,Interim results ~~of operations and cash flows for the interim periods presented.~~

~~Operating results for the~~ ~~three~~ ~~and six months ended June 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.~~

Goodwill and Other Indefinite-Lived Intangible Assets

~~Index~~

~~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~~ 0~~t note an impairment to long-lived assets during the~~ ~~three and six~~ ~~months ended June 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.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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:~~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~~indefinite-lived tradenames in conjunction with ~~its~~our annual goodwill impairment test.

The Company ~~has a 2 operating segment~~operates its business ~~which is made up~~through two segments consisting of ~~various~~physical therapy clinics ~~within partnerships,~~ and anits industrial injury prevention services business. ~~The partnerships are components~~For purposes 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.~~analysis, the segments are further broken down into reporting units. Reporting units within our physical therapy business are comprised of six regions primarily based on each clinic’s location. In ~~2021~~2022 and ~~2020, there were~~ 6 ~~regions. In addition to the~~ 6 ~~regions, the impairment analysis included a separate analysis for~~2023, the industrial injury prevention services business ~~as a separate~~consisted of two reporting ~~unit.~~units.

~~Index~~

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~~it 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~~

For the three months ended March 31, 2023, no triggering events or indicators were identified that would require impairment assessments as of ~~goodwill in~~ ~~2021~~ ~~and~~ ~~2020~~ ~~did not result in any goodwill amounts that were deemed impaired.~~

~~As part of the annual assessment,~~such dates. In 2022, the Company ~~evaluated whether events or circumstances indicated that it was more likely than not that~~recorded goodwill impairment of $9.1 million related to one reporting unit in the ~~fair value of~~industrial injury prevention services business. The impairment is related to a change in the reporting ~~units were reduced below their carrying value~~unit’s current and projected operating income as ~~of December 31, 2021. As~~well as various market inputs based on current market conditions, including the higher interest rate environment. No impairment was recognized as a result of ~~the~~our annual assessment ~~the Company determined that it was not more likely than not that~~of goodwill and tradenames offor the other seven reporting ~~units were impaired as of December 31, 2021.~~units. The Company also noted no impairment to long-lived assets for all reporting units.

The Company will continue to monitor for any triggering events or other indicators of impairment.

Investment in unconsolidated affiliates

Investments in unconsolidated affiliates, in which the Company has less than a controlling interest, are accounted for under the equity method of accounting and, accordingly, are adjusted for capital contributions, distributions and the Company’s equity in net earnings or loss of the respective joint venture.

Redeemable Non-Controlling Interest

The non-controlling interests that are reflected as redeemable non-controlling interest in the unaudited 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.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 unaudited consolidated statements of net income. Although the adjustments are not reflected in the unaudited consolidated statements of net 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 unaudited 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 unaudited 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.

~~Index~~

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

TheThe 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~~.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.

On August 16, 2022, Inflation Reduction Act of 2022 was enacted and signed into law and includes targeted tax provisions. The ~~CARES Act includes changes to certain~~Company does not anticipate these 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~~provisions will have a material impact on the ~~Company’s deferred income taxes and current income taxes payable during the~~ ~~three~~ ~~and six months ended June 30, 2022~~.financial statements.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 six~~ months ended ~~June 30, 2022.~~ March 31, 2023. 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.

~~Index~~

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%. See Note 5 for the changes in the fair value of redeemable non-controlling interest. ~~The put right increased $0.6 million for the three months ended June 30, 2022~~ ~~and was valued at $3.5 million on June 30, 2022.~~

The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement.

The ~~carrying and~~ fair value of the ~~Company’s~~ interest rate ~~derivative as~~swap on March 31, 2023, was $3.6 million, of ~~June 30, 2022, was $0.5~~which $2.6 million ~~which is~~has been included within Other current assets and $1.0 million has been included in ~~current liabilities~~Other assets in the ~~Company’s~~accompanying consolidated balance sheet. The impact of the interest rate swap on the accompanying unaudited Consolidated Statements of Comprehensive Income was an unrealized loss of $1.4 million, net of tax, for the three months ended March 31, 2023.

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 industrial injury prevention services acquisition (the “IIP Acquisition) 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 a company 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 10.98%. See Note 105 for the changes in the fair value of redeemable non-controlling interest. The put right decreased $0.1 million for the ~~interest rate swap~~three months ended March 31, 2023.The put-right was valued at $3.7 million on March 31, 2023. and $2.7 million on March 31, 2022.

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.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

InIn preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to, goodwill impairment, tradenames and other intangible assets, allocations of purchase price, ~~provision~~allowance 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~~.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 June 30, 2022.

~~Restricted Stock~~

Restricted stock issued to employees and directors is subject to continued employment or continued service on the board, respectively. Generally, restrictions on the stock granted to employees lapse in equal annual installments on the following ~~four~~ ~~anniversaries of the date of grant. For those shares granted to directors, the restrictions will lapse in equal quarterly installments during the~~ ~~first~~ year after the date of grant. For those granted to officers, the restriction will lapse in equal quarterly installments during the four years following the date of grant. Compensation expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the vesting period. The Company recognizes any forfeitures as they occur. The restricted stock issued is included in basic and diluted shares for the earnings per share computation.

~~Index~~

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~~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.~~

2. ACQUISITIONS OF BUSINESSES

2023 Acquisition

On February 28, 2023, the Company acquired an 80% interest in a one-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable. The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The purchase price for the 2023 acquisition has been preliminarily allocated as follows (in thousands):

	Physical Therapy
	Operations
Cash paid, net of cash acquired	$	5,796
Seller note		360
Total consideration	$	6,156

Estimated fair value of net tangible assets acquired:
Total current assets	$	168
Total non-current assets		1,062
Total liabilities		(1,012	)
Net tangible assets acquired		218
Customer and referral relationships		1,586
Non-compete agreement		76
Tradenames		391
Goodwill		5,424
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(1,539	)
	$	6,156

2022 Acquisitions

On November 30, 2022, the Company acquired an 80% interest in a thirteen-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $25.0 million, of which $24.2 million was paid in cash and $0.8 million in the form of a note payable. As part of the acquisition, the Company agreed to additional contingent consideration of up to $1.6 million if future operational objectives are met. The additional contingent consideration is currently valued at $1.6 million. The note accrues interest at 7.0% per annum and the principal and interest are payable on November 30, 2024.

On October 31, 2022, the Company acquired a 60% interest in a fourteen-clinic physical therapy practice. The practice’s owners retained 40% of the equity interests. The purchase price for the 60% equity interest was approximately $19.5 million, with additional contingent consideration valued at $9.0 million on March 31, 2023, to be paid at a later date based on the performance of the business. There is no maximum payout. The estimate of this contingent consideration will continue to be marked at fair value based on the practice’s operational results and updated market inputs.

OnSeptember 30, 2022, the Company 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 August 31, 2022, the Company 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 March 31, 2022, the Company acquired a 70% interest in a ~~6-clinic~~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 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.

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U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

The purchase ~~price~~prices for the 2022 ~~acquisition has~~acquisitions have been preliminarily allocated as follows (in thousands):

Physical Therapy
Operations

Cash paid, net of cash acquired $ 11,799
Seller notes 374
Contingent payments 100
Total consideration $ 12,273

Estimated fair value of net tangible assets acquired:
Total current assets $ 466
Total non-current assets 2,655
Total liabilities (2,664 )
Net tangible assets acquired 457
Customer and referral relationships 3,742
Non-compete agreements 247
Tradenames 659
Goodwill 12,114
Fair value of non-controlling interest (classified as redeemable non-controlling interest) (4,946 )
$ 12,273

On December 31, 2021, the Company acquired a 75% interest in a 3-clinic physical therapy practice with the practice founder retaining 25%. The purchase price for the 75% interest was approximately $3.6 million, of which $3.4 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on December 31, 2023.

On November 30, 2021, the Company acquired an approximate 70% interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The purchase price for the approximate 70% equity interest, not inclusive of a $2.0 million contingent payment, was approximately $65.2 million of which $60.7 million was paid in cash and $1.0 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest is payable on November 30, 2023. As part of the transaction, the Company also agreed to the potential future purchase of a separate company under the same ownership that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The current owners have the right to put this transaction to the Company in approximately five years, with such right having an initial fair value of $3.5 million value on December 31, 2021, as reflected on the Company’s consolidated balance sheet in Other long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in value reflected in the Company’s consolidated statement of income. The Company does not currently possess any of the controlling interests in this separate company, does not control this company through contract or governance rights and currently does not exercise significant influence over this separate company. Due to these reasons, and based on current accounting guidance, the Company did not consolidate the separate company through the variable interest or voting interest model. On June 30, 2022, the fair value of this put right was $3.5 million. The increase was reflected in the consolidated statement of income in the line item – ~~Loss on revaluation of put-right liability~~.

On September 30, 2021, the Company acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The Company acquired the company’s assets at a purchase price of approximately $3.3 million (which includes the obligation to pay an amount up to $0.6 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met) and contributed those assets to the industrial injury services business. The initial purchase price, not inclusive of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on September 30, 2023.

On June 30, 2021, the Company acquired a 65% interest in an 8-clinic physical therapy with the previous owners retaining 35%. The purchase price was approximately $10.7 million, of which $8.6 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 has an obligation to pay an additional amount up to $0.8 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date.

~~Index~~

On March 31, 2021, the Company acquired a 70% interest in a 5-clinic physical therapy practice with the previous owners retaining 30%. When acquired, the practice was developing a sixth clinic which has been completed. The purchase price for the 70% interest was approximately $11.6 million, of which $11.3 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on March 31, 2023.

~~The~~ ~~purchase price for the 2021 acquisitions has been preliminarily allocated as follows (in thousands):~~

Physical Therapy
IIPS* Operations Total
Cash paid, net of cash acquired $ 63,193 $ 23,544 $ 86,737
Seller notes 1,250 800 2,050
Contingent payments 2,520 837 3,357
Other payable 0 1,000 1,000
Seller put right 3,522 0 3,522
Total consideration $ 70,485 $ 26,181 $ 96,666

Estimated fair value of net tangible assets acquired:
Total current assets $ 5,588 $ 1,891 $ 7,479
Total non-current assets 12,620 7,014 19,634
Total liabilities (4,842 ) (8,399 ) (13,241 )
Net tangible assets acquired $ 13,366 $ 506 $ 13,872
Customer and referral relationships 21,127 7,969 29,096
Non-compete agreements 500 415 915
Tradenames 5,141 2,144 7,285
Goodwill 58,257 27,103 85,360
Fair value of non-controlling interest (classified as redeemable non-controlling interest) (27,906 ) (11,956 ) (39,862 )
$ 70,485 $ 26,181 $ 96,666

*	~~Industrial injusry prevention services~~

~~The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition.~~

	Physical Therapy
	Operations
Cash paid, net of cash acquired	$	59,788
Seller notes		1,574
Contingent payments		10,000
Total consideration	$	71,362

Estimated fair value of net tangible assets acquired:
Total current assets	$	1,558
Total non-current assets		7,619
Total liabilities		(9,865	)
Net tangible assets acquired		(688	)
Customer and referral relationships		18,955
Non-compete agreements		983
Tradenames		4,417
Goodwill		74,496
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(26,801	)
	$	71,362

For the ~~2022~~2023 and ~~2021~~2022 acquisitions, a majority of total current assets primarily represents accounts receivable. Total non-current assets are fixed assets and equipment used in the practice.

The purchase ~~prices~~price plus the fair value of the non-controlling interests for the acquisitions in ~~2021~~2022 were allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, ~~i.e.~~(i.e. trade names, referral relationships and non-compete ~~agreements,~~agreements) and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values being recorded as goodwill.

For the acquisition in 2023, the values assigned to the customer and referral relationships and non-compete agreement are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period was 12.0 years. For the non-compete agreements, the amortization period was 5.0 years. The values assigned to tradenames are tested annually for impairment.

For the acquisitions in ~~2021,~~2022, the values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period w~~as 13.8~~is 12.0 years. For non-compete agreements, the weighted-average amortization period ~~was 5.6 years~~ ~~at the end of the year.~~is 5.0 years. The values assigned to tradenames are tested annually for ~~impairment~~.impairment.

The consideration paid for each of the acquisitions was derived through arm’s length negotiations. Funding for the cash portions was derived from proceeds from the Company’s revolving credit facility. The results of operations of the acquisitions have been included in the Company’s consolidated financial statements since their respective date of acquisition. Unaudited proforma consolidated financial information for the acquisitions in ~~2022~~2023 and ~~2021~~2022 have not been included, as the results, individually and in the aggregate, were not material to current operations.

The purchase price plus the fair value of the non-controlling interest for the acquisitions in ~~2022~~2023 and those acquired after ~~June 30, 2021~~March 31, 2022 was allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets ~~i.e.~~(i.e. tradenames, referral relationships and non-compete ~~agreements,~~agreements) and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used on ~~June 30, 2022~~March 31, 2023 based on additional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimated valuation of the tangible assets acquired, the completion of the valuation of identifiable intangible assets and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to goodwill. The Company does not expect the adjustments to be material. The purchase price allocation for the March ~~2021 and the June 2021 Acquisitions have~~2022 Acquisition has been finalized. The Company continues to evaluate the components for the purchase price allocations for other acquisitions in ~~2021.~~2022 and 2023.

1614

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

For the acquisitions in 2022, the values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment.

3.3. REVENUE RECOGNITION

~~Categories~~

Revenues are recognized in the period in which services are rendered.

~~Net~~ Net patient revenue consists of ~~revenue~~revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for ~~orthopedic-related~~orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenue (patient ~~revenue~~revenues less estimated contractual ~~adjustments)~~adjustments – as described below) 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~~Separate contractual arrangements exist between us and third-party payors (e.g. insurers, managed care programs, government programs, and workers’ compensation programs) which establish the amounts the third parties pay on behalf of the patients for covered services rendered. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations for us but indicate reimbursement rates for patients who are covered by those payors when the services are provided. At that time, we are obligated to provide services for the reimbursement rates stipulated in the payor contracts. The execution of the contract alone does not indicate a performance obligation. For self-paying customers, the performance obligation exists when we provide the services at established rates. The difference between our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue—contractual allowance. The payment for 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~~is due to the Company ~~at amounts different from its established rates. The allowance for estimated contractual adjustments is~~ based on ~~terms~~the respective payor contract. Typically, we receive payment within thirty to forty-five days of ~~payor contracts and historical collection and write-off experience.~~service.

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. Management contract revenue is typically due the month following the service provided.

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. Payment for services rendered is typically within thirty days.

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~~collectibl.e.

1715

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

The following table details the revenue related to the various categories (in thousands):

Medicare Reimbursement

~~The~~ The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2017 through 2019, a0.5% increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 20250 no 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~~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~~.2020.

In the 2022 MPFS Final Rule, ~~published on November 2, 2021,~~ there was to be an approximately 3.75% reduction to Medicare payments for physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by Congress in 2021 under the Consolidated Appropriations Act, 2021.However, this reduction was addressed in the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 Act”) signed into law on December 10, 2021. Based on various provisions in the 2021 Act, the ~~Company now estimates that the~~ Medicare rate reduction for ~~the full year of~~ 2022 ~~will be~~was 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%~~4.5% reduction in the Physician Fee Schedule conversion factor. ~~In addition,~~However, this reduction was addressed in the Consolidated Appropriations Act, ~~2021 included a~~2023 (“2023 Act”) signed into law on December 29, 2022. The provisions of the 2023 Act increase the conversion factor by 2.5% for 2023 and by 1.25% for 2024. This results in an overall reduction ~~in Medicare payment rates~~ of approximately 3%2% 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 2023 Physician Fee Schedule conversion factor for 2023.

The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the nextten years and requires automatic reductions in federal spending by approximately $~~1.2~~$1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. ~~On April 1,~~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~~The CARES Act suspended the 2%payment reduction to Medicare payments for dates of service from May 1, 2020, through December 31, ~~2020. The~~2020, and the Consolidated Appropriations Act, 2021 further suspended the 2% payment reduction ~~until~~through 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 end~~ended on June 30, 2022.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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~~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~~professional’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 ~~will determine~~determined 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%.

~~Index~~

Under the Middle-Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or ~~exceeded~~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~~$3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $~~3,700~~$3,700 threshold is applied to the Occupational Therapy. The ~~MACRA~~Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) directed CMS to modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the $~~3,700~~$3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate.

The Bipartisan Budget Act of 2018 extends the targeted medical review indefinitely but reduces the threshold to $~~3,000~~$3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.

CMS adopted a multiple procedure payment reduction ~~(“MPPR”~~(“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit ~~(“RVU”~~(“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50%.

Medicare claims for outpatient therapy services furnished by therapist assistants on or after January 1, 2020, must include a modifier indicating the service was furnished by a therapist assistant. Outpatient therapy services furnished on or after January 1, 2022, in whole or part by a therapist assistant are paid at an amount equal to 85% of the payment amount otherwise applicable for the service.

Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that ~~the Company~~it 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~~Company’s financial statements as of ~~June 30, 2022.~~March 31, 2023. 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 ~~six~~three months ended ~~June 30,~~March 31, 2023, and March 31, 2022, ~~and 2021,~~ respectively, net patient revenue from Medicare ~~was~~were approximately ~~$74.9~~$41.9 million and ~~$62.1~~$35.6 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 usit for the ~~Company’s~~Company’s services or, in some instances, cover the ~~Company’s~~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~~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~~Company’s business, financial condition and results of operations.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 ~~June 30, 2022.~~March 31, 2023.

~~Index~~

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 collection ~~collections.~~

4. EARNINGS PER SHARE

In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 5 – Redeemable Non-Controlling Interest), net of tax, charged directly to retained earnings is included in the earnings per basic and diluted share calculation. The following table provides a detail of the basic and diluted earnings per share computation (in thousands, except per share data).

Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Computation of earnings per share - USPH shareholders:
Net income attributable to USPH shareholders $ 11,195 $ 12,436 $ 19,994 $ 20,609
(Charges) credit to retained earnings:
Revaluation of redeemable non-controlling interest 210 (2,549 ) 57 (9,819 )
Tax effect at statutory rate (federal and state) of 25.55%
(54 ) 651 (15 ) 2,508
$ 11,351 $ 10,538 $ 20,036 $ 13,298

Earnings per share (basic and diluted) $ 0.87 $ 0.82 $ 1.55 $ 1.03

Shares used in computation:
Basic and diluted earnings per share - weighted-average shares 12,998 12,902 12,968 12,886

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Three Months Ended
	March 31, 2023			March 31, 2022
Computation of earnings per share - USPH shareholders:
Net income attributable to USPH shareholders	$	7,410		$	8,799
Charges to retained earnings:
Revaluation of redeemable non-controlling interest		119			(153	)
Tax effect at statutory rate (federal and state)		(30	)		39
	$	7,499		$	8,685

Earnings per share (basic and diluted)	$	0.58		$	0.67

Shares used in computation:
Basic and diluted earnings per share - weighted-average shares		13,025			12,937

5. REDEEMABLE NON-CONTROLLING INTEREST

Since October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic business (referred to as “Therapy Practice”), these Acquisitions occur in a series of steps which are described below.

Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity is owned by one or more individuals (the “Selling Shareholders”) most of whom are physical therapists that work in the Therapy Practice and provide physical therapy services to patients.

~~Index~~

In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limited partnership (“NewCo”), in exchange for one hundred percent (100%) of the limited and general partnership interests in NewCo. Therefore, in this step, NewCo becomes a wholly-owned subsidiary of the Seller Entity.

The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (ranges from 50% to 90%) of the limited partnership interest and in all cases 100% of the general partnership interest in NewCo. The Company does not purchase 100% of the limited partnership interest because the Selling Shareholders, through the Seller Entity, want to maintain an ownership percentage. The consideration for the Acquisition is primarily payable in the form of cash at closing and a small, two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement does not contain any future earn-out or other contingent consideration that is payable to the Seller Entity or the Selling Shareholders.

The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo.

As noted above, the Company does not purchase 100% of the limited partnership interests in NewCo and the Seller Entity retains a portion of the limited partnership interest in NewCo (“Seller Entity Interest”).

In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”) with NewCo with an initial term that ranges from three to five years (the “Employment Term”), with automatic one-year renewals, unless employment is terminated prior to the end of the Employment Term. As a result, a Selling Shareholder becomes an employee (“Employed Selling Shareholder”) of NewCo. The employment of an Employed Selling Shareholder can be terminated by the Employed Selling Shareholder or NewCo, with or without cause, at any time. In a few situations, a Selling Shareholder does not become employed by NewCo and is not involved with NewCo following the closing; in those situations, such Selling Shareholders sell their entire ownership interest in the Seller Entity as of the closing of the Acquisition.

The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary and commensurate with his or her responsibilities based on other employees in similar capacities within NewCo, the Company and the industry.

The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). A Non-Compete Agreement is executed with the Selling Shareholders in all cases. That is, even if the Selling Shareholder does not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competing business during the Non-Compete Term.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Non-Compete Term commences as of the date of the Acquisition and expires on the later of :

Two years after the date an Employed Selling Shareholders’ employment is terminated (if the Selling Shareholder becomes an Employed Selling Shareholder) or

Five to six years from the date of the Acquisition, as defined in the Non-Compete Agreement, regardless of whether the Selling Shareholder is employed by NewCo.

10.

The Non-Compete Agreement applies to a restricted region which is a defined mile radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in competing businesses or activities outside the defined mileage (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is not employed by NewCo immediately is permitted to engage in the competing business or activities outside the defined mileage.

The Partnership Agreement contains provisions for the redemption of the Seller Entity Interest, either at the option of the Company (the “Call Right”) or at the option of the Seller Entity (the “Put Right”) as follows:

Put Right

In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to a specified date (the “Specified Date”), the Seller Entity thereafter may have an irrevocable right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below.

In the event that any Selling Shareholder is not employed by NewCo as of the Specified Date and the Company has not exercised its Call Right with respect to the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below.

~~Index~~

In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the Specified Date, the Seller Entity shall have the Put Right, and upon the exercise of the Put Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.

Call Right

If any Selling Shareholder’s employment by NewCo is terminated prior to the Specified Date, the Company thereafter shall have an irrevocable right to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below.

In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after Specified Date, the Company shall have the Call Right, and upon the exercise of the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.

For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within NewCo. Therefore, the undistributed earnings amount is small, if any.

The Purchase Price for the initial equity interest purchased by the Company is, in almost all cases, also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right and the Call Right noted above.

The Put Right and the Call Right do not have an expiration date, and the Seller Entity Interest is not required to be purchased by the Company or sold by the Seller Entity unless either the Put Right or the Call Right is exercised.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since the Company requires that such Selling Shareholders sell their entire ownership interest in the Seller Entity at the closing of the Acquisition.

ProgressiveHealth Acquisition

On November 30, 2021, the Company acquired a majority interest in ProgressiveHealth Companies, LLC (“Progressive”), which owns a majority interest in certain subsidiaries (“Progressive Subsidiaries”) that operate in the industrial injury prevention and therapy services businesses. The Progressive transaction was completed in a series of steps which are described below.

Prior to the acquisition, the Progressive Subsidiaries were owned by a legal entity (“Progressive Parent”) controlled by its individual owners (the ~~“Progressive~~“ Progressive Selling Shareholders”), who work in and manage the Progressive business.

In conjunction with the acquisition, the Progressive Selling Shareholders caused the Progressive Parent to transfer its ownership of the Progressive Subsidiaries into a newly-formed limited liability company (“Progressive NewCo”), in exchange for one hundred percent (100%) of the membership interests in Progressive NewCo. Therefore, in this step, Progressive NewCo became wholly-owned by the Progressive Selling Shareholders.

The Company entered into an agreement (the “Progressive Purchase Agreement”) to acquire from the Progressive Selling Shareholders a majority of the membership interest in Progressive NewCo. The consideration for the acquisition is primarily payable in the form of cash at closing, a relatively small portion paid in cash after the closing contingent on certain performance criteria, and a small note in lieu of an escrow (the “Progressive Purchase Price”).

~~Index~~

The Company and the Progressive Selling Shareholders also executed an operating agreement (the “Progressive Operating Agreement”) for Progressive NewCo that sets forth the rights and obligations of the members of Progressive NewCo.

As noted above, the Company did not purchase 100% of the membership interests in Progressive NewCo and the Progressive Selling Shareholders retained a portion of the membership interest in Progressive NewCo (“Progressive Selling Shareholders’ Interest”).

The Company and the Progressive Selling Shareholders executed a non-compete agreement (the “Progressive Non-Compete Agreement”) which restricts the Progressive Selling Shareholders from competing for a specified period of time (the “Progressive Non-Compete Term”).

The Progressive Non-Compete Term commences as of the date of the ~~Acquisition~~Progressive acquisition and expires on the later of:

Two years after the date a Progressive Selling Shareholder no longer is involved in the management of Progressive NewCo or

Seven years from the date of the acquisition.

The Progressive Non-Compete Agreement applies to the entire United States.

The Progressive Put Right (as defined below) and the Progressive Call Right (as defined below) do not have an expiration date.

The Progressive Operating Agreement contains provisions for the redemption of the Progressive Selling Shareholder’s Interest, either at the option of the Company (the “Progressive Call Right”) or at the option of the Progressive Selling Shareholder (the “Progressive Put Right”) as follows:

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Progressive Put Right

Each of the Progressive Selling Shareholders has the right to sell 30% of their respective residual interests on each of the 4th and 5th anniversaries of the acquisition closing, and then 10% on each of the 6th and 7th anniversaries

In the event that any Progressive Selling Shareholder terminates his management relationship with Progressive NewCo for any reason on or after the seventh anniversary of the Closing Date, the Progressive Selling Shareholder has the Put Right, and upon the exercise of the Progressive Put Right, the Progressive Selling Shareholder’s Interest shall be redeemed by the Company at the purchase price described in “3” below.

Progressive Call Right

If any Progressive Selling Shareholder’s ceases to perform management services on behalf of Progressive NewCo, the Company thereafter shall have an irrevocable right to purchase from such Progressive Selling Shareholder his Interest, in each case at the purchase price described in “3” below.

For the Progressive Put Right and the Progressive Call Right, the purchase price is derived from a formula based on a specified multiple of Progressive NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of Progressive NewCo (the “Redemption Amount”). Progressive NewCo’s earnings are distributed monthly based on available cash within Progressive NewCo; therefore, the undistributed earnings amount is small, if any.

The Progressive Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month earnings that is used in the Progressive Put Right and the Progressive Call Right noted above.

The Progressive Put Right and the Progressive Call Right do not have an expiration date.

Neither the Progressive Operating Agreement nor the Progressive Non-Compete Agreement contain any provision to escrow or “claw back” the equity interest in Progressive NewCo held by the Progressive Selling Shareholders, in the event of a breach of the operating agreement or non-compete terms, or the management services agreement pursuant to which the Progressive Selling Shareholders perform services on behalf of Progressive NewCo. The Company’s only recourse against the Progressive Selling Shareholder for breach of any of these agreements is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with a Progressive Selling Shareholder that would result in a forfeiture of the equity interest in Progressive NewCo held by a Progressive Selling Shareholder.

AnFor both scenarios described above, an Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and the Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do not contain any provision to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any portion of the Seller Entity Interest. The Company’s only recourse against the Employed Selling Shareholder for breach of either the Employment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with an Employed Selling Shareholder that would result in a forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest.

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

For the dates indicated, the following table details the changes in the carrying amount (fair value) of the redeemable non-controlling interest (in ~~thousands)~~ thousands):

The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interest (in thousands):

Contractual time period has lapsed but holder’s employment has not terminated

Contractual time period has not lapsed and holder’s employment has not terminated

Holder’s employment has terminated and contractual time period has expired

Holder’s employment has terminated and contractual time period has not expired

6. GOODWILL

The changes in the carrying amount of goodwill consisted of the following (in thousands):

	Six Months Ended			Year Ended			Three Months Ended		Year Ended
	June 30, 2022			December 31, 2021			March 31, 2023		December 31, 2022

Beginning balance	$	434,679		$	345,646		$	494,101	$	434,679
Goodwill acquired		12,114			89,746			5,424		72,674
Goodwill adjustments for purchase price allocation of businesses acquired in prior year		(4,032	)		(713	)		1,822		(4,140	)
Goodwill impairment								-		(9,112	)
Ending balance	$	442,761		$	434,679		$	501,347	$	494,101

During the year ended December 31, 2022, the Company recorded a charge for goodwill impairment of $9.1 million related to the IIP Acquisition. The impairment is related to a change in the IIP Acquisition’s current and projected operating income as well as various market inputs based on current market conditions, including the higher interest rate environment.

7. INTANGIBLE ASSETS, NET

Intangible assets, net as of ~~June~~ ~~30,2022,~~March 31, 2023, and December 31,~~2021~~ 2022 consisted of the following (in ~~thousand~~s) thousands):

June 30, 2022 December 31, 2021
Tradenames $ 39,838 $ 38,790
Customer and referral relationships, net of accumulated amortization of $20,772 and $17,762, respectively
51,047 45,643
Non-compete agreements, net of accumulated amortization of $6,717 and $6,450, respectively
1,770 1,949
$ 92,655 $ 86,382

	March 31, 2023		December 31, 2022
Tradenames	$	43,764	$	43,373
Customer and referral relationships, net of accumulated amortization of $25,400 and $23,736, respectively (weighted average amortization period 12.7 years)		63,160		63,238
Non-compete agreements, net of accumulated amortization of $7,152 and $6,999 respectively (weighted average amortization period 5.0 years)		2,067		2,144
	$	108,991	$	108,755

~~Index~~

Tradenames, customer and referral relationships and non-compete agreements are related to the businesses acquired. The value assigned to tradenames has an indefinite life and is tested at least annually for impairment using the relief from royalty method in conjunction with the Company’s annual goodwill impairment test. The value assigned to customer and referral relationships is being amortized over their respective estimated useful lives which range from ~~six~~7 to ~~fourteen~~16 years. Non-compete agreements are amortized over the respective term of the agreements which range from ~~five~~5 to ~~six~~6 years.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table details the amount of amortization expense recorded for intangible assets for the three and three months ended ~~June~~ ~~30,2022,~~March 31, 2023, and ~~2021~~2022 (in ~~thousand~~s) thousands):

	Three Months Ended				Six Months Ended				Three Months Ended		Three Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		March 31, 2023		March 31, 2022
Customer and referral relationships	$	1,339	$	778	$	3,011	$	1,561	$	1,664	$	2,050
Non-compete agreements		120		138		267		177		153		147
	$	1,459	$	916	$	3,278	$	1,738	$	1,817	$	2,197

Based on the balance of referral relationships and non-compete agreements as of ~~June 30, 2022,~~March 31,2023, the expected amount to be amortized in ~~2022~~2023 and thereafter by year is as follows (in ~~thousands)~~ thousands):

Customer and Referral Relationships	Customer and Referral Relationships			Non-Compete Agreements			Customer and Referral Relationships			Non-Compete Agreements
Years		Annual Amount		Years	Annual Amount			Annual Amount		Years	Annual Amount
Ending December 31,				Ending December 31,						Ending December 31,
2022 (excluding the six months ended June 30, 2022)		$	2,745	2022 (excluding the six months ended June 30, 2022)	$	267
2023		$	5,393	2023	$	477
2023 (excluding the three months ended March 31, 2023)								$	5,096	2023 (excluding the three months ended March 31, 2023)	$	464
2024		$	5,228	2024	$	421		$	6,636	2024	$	576
2025		$	5,084	2025	$	355		$	6,492	2025	$	505
2026		$	4,616	2026	$	216		$	6,023	2026	$	365
2027								$	5,860	2027	$	157
Thereafter		$	27,981	Thereafter	$	34		$	33,053

8. ACCRUED EXPENSES

Accrued expenses as of ~~June 30, 2022~~March 31, 2023, and December 31, ~~2021~~2022 consisted of the following (in thousands):

June 30, 2022 December 31, 2021
Salaries and related costs $ 19,524 $ 23,569
Credit balances due to patients and payors 7,875 6,649
Group health insurance claims 2,038 1,984
Closure costs 285 498
Federal taxes payable 1,754 2,716
Contingent payments related to acquisition
1,000 1,000
Settlement of a legal matter
0 2,750
Other 8,770 6,539
Total $ 41,246 $ 45,705

~~In January~~ ~~2022,~~ to avoid the legal fees and discovery costs in defending a legal matter and the uncertainty of protracted litigation, the Company entered into a settlement agreement. The Company admitted no liability or wrongdoing. Under the terms of the settlement, the Company agreed to make payments which amounted to ~~$2.75 million, of which~~ ~~$2.6 million~~ ~~was recorded as an expense in~~ ~~2021.~~

	March 31, 2023		December 31, 2022
Salaries and related costs	$	16,975	$	22,912
Credit balances due to patients and payors		7,962		8,094
Group health insurance claims		2,930		1,666
Closure costs		230		243
Dividend payable		5,617		-
Payable related to purchase of redeemable non-controlling interest		5,015		4,498
Interest payable		1,193		-
Contingent consideration		1,600		-
Other		3,698		-
Total	$	45,220	$	37,413

9. ~~NOTES PAYABLE AND AMENDED CREDIT AGREEMENT~~BORROWINGS

Effective December 5, 2013, the Company entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility. This agreement was amended and/or restated in August 2015, January 2016, March 2017, November 2017, ~~January~~ and January 2021 (hereafter referred to as (“Amended Credit Agreement”).

On June 17, 2022, the Company 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.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

Amounts outstanding under the ~~Amended Credit Agreement and~~ Credit Agreement (as defined above) and notes payable as of ~~June~~ March 31~~30,~~, ~~2022~~2023 and December 31, ~~2021~~2022 consisted of the following (in thousands):

	June 30, 2022						December 31, 2021						March 31, 2023						December 31, 2022
	Principal Amount		Unamortized discount and debt issuance cost		Net Debt		Principal Amount		Unamortized discount and debt issuance cost		Net Debt		Principal Amount		Unamortized discount and debt issuance cost		Net Debt		Principal Amount		Unamortized discount and debt issuance cost		Net Debt
Revolving Facilitiy	$	0	$	0	$	0	$	114,000	$	0	$	114,000	$	38,000	$	-	$	38,000	$	31,000	$	-	$	31,000
Term Facility		150,000		2,027		147,973		0		0		0		147,188		1,757		145,431		148,125		1,861		146,264
Other Debt		5,696		0		5,696		4,417		0		4,417		6,980		-		6,980		6,430		-		6,430
Total Debt	$	155,696	$	2,027	$	153,669	$	118,417	$	0	$	118,417	$	192,168	$	1,757	$	190,411	$	185,555	$	1,861	$	183,694
Less: Current portion of long-term debt		5,188		408	$	4,780		830		0		830		7,730		-		7,730		8,271		408		7,863
Total long-term debt, net of current portion	$	150,508	$	1,619	$	148,889	$	117,587	$	0	$	117,587	$	184,438	$	1,757	$	182,681	$	177,284	$	1,453	$	175,831

The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans were made available through the following facilities (collectively, the “Senior Credit Facilities”):

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”).

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 the Company 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 the Company to refinance the indebtedness outstanding under the Amended Credit Agreement, to pay fees and expenses incurred in connection with the transactions involving the loan facilities, for working capital and other general corporate purposes of the Company and its subsidiaries.

The Company is 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 Credit Agreement) plus an applicable margin or, at the option of the Company, an alternate base rate plus an applicable margin. Each Swingline Loan shall bear interest at the base rate plus the applicable margin. The applicable margin for Term SOFR borrowings ranges from 1.50% to 2.25%, and the applicable margin for alternate base rate borrowings ranges from 0.50% to 1.25%, in each case, based on the Consolidated Leverage Ratio of the Company and its subsidiaries. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity.

The Company ~~will~~is also required to pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). Such unused fee will range between 0.25% and 0.35% per annum and is also based on the Consolidated Leverage Ratio of the Company and its subsidiaries. The Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any 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.

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

The Company’s obligations under the Credit Agreement are guaranteed by its wholly-owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by a perfected first priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions.

As of ~~June~~March ~~30,~~31, ~~2022,~~2023, $~~150.0~~185.2 million was outstanding on the Senior Credit Facilities, resulting in $~~175.0~~137.0 million of ~~availability.~~availability on the Revolving Facility. As of ~~June~~March ~~30,~~31, ~~2022,~~2023, the Company was in compliance with all of the covenants contained in the Credit Agreement.

The Company generally enters into various notes payable as a means of financing a portion of its acquisitions and purchasing of non-controlling interests. In conjunction with these transactions in ~~2022~~2023 and ~~2021,~~2022, the Company entered into notes payable in the aggregate amount of $~~4.9~~7.4 million of which an aggregate principal payment of $0.4 million was paid in the three months ended March 31, 2023, $~~0.8~~4.1 million is due later in 2023, $1.9 million is due in ~~2022,$4.1~~2024 and $1.0 million is due in ~~2023.~~2025. Interest accrues in the range of 3.25% to ~~3.50%~~8.0% per annum and is payable with each principal installment.

10. DERIVATIVE INSTRUMENTS

The Company is exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.

Interest Rate Swap

In May 2022, the Company 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, the Company receives 1-month SOFR, and pays a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on the Company’s consolidated leverage ratio.

In connection with the swap, no cash was exchanged between the Company and the counterparty.

The Company designated its interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income, ~~(loss),~~ net of tax.

The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income for the three months ~~and six months~~ ended ~~June 30, 2022~~March 31, 2023 are presented in the table below (in thousands):

Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Unrealized loss on cash flow hedge
(531
)

0

(531
)

0

Tax effect at statutory rate (federal and state) of 25.55%

136

0

136

0

Other Comprehensive loss
$
(395
)

$
0

$
(395
)

$
0

	For the Three Months Ended
	March 31, 2023			March 31, 2022
Net income	$	11,427		$	11,982
Other comprehensive loss
Unrealized loss on cash flow hedge		(1,817	)		-
Tax effect at statutory rate (federal and state)		464			-
Comprehensive income	$	10,074		$	11,982

Comprehensive income attributable to non-controlling interest		(4,017	)		(3,183	)
Comprehensive income attributable to USPH shareholders	$	6,057		$	8,799

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

The carrying and fair value of the Company’s interest rate ~~derivatives (included~~derivatives (included in Other current ~~liabilities)~~assets and Other assets) were as ~~follows:~~follows:

June 30, 2022 June 30, 2021

Interest rate swap
$
(531
)

$
0

	March 31, 2023		March 31, 2022
Interest rate swap:
Other current assets	$	2,614	$	-
Other assets	$	947	$	-

11. LEASES

The Company has operating leases for its corporate offices and operating facilities. The Company determines if an arrangement is a lease at the inception of a contract. Effective January 1, 2019, right- of-use assets and operating lease liabilities are included in the consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent net present value of the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the net present value of the fixed lease payments over the lease term. The Company’s operating lease terms are generally five years or less. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating fixed lease expense is recognized on a straight-line basis over the lease term.

In accordance with ASC 842, the Company records on its consolidated balance sheet leases with a term greater than 12 months. The Company has elected, in compliance with current accounting standards, not to record leases with an initial term of 12 months or less in the consolidated balance sheet. ASC 842 requires the separation of the fixed lease components from the variable lease components. The Company has elected the practical expedient to account for separate lease components of a contract as a single lease cost thus causing all fixed payments to be capitalized. Non-lease and variable cost components are not included in the measurement of the right-of-use assets or operating lease liabilities. The Company also elected the package of practical expedients permitted within ASC 842, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage are not included in the right-of- use assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2023, and 2022, the components of lease expense were as follows (in thousands):

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		March 31, 2023		March 31, 2022
Operating lease cost	$	8,700	$	7,895	$	17,104	$	15,624	$	9,365	$	8,404
Short-term lease cost		259		361		580		729		274		321
Variable lease cost		1,994		1,628		3,926		3,239		2,132		1,932
Total lease cost *	$	10,953	$	9,884	$	21,610	$	19,592	$	11,771	$	10,657

*Sublease income was immaterial

Lease cost is reflected in the consolidated statement of net income in the line item – rent, supplies, contract labor and other.

Supplemental information related to leases was as follows (in thousands):

Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021
June 30, 2022

June 30, 2021

Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) $ 8,940 $ 8,258 $ 17,557 $ 16,370

Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands) $ 15,595 $ 12,976 $ 21,606 $ 20,873

	Three Months Ended
	March 31, 2023		March 31, 2022

Cash paid for amounts included in the measurement of operating lease liabilities	$	9,646	$	8,617

Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,281	$	6,011

2827

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Index~~

The aggregate future lease payments for operating leases as of ~~June 30, 2022~~March 31, 2023 were as follows (in thousands):

Fiscal Year	Amount		Amount
2022 (excluding the six months ended June 30, 2022)	$	17,829
2023		31,725	$	27,967
2024		25,292		31,548
2025		18,060		23,584
2026		11,613		16,065
2027 and therafter		11,135		16,836
Total lease payments	$	115,654	$	116,000
Less: imputed interest		5,795		6,890
Total operating lease liabilities	$	109,859	$	109,110

Average lease terms and discount rates were as follows:

Three Months Ended

Six Months Ended

Three Months Ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

March 31, 2023

March 31, 2022

Weighted-average remaining lease term - Operating leases

4.19 Years

4.11 Years

4.19 Years

4.11 Years

4.0 Years

4.1 Years

Weighted-average discount rate - Operating leases

2.48

3.0

2.48

3.0

3.1%

2.7%

12. SEGMENT INFORMATION

The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Also included in the physical therapy operations segment are revenues from management contract services and other services which include services the Company provides on-site, such as schools for athletic trainers.

The Company evaluates performance of the segments based on gross profit. The Company has provided additional information regarding its reportable segments which contributes to the understanding of the Company and provides useful information.

The following table summarizes selected financial data for the Company’s reportable segments.

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021		Three Months Ended
									March 31, 2023		March 31, 2022
Net operating revenue:
Physical therapy operations	$	121,219	$	116,895	$	233,855	$	219,253	$	129,159	$	112,636
Industrial injury prevention services		19,437		10,033		38,505		20,043		19,350		19,068
Total Company	$	140,656	$	126,928	$	272,360	$	239,296	$	148,509	$	131,704

Gross profit:
Physical therapy operations	$	26,698	$	31,761	$	49,135	$	54,935	$	27,089	$	22,436
Industrial injury prevention services		4,123		2,543		8,274		5,265		3,768		4,152
Gross profit	$	30,821	$	34,304	$	57,409	$	60,200
Total Company									$	30,857	$	26,588

Total Assets:
Physical therapy operations					$	414,172	$	545,449	$	726,422	$	608,240
Industrial injury prevention services						382,272		203,977		141,705		155,623
Total Company					$	796,444	$	749,426	$	868,127	$	763,863

Index

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. INVESTMENT IN UNCONSOLIDATED AFFILIATE

Through one of ~~the~~its subsidiaries, the Company has a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals. Since the Company is deemed to not have a controlling interest in the ~~joint venture,~~company, the Company’s investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of ~~June 30, 2022,~~March 31, 2023, is ~~$12.3 million. For the six months ended June 30, 2022,~~$12.2 million and the earnings amounted ~~to$679 thousand and $548 thousand was distributed~~ to $0.3 million for the ~~Company.~~three months ended March 31,2023.

14. SUBSEQUENT EVENT

The Company’s Board of Directors declared a quarterly dividend of $0.43 per share payable on June 9, 2023, to shareholders of record on May 18, 2023.

Index

~~14. COMMON STOCK~~

From September 2001 through December 31, 2008, the Board authorized the Company to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of the Company’s common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of its common stock (“March 2009 Authorization”). The Amended Credit Agreement permits share repurchases of up to $15,000,000, subject to compliance with covenants. The Company is required to retire shares purchased under the March 2009 Authorization.

Under the March 2009 Authorization, the Company has purchased a total of 859,499 shares. There is no expiration date for the share repurchase program. There are currently an additional estimated 137,363 shares (based on the closing price of $109.20 on June 30, 2022) that may be purchased from time to time in the open market or private transactions depending on price, availability and the Company’s cash position. The Company did 0t purchase any shares of its common stock during the three and six months ended June 30, 2022.

~~15. RECLASSIFICATION OF PRIOR PERIOD PRESENTATION~~

~~Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.~~

~~Index~~

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~~2022 filed with the Securities and Exchange Commission (the “SEC”) on ~~March 1,~~ February 28, 2023 (“2022 ~~(“2021~~ Annual Report”); and (iii) our management’s discussion and analysis of financial condition and results of operations included in our ~~2021~~2022 Annual Report.

This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed ~~in “Forward-Looking Statements” herein and in Part II, Item 1A. Risk Factors of this report.~~

~~References to “we,” “us,” “our” and the “Company” shall mean U.S. Physical Therapy, Inc. and its subsidiaries.~~

~~EXECUTIVE SUMMARY~~

~~Our Business~~

We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and rehabilitation of injured workers. We also operate an industrial injury prevention services (“IIPS”) business which includes onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments services.

~~Selected Operating and Financial Data~~

Our reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Our physical operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.

At June 30, 2022, we operated 608 clinics in 39 states. In addition to our ownership and operation of outpatient physical therapy clinics, we also manage physical therapy facilities for third parties, such as physicians and hospitals, with 33 such third-party facilities under management as of June 30, 2022.

~~During the 2021 year and for the six months ended June 30, 2022, we completed the acquisitions of four multi-clinic practices and two industrial injury services businesses as detailed~~ below.

Acquisition
Date Acquired Clinics
March 2022 Acquisition
March 31, 2022 70% 6
December 2021 Acquisition
December 31, 2021 75% 3
November 2021 Acquisition
November 30, 2021 70% IIPS*
September 2021 Acquisition
September 30, 2021 100% IIPS*
June 2021 Acquisition
June 30, 2021 65% 8
March 2021 Acquisition
March 31, 2021 70% 6

*Industrial injury prevention services business

~~During the six months ended June 30, 2022, we closed three clinics and sold five clinics.~~

~~Employees~~

Our strategy is to acquire physical therapy practices, develop outpatient physical therapy clinics as satellites within existing partnerships, acquire industrial injury prevention services businesses, and to continue to support the growth of our existing businesses requires a talented workforce that can grow with us. As of June 30, 2022 we employed approximately 5,809 people nationwide, of which approximately 3,158 were full-time employees.

~~Index~~

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 June 30, 2022 (“2022 Second Quarter”), our net income attributable to our shareholders was $11.2 million as compared to $12.4 million for the three months ended June 30, 2021 (“2021 Second 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 million, or $0.87 per diluted share, for the 2022 Second Quarter, and $10.5 million, or $0.82 per diluted share, for the 2021 Second Quarter.

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”), our net income attributable to our shareholders was $20.0 million and was $20.6 million for the six months ended June 30, 2022 (“2021 Six Months”). Inclusive of the charge for revaluation of non-controlling interest, net of taxes, the amount is $20.0 million, or $1.55 per diluted share, for the 2022 Six Months, and $13.3 million, or $1.03 per diluted share, for the 2021 Six Months.

For the 2022 Six Months, our Operating Results, a non-GAAP measure, was $20.0 million, or $1.54 per diluted share, a decrease of 3.0%, as compared to $20.6 million, or $1.60 per diluted share, for the 2021 Second Quarter.

We believe providing Operating Results is useful to investors for comparing 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.

~~Index~~

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

Six Months Ended June 30,
2022 2021
Computation of earnings per share - USPH shareholders:
Net income attributable to USPH shareholders $ 19,994 $ 20,609
Credit (charges) to retained earnings:
Revaluation of redeemable non-controlling interest 57 (9,819 )
Tax effect at statutory rate (federal and state) of 25.55% (15 ) 2,508
$ 20,036 $ 13,298

Earnings per share (basic and diluted) $ 1.55 $ 1.03

Adjustments:
Change in revaluation of put-right liability 14 -
Revaluation of redeemable non-controlling interest (57 ) 9,819
Tax effect at statutory rate (federal and state) 11 (2,508 )
Operating Results (a non-GAAP measure) $ 20,004 $ 20,609

Basic and diluted Operating Results per share (a non-GAAP measure) $ 1.54 $ 1.60

Shares used in computation - basic and diluted 12,968 12,886

~~Index~~

~~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,
2022 2021

Net operating revenue:
Physical therapy operations $ 121,219 $ 116,895
Industrial injury prevention services 19,437 10,033
Total Company $ 140,656 $ 126,928

Gross profit:
Physical therapy operations $ 26,698 $ 31,761
Industrial injury prevention services 4,123 2,543
Gross profit $ 30,821 $ 34,304

Total Assets:
Physical therapy operations $ 414,172 $ 545,449
Industrial injury prevention services 382,272 203,977
Total Company $ 796,444 $ 749,426

~~Revenue~~

Reported total revenue for the 2022 Second Quarter was $140.7 million, an increase of 10.8% as compared to $126.9 million for the 2021 Second Quarter. See table below for a detail of reported total revenue (in thousands):

Three Months Ended
June 30, 2022 June 30, 2021
Revenue related to Mature Clinics $ 108,582 $ 110,105
Revenue related to 2022 Clinic Additions 3,117 -
Revenue related to 2021 Clinic Additions 6,191 2,414
Revenue from clinics sold or closed in 2022 306 592
Revenue from clinics sold or closed in 2021 - 127
Net patient revenue from physical therapy operations 118,196 113,238
Other revenue 898 918
Revenue from physical therapy operations 119,094 114,156
Revenue - Management contracts 2,125 2,739
Revenue - Industrial injury prevention services 19,437 10,033
Total Revenue $ 140,656 $ 126,928

Revenue from physical therapy operations increased $4.9 million, or 4.3%, to $119.1 million for the 2022 Second Quarter from $114.2 million for the 2021 Second Quarter. Net patient revenue related to clinics opened or acquired prior to 2021 and still in operation on June 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. Visits for Mature Clinics (same store) for the 2022 Second Quarter decreased slightly (0.2%) as compared to the 2021 Second Quarter.

The average net patient revenue per visit was $103.18 for the 2022 Second Quarter as compared to $104.46 for the 2021 Second Quarter. Total patient visits increased 5.7% to 1,145,554 for the 2022 Second Quarter from 1,084,070 for the 2021 Second 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.

~~Index~~

Revenue from the industrial injury prevention services business increased 93.7% to $19.4 million for the 2022 Second Quarter as compared to $10.0 million for the 2021 Second Quarter. Excluding $6.8 million of revenue related to the IIPS acquisition in November 2021, IIPS revenue increased 25.5% in the 2022 Second Quarter as compared to the 2021 Second Quarter.

Revenue from management contracts decreased 22.4% to $2.1 million for the 2022 Second Quarter as compared to $2.7 million for the 2021 Second Quarter due to the termination of five management contracts.

~~Operating Cost~~

Total operating cost was $109.8 million for the 2022 Second Quarter, or 78.1% of total revenue, as compared to $92.6 million, or 73.0% of total revenue, for the 2021 Second Quarter. Operating cost related to Mature Clinics increased by $4.0 million or 5.0%, for the 2022 Second Quarter compared to the 2021 Second Quarter. In addition, operating cost related to the IIPS business increased by $7.8 million of which $5.7 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%. See table below for a detail of operating cost (in thousands):

Three Months Ended
June 30, 2022 June 30, 2021
Operating cost related to Mature Clinics $ 84,216 $ 80,205
Operating cost related to 2022 Clinic Additions 2,692 -
Operating cost related to 2021 Clinic Additions 5,996 2,063
Operating cost related to clinics sold or closed in 2022 324 555
Operating cost related to clinics sold or closed in 2021 - 107
Operating cost related to physical therapy operations 92,898 82,930
Operating cost related to management contracts 1,622 2,203
Operating cost related to industrial injury prevention services 15,315 7,491
Total operating cost $ 109,835 $ 92,624

~~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 services business, was 56.8% of net revenue for the 2022 Second Quarter versus 54.3% for the 2021 Second Quarter. Salaries and related costs for the physical therapy operations was $66.7 million in the 2022 Second Quarter, or 56.1% of physical therapy operations revenue, as compared to $60.6 million in the 2021 Second Quarter, or 53.1% of physical therapy operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 Second Quarter was $4.9 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 million in the Second Quarter and $0.4 million in 2021 Second Quarter, salaries and related costs related to Mature Clinics increased by $2.7 million in the 2022 Second Quarter compared to the 2021 Second Quarter. Physical therapy salaries and related costs were $58.29 per visit in the 2022 Second Quarter as compared to $55.95 per visit in the Second Quarter 2021, an increase of 4.2%. Salaries and related costs related to management contracts decreased by $0.4 million for the 2022 Second Quarter.

Salaries and related costs for the industrial injury prevention services business was $11.6 million in the 2022 Second Quarter, or 59.9% of industrial injury prevention services revenue, as compared to $6.2 million in the 2021 Second Quarter, or 62.2% of industrial injury prevention services 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% of net revenue in the 2022 Second Quarter versus 17.6% in the 2021 Second Quarter. Rent, supplies, contract labor and other costs for the physical therapy operations was $24.7 million in the 2022 Second Quarter, or 20.7% of physical therapy operations revenue, as compared to $20.9 million in the 2021 Second Quarter, or 18.3% of physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 Second Quarter was $2.7 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 million in the 2022 Second Quarter and $0.2 million in the 2021 Second Quarter, rent, supplies, contract labor and other costs for Mature Clinics increased by $1.9 million in the 2022 Second Quarter compared to the 2021 Second Quarter. Rent, supplies, contract labor and other costs, related to management contracts decreased $0.1 million in the 2022 Second Quarter.

~~Index~~

Rent, supplies, contract labor and other costs for the industrial injury prevention services business was $3.5 million in the 2022 Second Quarter, or 18.2% of industrial injury prevention services revenue, as compared to $1.2 million in the 2021 Second Quarter, or 12.5% of net industrial injury prevention services revenue.

~~Operating Cost—Provision for Credit Losses~~

~~The provision for credit losses as a percentage of net revenue was 1.1% in the 2022 Second Quarter and 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% on June 30, 2022, as compared to 5.64% on December 31, 2021. Our days’ sales outstanding was 33 days on June 30, 2022 and 32 days on December 31, 2021.

~~Gross Profit~~

Gross profit for the 2022 Second Quarter, was $30.8 million, a decrease of $3.5 million, or approximately 10.2%, as compared to $34.3 million for the 2021 Second Quarter. The gross profit percentage was 21.9% of total revenue for the 2022 Second Quarter as compared to 27.0% for the 2021 Second Quarter. The gross profit percentage for our

physical therapy operations was 22.0% for the 2022 Second Quarter as compared to 27.4% for the 2021 Second Quarter. The gross profit percentage on management contracts was 23.7% for the 2022 Second Quarter as compared to 19.6% for the 2021 Second Quarter. The gross profit percentage for the industrial injury prevention services business was 21.2% for the 2022 Second Quarter as compared to 25.3% for the 2021 Second Quarter. The IIPS margin in 2022 has been impacted by the lower margin profile of the Company’s November 2021 IIPS acquisition The table below details the gross profit (in thousands):

Three Months Ended
June 30, 2022 June 30, 2021

Physical therapy operations $ 26,196 $ 31,226
Management contracts 503 536
Industrial injury prevention services 4,122 2,542
Gross profit $ 30,821 $ 34,304

~~Corporate Office Costs~~

Corporate office costs were $10.7 million for the 2022 Second Quarter compared to $12.1 million for the 2021 Second Quarter. Corporate office costs were 7.6% of total revenue for the 2022 Second Quarter as compared to 9.5% for the 2021 Second Quarter. The decrease was primarily due to lower estimated bonus expense in the 2022 Second Quarter compared to the 2021 Second Quarter.

~~Operating Income~~

Operating income for the 2022 Second Quarter was $20.1 million and $22.2 million for the 2021 Second Quarter. Operating income as a percentage of total revenue was 14.3% for the 2022 Second Quarter as compared to 17.5% for the 2021 Second Quarter.

~~Loss on Revaluation of Put-Right Liability~~

The loss on revaluation of put-right liability was $617,000. As part of the IIPS business acquisition on November 30, 2021, 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 million value at June 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.

~~Index~~

~~Provision for Income Taxes~~

The provision for income tax was $4.2 million for the 2022 Second Quarter and $4.6 million for the 2021 Second Quarter. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.5% for the 2022 Second Quarter and 26.9% for the 2021 Second Quarter. See table below ($ in thousands):

~~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
June 30, 2022 June 30, 2021
Income before taxes $ 19,495 $ 22,039

Less: net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity (2,626 ) (3,611 )
Non-controlling interest - permanent equity (1,435 ) (1,425 )
$ (4,061 ) $ (5,036 )

Income before taxes less net income attributable to non-controlling interest $ 15,434 $ 17,003

Provision for income taxes $ 4,239 $ 4,567

Percentage 27.5 % 26.9 %

~~Net Income Attributable to Non-controlling Interest~~

Net income attributable to redeemable non-controlling interest (temporary equity) was $2.6 million for the 2022 Second Quarter and $3.6 million for the 2021 Second Quarter. Net income attributable to non-controlling interest (permanent equity) was $1.4 million for the 2022 Second Quarter and million for the 2021 Second Quarter.

~~2022 Six Months Compared to 2021 Six Months~~

~~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,
2022 2021

Net operating revenue:
Physical therapy operations $ 233,855 $ 219,253
Industrial injury prevention services 38,505 20,043
Total Company $ 272,360 $ 239,296

Gross profit:
Physical therapy operations $ 49,135 $ 54,935
Industrial injury prevention services 8,274 5,265
Gross profit $ 57,409 $ 60,200

Total Assets:
Physical therapy operations $ 414,172 $ 545,449
Industrial injury prevention services 382,272 203,977
Total Company $ 796,444 $ 749,426

~~Index~~

~~Revenue~~

Reported total revenue for the 2022 Six Months was $272.4 million, an increase of 13.8% as compared to $239.3 million for the 2021 Six Months. See table below for a detail of reported total revenue (in thousands):

For the Six Months Ended
June 30, 2022 June 30, 2021
Revenue related to Mature Clinics $ 211,215 $ 208,531
Revenue related to 2022 Clinic Additions 3,312 -
Revenue related to 2021 Clinic Additions 12,346 2,465
Revenue from clinics sold or closed in 2022 861 1,104
Revenue from clinics sold or closed in 2021 - 392
Net patient revenue from physical therapy operations 227,734 212,492
Other revenue 1,770 1,464
Revenue from physical therapy operations 229,504 213,956
Revenue - Management contracts 4,351 5,297
Revenue - Industrial injury prevention services 38,505 20,043
Total Revenue $ 272,360 $ 239,296

~~Revenue from physical therapy operations increased $15.5 million, or 7.3%, to $229.5 million for the 2022 Six Months from $214.0 million for the 2021 Six Months.~~

The average net patient revenue per visit was $103.09 for the 2022 Six Months as compared to $104.58 for the 2021 Six Months. Total patient visits increased 8.7% to 2,209,073 for the 2022 Six Months from 2,031,858 for the 2021 Six 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 million, or 1.3%, to $211.2 million for the 2022 Six Months compared to $208.5 million for the 2021 Six Months. Visits for Mature Clinics (same store) for the 2022 Six Months increased 3.0% as compared to the 2021 Six Months. The increase in visits was partially offset by a reduction in the net patient revenue per visit.

Revenue from the industrial injury prevention services business increased 92.1% to $38.5 million for the 2022 Six Months as compared to $20.0 million for the 2021 Six Months. Excluding $13.7 million of revenue related to the IIPS acquisition in November 2021, IIPS revenue increased 24.0% in the 2022 Six Months as compared to the 2021 Six Months.

Revenue from management contract revenue decreased 17.9% to $4.4 million for the 2022 Six Months as compared to $5.3 million for the 2021 Six Months due to the termination of certain management contracts.

~~Index~~

~~Operating Cost~~

Total operating cost was $215.0 million for the 2022 Six Months, or 78.9% of total revenue, as compared to $179.1 million, or 74.8% of total revenue, for the 2021 Six Months. Operating cost related to Mature Clinics increased by $10.1 million for the 2022 Six Months compared to the 2021 Six Months. In addition, operating cost related to the industrial injury prevention services business increased by $15.5 million of which $11.3 million related to the recent IIPS acquisition. See table below for a detail of operating cost (in thousands):

Six Months Ended
June 30, 2022 June 30, 2021
Operating cost related to Mature Clinics $ 166,468 $ 156,321
Operating cost related to 2022 Clinic Additions 3,083 -
Operating cost related to 2021 Clinic Additions 11,466 2,128
Operating cost related to clinics sold or closed in 2022 251 979
Operating cost related to clinics sold or closed in 2021
-
442
Operating cost related to physical therapy operations 181,268 159,870
Operating cost related to management contracts 3,453 4,448
Operating cost related to industrial injury prevention services 30,230 14,778
Total operating cost $ 214,951 $ 179,096

~~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 services business, was 56.9% of net revenue for the 2022 Six Months versus 55.4% for the 2021 Six Months. Salaries and related costs for the physical therapy operations was $129.2 million in the 2022 Six Months, or 56.3% of physical therapy operations revenue, as compared to $116.2 million in the 2021 Six Months, or 54.3% of physical therapy operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 Six Months was $8.1 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 million in the 2022 Six Months and $0.9 million in 2021 Six Months, salaries and related costs related to Mature Clinics increased by $6.6 million in the 2022 Six Months compared to the 2021 Six Months. Salaries and related costs related to management contracts decreased by $0.8 million for the 2022 Six Months.

Salaries and related costs for the industrial injury prevention services business was $22.7 million in the 2022 Six Months, or 59.0% of industrial injury prevention services revenue, as compared to $12.5 million in the 2021 Six Months, or 62.3% of industrial injury prevention services 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 services business, was 20.9% of net revenue in the 2022 Six Months versus 18.3% in the 2021 Six Months. Rent, supplies, contract labor and other costs for the physical therapy operations was $49.3 million in the 2022 Six Months, or 21.5% of physical therapy operations revenue, as compared to $41.0 million in the 2021 Six Months, or 19.2% of physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 Six Months was $4.7 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 million in the 2022 Six Months and $0.5 million in the 2021 Six Months, rent, supplies, contract labor and other costs for Mature Clinics increased by $4.6 million in the 2022 Six Months compared to the 2021 Six Months. Rent, supplies, contract labor and other costs, related to management contracts decreased $0.2 million in the 2022 Six Months.

Rent, supplies, contract labor and other costs for the industrial injury prevention services business was $7.4 million in the 2022 Six Months, or 19.1% of industrial injury prevention services revenue, as compared to $2.3 million in the 2021 Six Months, or 11.4% of net industrial injury prevention services 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 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% at June 30, 2022, as compared to 5.64% at December 31, 2021. Our days’ sales outstanding was 33 days at June 30, 2022 and 32 days at December 31, 2021.

~~Index~~

~~Gross Profit~~

Gross profit for the 2022 Six Months, was $57.4 million, a decrease of $2.8 million, or approximately 4.6%, as compared to $60.2 million for the 2021 Six Months. The gross profit percentage was 21.1% of total revenue for the 2022 Six Months as compared to 25.2% for the 2021 Six Months. The gross profit percentage for our physical therapy operations was 21.0% for the 2022 Six Months as compared to 25.3% for the 2021 Six Months. The gross profit percentage on management contracts was 20.6% for the 2022 Six Months as compared to 16.0% for the 2021 Six Months. The gross profit percentage for industrial injury prevention services was 21.5% for the 2022 Six Months as compared to 26.3% for the 2021 Six Months. The IIPS margin in 2022 has been impacted by the lower margin profile of our November 2021 IIPS acquisition. The table below details the gross profit (in thousands):

Six Months Ended
June 30, 2022 June 30, 2021

Physical therapy operations $ 48,236 $ 54,086
Management contracts 898 849
Industrial injury prevention services 8,275 5,265
Gross profit $ 57,409 $ 60,200

~~Corporate Office Costs~~

Corporate office costs were $22.3 million for the 2022 Six Months compared to $22.9 million for the 2021 Six Months. Corporate office costs were 8.2% of total revenue for the 2022 Six Months as compared to 9.6% for the 2021 Six Months. The decrease was primarily due to lower estimated bonus expense in the 2022 Six Months than the 2021 Six Months.

~~Operating Income~~

Operating income for the 2022 Six Months were $35.1 million and $37.3 million for 2021 Six Months. Operating income as a percentage of total revenue was 12.9% for the 2022 Six Months as compared to 15.6% for the 2021 Six Months.

~~Loss on Revaluation of Put-Right Liability~~

The loss on revaluation of the put-right liability was $14,000. As part of the IIPS business acquisition on November 30, 2021, 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 million value at June 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.

~~Index~~

~~Provision for Income Taxes~~

The provision for income tax was $7.7 million for the 2022 Six Months and $7.5 million for the 2021 Six Months. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.9% for the 2022 Six Months and 26.7% for the 2021 Six Months. See table below detailing calculation of the provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):

Six Months Ended
June 30, 2022 June 30, 2021
Income before taxes $ 34,975 $ 36,869

Less: net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity (5,183 ) (6,064 )
Non-controlling interest - permanent equity (2,061 ) (2,685 )
$ (7,244 ) $ (8,749 )

Income before taxes less net income attributable to non-controlling interest $ 27,731 $ 28,120

Provision for income taxes $ 7,737 $ 7,511

Percentage 27.9 % 26.7 %

~~Net Income Attributable to Non-controlling Interest~~

Net income attributable to redeemable non-controlling interest (temporary equity) was $5.2 million for the 2022 Six Months and $6.1 million for the 2021 Six Months. Net income attributable to non-controlling interest (permanent equity) was $2.1 million for the 2022 Six Months and $2.7 million for the 2021 Six Months.

~~Other Comprehensive Loss~~

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 on the accompanying Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2022 was an unrealized loss of $0.4 million, net of tax.

~~LIQUIDITY AND CAPITAL RESOURCES~~

We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. At June 30, 2022 and December 31, 2021, we had $48.6 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 June 30, 2023.

Cash and cash equivalents increased by $20.4 million from December 31, 2021 to June 30, 2022. During the 2022 Six Months, $27.5 million was provided by operations and $211.0 million 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 ($7.2 million), dividends paid to shareholders ($10.7 million), purchase of business and non-controlling interest ($20.4 million), and purchase of fixed assets ($4.6 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.

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”):

~~Index~~

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 Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any 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-owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by a perfected first priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions.

On June 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 June 30, 2022, we were in compliance with all of the covenants thereunder.

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 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.

~~Index~~

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’s consolidated balance sheet in Other long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in fair value reflected in the Company’s consolidated statement of income.

On September 30, 2021, the Company 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 services 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 Company 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 has an obligation to pay an additional amount up to $0.8 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date.

On March 31, 2021, the Company acquired a 70% interest in a 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 MedicareAccelerated 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 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 2021 First Quarter, the Company 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.

~~Index~~

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 June 30, 2022 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interest that occurred in 2018 through June 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 June 30, 2022, the balance on these notes payable was $5.7 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 June 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 June 30, 2022, there are currently an additional estimated 137,363 shares (based on the closing price of $109.20 on June 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 six months ended June 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;~~

~~governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs;~~

~~Index~~

~~revenue and earnings expectations;~~

~~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 retaining key personnel;~~

competitive environment in the industrial injury prevention services 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;~~

~~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 2 - 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 discussion of this swap agreement.

~~Index~~

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.~~following.

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;

one of our acquisition agreements contains a Put Right related to a future purchase of a majority interest in a separate company;

our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing and our ability to operate our business;

changes as the result of government enacted national healthcare reform;

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;

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;

actual or perceived events involving banking volatility or limited liability, defaults or other adverse developments that affect the U.S. or international financial systems, may result in market wide liquidity problems which could have a material and adverse impact on our available cash and results of operations;

Index

our business depends on hiring, training, and retaining qualified employees

availability and cost of qualified physical therapists;

competitive environment in the industrial injury prevention services business, which could result in the termination or non-renewal 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;

maintaining clients for which we perform management, industrial injury prevention related services, 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;

maintaining necessary insurance coverage;

availability, terms, and use of capital; and

weather and other seasonal factors.

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.

EXECUTIVE SUMMARY

Our Business

References to “we,” “us,” “our” and the “Company” shall mean U.S. Physical Therapy, Inc. and its subsidiaries.

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 (“IIP”) 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 IIPS 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 the IIP segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.

On March 31, 2023, we operated 647 clinics in 40 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 35 third-party facilities under management as of March 31, 2023.

Index

During the three months ended March 31, 2023 (“2023 First Quarter) and for the year ended December 31, 2022, we completed the acquisitions of six clinic practices as detailed below.

Acquisition	Date	% Interest Acquired	Number of Clinics
February 2023 Acquisition	February 28, 2023	80%	1
November 2022 Acquisition	November 30, 2022	80%	13
October 2022 Acquisition	October 31, 2022	60%	14
September 2022 Acquisition	September 30, 2022	80%	2
August 2022 Acquisition	August 31, 2022	70%	6
March 2022 Acquisition	March 31, 2022	70%	6

During the 2023 First Quarter, the Company closed one clinic.

RESULTS OF OPERATIONS

Net income attributable to our shareholders, was $7.4 million for the 2023 First Quarter compared to $8.8 million for the three months ended March 31, 2022 (“2022 First Quarter”). The decrease in net income is primarily due to a $2.0 million increase in interest expense as a result of a higher effective interest rate as well as increased borrowings to fund acquisitions. In accordance with Generally Accepted Accounting Principles (“GAAP”), the revaluation of non-controlling interest, net of taxes, is not included in net income but is charged directly to retained earnings; however, this change is included in the computation of earnings per diluted share. Earnings per diluted share, in accordance with GAAP, was $0.58 for the 2023 First Quarter as compared to $0.67 for the 2022 First Quarter.

Operating income increased $2.0 million, or 13.1%, to $17.0 million in the 2023 First Quarter from $15.0 million in the 2022 First Quarter.

Non-GAAP Measures

Adjusted EBITDA, a non-GAAP measure, increased $1.0 million to $18.5 million for the 2023 First Quarter, an all-time high first quarter amount, from $17.5 million for the 2022 First Quarter. Adjusted EBITDA, a non-GAAP measure, is defined as net income attributable to USPH shareholders before interest income, interest expense, taxes, depreciation, amortization, change in fair value of contingent earn-out consideration, income received under the Coronavirus Aid, Relief and Economic Security Act (“Relief Funds”), changes in revaluation of put-right liability, equity-based awards compensation expense, and related portions for non-controlling interests.

Operating results per diluted share, a non-GAAP measure, was $0.59 per diluted share for the 2023 First Quarter as compared to $0.65 for 2022 First Quarter, with the decrease primarily due to an increase in interest expense. Operating Results, a non-GAAP measure, equals net income attributable to our diluted shareholders per the consolidated statements of income, less a change in revaluation of the put-right liability, Relief Funds, changes in fair value of contingent earn-out consideration, and any allocations to non-controlling interests, all net of taxes. Operating Results per diluted share also exclude the impact of the revaluation of redeemable non-controlling interest and the associated tax impact.

We use Operating Results and Adjusted EBITDA, which eliminate certain items described above that can be subject to volatility and unusual costs, as one the principal measures to evaluate and monitor financial performance period over period. We believe that presenting Operating Results and Adjusted EBITDA is useful information for investors to use in comparing the Company’s period-to-period results as well as for comparing with other similar businesses since most do not have redeemable instruments and therefore have different equity structures.

Operating Results and Adjusted EBITDA are not measures of financial performance under GAAP. Adjusted EBITDA and Operating Results 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.

Index

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 Adjusted EBITDA and Operating Results (in thousands, except per share data):

	Three Months Ended March 31,
	2023				2022*
Adjusted EBITDA
Net income attributable to USPH shareholders	$	7,410		$	8,799
Adjustments:
Depreciation and amortization		3,788			3,824
Change in fair value of contingent earn-out consideration		698			-
Interest income		(64	)		(46	)
Relief funds		(467	)		-
Change in revaluation of put-right liability		149			(603	)
Interest expense - debt and other, net		2,560			540
Provision for income taxes		2,969			3,498
Equity-based awards compensation expense		1,806			1,846
Allocation to non-controlling interests		(371	)		(363	)
Adjusted EBITDA (a non-GAAP measure)		18,478			17,495

Earnings per share
Computation of earnings per share - USPH shareholders:
Net income attributable to USPH shareholders	$	7,410		$	8,799
Charges to retained earnings:
Revaluation of redeemable non-controlling interest		119			(153	)
Tax effect at statutory rate (federal and state)		(30	)		39
	$	7,499		$	8,685

Earnings per share (basic and diluted)	$	0.58		$	0.67

Operating Results
Net income attributable to USPH shareholders		7,410			8,799
Adjustments:
Change in fair value of contingent earn-out consideration		698			-
Change in revaluation of put-right liability		149			(603	)
Allocation to non-controlling interests		33			-
Relief Funds		(467	)		-
Tax effect at statutory rate (federal and state)		(105	)		154
Operating Results (a non-GAAP measure)	$	7,718		$	8,350

Basic and diluted Operating Results per share (a non-GAAP measure)	$	0.59		$	0.65

Shares used in computation - basic and diluted		13,025			12,937

*Revised to conform to current year presentation

Index

2023 First Quarter Compared to 2022 First 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 March 31,
	2023		2022

Net operating revenue:
Physical therapy operations	$	129,159	$	112,636
Industrial injury prevention services		19,350		19,068
Total Company	$	148,509	$	131,704

Gross profit:
Physical therapy operations	$	27,089	$	22,436
Industrial injury prevention services		3,768		4,152
Total Company	$	30,857	$	26,588

Total Assets:
Physical therapy operations	$	726,422	$	608,240
Industrial injury prevention services		141,705		155,623
Total Company	$	868,127	$	763,863

Revenue

Total net revenue for 2023 First Quarter was $148.5 million, an increase of 12.8%, compared to $131.7 million for the 2022 First Quarter. See table below for a breakdown of total net revenue.

	Three Months Ended March 31,				Variance
	2023		2022		$			%
	(In thousands, except percentages)
Revenue related to:	In USD
Mature Clinics ⁽¹⁾	$	114,502	$	108,229	$	6,273		5.8	%
2023 Clinic Additions		371		-		371		*		⁽²⁾
2022 Clinic Additions		11,708		195		11,513		*		⁽²⁾
Clinics sold or closed in 2022		-		1,114		(1,114	)	*		⁽²⁾
Net patient revenue from physical therapy operations		126,581		109,538		17,043		15.6	%
Other revenue		799		872		(73	)	-8.4	%
Physical therapy operations		127,380		110,410		16,970		15.4	%
Management contracts		1,779		2,226		(447	)	-20.1	%
Industrial injury prevention services		19,350		19,068		282		1.5	%
	$	148,509	$	131,704	$	16,805		12.8	%

(1)

See Glossary of Terms - Key Business Metrics for the definition.

(2)

Not meaningful.

Revenue from physical therapy operations increased $17.0 million, or 15.4%, to $127.4 million for the 2023 First Quarter from $110.4 million for the 2022 First Quarter primarily due to a 15.4% increase in the number of patient visits to 1,227,490 for the 2023 First Quarter from 1,063,519 in the 2022 First Quarter. Net patient revenue per visit increased to $103.12 in the 2023 First Quarter from $103.00 in the 2022 First Quarter.

IIP services revenue increased to $19.4 million for the 2023 First Quarter as compared to $19.1 million for the 2022 First Quarter.

Operating Cost

Operating cost was $117.7 million for the 2023 First Quarter, or 79.2% of net revenue, compared to $105.1 million, or 79.8% of net revenue, for the 2022 First Quarter. Salaries and related costs were 57.9% of net revenue for the 2023 First Quarter versus 57.1% for the 2022 First Quarter. Rent, supplies, contract labor and other costs as a percentage of total revenue were 20.3% for the 2023 First Quarter versus 21.8% for the 2022 First Quarter. The provision for credit losses as a percentage of total revenue was 1.0% for both 2023 First Quarter and 2022 First Quarter. See table below for a more detailed breakdown of operating costs. See table below for a breakdown of Operating costs.

Index

	Three Months Ended March 31,				Variance
	2023		2022		$			%
Operating costs related to:
Mature clinics ⁽¹⁾	$	91,025	$	86,978	$	4,047		4.7	%
2023 clinic additions		432		-		432		*		⁽²⁾
2022 clinic additions		9,100		389		8,711		*		⁽²⁾
Clinics sold or closed in 2022		64		1,002		(938	)	*		⁽²⁾
Physical therapy operations		100,621		88,369		12,252		13.9	%
Management contracts		1,449		1,831		(382	)	-20.9	%
Industrial injury prevention services		15,582		14,916		666		4.5	%
Operating costs	$	117,652	$	105,116	$	12,536		11.9	%

(1)

See Glossary of Terms of our Key Business Metrics for the definition of these terms.

(2)

Not meaningful

Physical therapy operating costs increased $12.3 million or 13.9% primarily driven by the impact of a full quarter of 2022 and 2023 clinic additions. Additionally, costs associated with mature clinics increased 4.7% mostly due to higher salaries and related costs related to a 6.0% increase in patient visits at mature clinics.

IIP services operating costs increased by $0.7 million, or 4.5%, to $15.6 million as compared to $14.9 million in the 2022 First Quarter.

Operating Cost—Salaries and Related Costs

Salaries and related costs was $86.0 million or 57.9% of net revenue for the 2023 First Quarter versus $75.1 million or 57.1% for the 2022 First Quarter. Salaries and related costs for the physical therapy operations was $72.6 million in the 2023 First Quarter, or 57.0% of physical therapy operations revenue, as compared to $62.5 million in the 2022 First Quarter, or 56.6% of physical therapy operations revenue. Salaries and related costs for the IIP business was $12.1 million in the 2023 First Quarter, or 62.8% of IIP services revenue, as compared to $11.1 million in the 2022 First Quarter, or 58.2% of IIP revenue.

Operating Cost—Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs as a percentage of total revenue were $30.1 million or 20.3% for the 2023 First Quarter versus $28.7 million or 21.8% for the 2022 First Quarter. Rent, supplies, contract labor and other costs for the physical therapy operations was $26.5 million in the 2023 First Quarter, or 20.8% of physical therapy operations revenue, as compared to $24.6 million in the 2022 First Quarter, or 22.3% of physical therapy operations revenue. Rent, supplies, contract labor and other costs for the IIP services business was $3.4 million in the 2023 First Quarter, or 17.7% of IIP services revenue, as compared to $3.8 million in the 2022 First Quarter, or 20.1% of net IIP services revenue.

Operating Cost—Provision for Credit Losses

The provision for credit losses as a percentage of net revenue were 1.0% in the 2023 First Quarter and for 2022 First Quarter.

Our provision for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 4.5% on March 31, 2023, as compared to 5.2% on December 31, 2022. Our days’ sales outstanding were both 31 days on March 31, 2023, and December 31, 2022.

Index

Gross Profit

Gross profit for the 2023 First Quarter increased $4.3 million, or 16.1%, to $30.9 million from $26.6 million for the 2022 First Quarter. The following table provides a more detailed breakdown of gross profit and related gross profit margins:

	First Quarter Ended March 31,
	2023					2022					Variance
	In USD		Margin %			In USD		Margin %			$			%
Physical therapy operations	$	26,759		21.0	%	$	22,041		20.0	%	$	4,718		21.4	%
Management contracts		330		18.5	%		395		17.7	%		(65	)	-16.5	%
Industrial injury prevention services		3,768		19.5	%		4,152		21.8	%		(384	)	-9.2	%
Gross profit	$	30,857		20.8	%	$	26,588		20.2	%	$	4,269		16.1	%

Corporate Office Cost

Corporate office cost was $13.9 million, or 9.3% of net revenue, for the 2023 First Quarter compared to $11.6 million, or 8.8% of net revenue, for the 2022 First Quarter.

Operating Income

Operating income was $17.0 million for the 2023 First Quarter compared to $15.0 million in the 2022 First Quarter. In both comparative periods, the operating income was 11.4% of net revenue.

Other Income and Expense

For 2023 First Quarter, other expenses were $2.6 million compared to other income of $0.4 million in 2022 First Quarter.

During the 2023 First Quarter, we recognized $0.5 million of Relief Funds. The Relief Funds were received in prior years but were subject to certain compliance requirements which were met in 2023 First Quarter. We do not expect to receive or recognize any future Relief Funds. No such income was recognized in the comparable prior year period.

During the 2023 First Quarter, we revalued the contingent earn-out consideration related to an acquisition and recognized an increase in the related liability of $0.7 million.

The revaluation of the put-right liability resulted in an increase of $0.1 million to the related liability for the 2023 First Quarter. The put-right relates to the potential future purchase of a company 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. The value of this right will continue to be adjusted in future periods, as appropriate.

Interest expense, net of $0.6 million savings from the interest rate swap arrangement discussed below, was $2.6 million for the 2023 First Quarter compared to $0.5 million in the 2022 First Quarter. The increase in interest expense was primarily due to a higher effective interest rate as well as increased borrowings to fund acquisitions. The overall effective interest rate on our debt was 5.5% for the 2023 First Quarter.

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 March 31, 2023, is $12.2 million. For the 2023 First Quarter, we recognized income of $0.3 million on this 49% joint venture.

Index

Provision for Income Taxes

The provision for income tax was $3.0 million for the 2023 First Quarter compared to $3.5 million for the 2022 First 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 28.6% for the 2023 First Quarter and 28.4% for the 2022 First Quarter. A reconciliation of our income tax expense and effective income rate is as follows:

	First Quarter Ended March 31,
	2023			2022
	(In thousands, except percentages)
Income before taxes	$	14,396		$	15,480

Less: net loss (income) attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity		(2,720	)		(2,557	)
Non-controlling interest - permanent equity		(1,297	)		(626	)
	$	(4,017	)	$	(3,183	)

Income before taxes less net income attributable to non-controlling interest	$	10,379		$	12,297

Provision for income taxes	$	2,969		$	3,498

Percentage		28.6	%		28.4	%

Net Income Attributable to Non-controlling Interest

Net income attributable to redeemable non-controlling interest (temporary equity) was $2.7 million for the 2023 First Quarter and $2.6 million for the 2022 First Quarter. Net income attributable to non-controlling interest (permanent equity) was $1.3 million for the 2023 First Quarter and $0.6 million for the 2022 First Quarter.

Other Comprehensive Loss

The Company entered into an interest rate swap effective on June 30, 2022, which will mature on June 30, 2027. It has a $150.0 million notional value adjusted concurrently with scheduled principal payments made on the Term Facility. On March 31, 2023, the fair value of the interest rate swap was $3.6 million, a decrease of $1.8 million, net of tax, as compared to December 31, 2022. The fair value of the interest rate swap is included in other assets (current and long term) in the accompanying consolidated balance sheet while the decrease in fair value is presented as unrealized loss in the accompanying unaudited consolidated statements of comprehensive income. The interest rate swap arrangement has generated $0.7 million in interest savings since its inception. The average interest rate for the term loan during the 2023 First Quarter was 4.9%.

GLOSSARY OF TERMS – Key Business Metrics

Mature clinics are clinics opened or acquired prior to January 1, 2021, and are still operating as of the balance sheet date.

Net rate per patient visit is net patient revenue related to our physical therapy operations divided by total number of patient visits (defined below) during the periods presented.

Patient visitsis the number of unique patient visits during the periods presented.

Average visits per day per clinic is patient visits divided by the number of days in which normal business operations were conducted during the periods presented and further divided by the average number of clinics in operation during the periods presented.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. On March 31, 2023, and December 31, 2022, we had $32.6 million and $31.6 million, respectively, in cash and cash equivalents. 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 March 31, 2024.

Index

Cash and cash equivalents increased by $8.4 million from March 31, 2022 to March 31, 2023. During the First Quarter 2023, $11.3 million was provided by operations, $2.3 million was provided by financing activities and $12.7 million was used in investing activities. The major uses of cash for investing and financing activities included: purchase of business and non-controlling interest ($11.0 million) distributions to non-controlling interests inclusive of those classified as redeemable non-controlling interest ($3.3 million), and purchase of fixed assets ($2.1 million).

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 have been and shall continue to be used by us for working capital and other general corporate purposes of our 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.

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 4.915%. 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”). We 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 our wholly owned material domestic subsidiaries (each, a “Guarantor”), and our obligations and any Guarantors are secured by a perfected first priority security interest in substantially all of our existing and future personal property and each Guarantor, subject to certain exceptions.

Index

In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which became effective on June 30, 2022. It has a $150 million notional value adjusted concurrently with schedule principal payments made on the term loan, and has 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% on 1-month SOFR on a quarterly basis. The total interest rate in any period also includes an applicable margin based on our consolidated leverage ratio. In connection with the swap, no cash was exchanged between us and the counterparty.

We designated our 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 March 31, 2023, $147.2 million was outstanding on the Term Loan and $38.0 million was outstanding under the Revolving Facility. The Revolving Facility has $137.0 million of availability. As of March 31, 2023, we were in compliance with all of the covenants thereunder.

On February 28, 2023, we acquired an 80% interest in a one-clinic physical therapy practice. The practice’s owners and founders retained 20% of the equity interest. The purchase price for the 80% equity interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable. The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025.

On November 30, 2022, we acquired an 80% interest in a thirteen-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $25.0 million, of which $24.2 million was paid in cash and $0.8 million in the form of a note payable. The note accrues interest at 7.0% per annum and the principal and interest are payable on November 30, 2024.

On October 31, 2022, we acquired a 60% interest in a fourteen-clinic physical therapy practice. The practice’s owners retained 40% of the equity interests. The purchase price for the 60% equity interest was approximately $19.5 million, with a potential additional amount to be paid at a later date based on the performance of the business. This contingent consideration had a fair value of $8.9 million on March 31, 2023. The fair value of this contingent consideration will be adjusted quarterly based on certain criteria and market inputs.

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 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.

Index

We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. 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 CMS approval initially may not be submitted for six months or more. 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 account receivable has been outstanding for 120 days or longer.

We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payable primarily relate to the acquisitions of a business or acquisitions of majority interests in businesses. At March 31, 2023, our remaining outstanding balance on these notes aggregated $7.0 million. $6.0 million of the outstanding notes payable are payable in 2023 and 2024 and $1.0 million is payable in 2025. Notes are generally payable in equal annual installments of principal over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 8.0% per annum.

The limited partnership agreements, as amended, provide that, upon the triggering events, we have a Call Right and the selling entity or individual has a Put Right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the Put Right and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon the exercise of either the Put Right or the Call Right is calculated per the terms of the respective agreements and classified as redeemable non-controlling interest (temporary equity) in our consolidated balance sheets. The fair value of the redeemable non-controlling interest at March 31, 2023 was $164.3 million.

As of March 31, 2023, we have accrued $8.0 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 Credit Agreement permits share repurchases of up to $15,000,000 in the aggregate, 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 March 31, 2023, there are currently an additional estimated 156,855 shares (based on the closing price of $95.63 on March 31, 2023) 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 three months ended March 31, 2023.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

~~In May 2022, we entered into~~We maintain an interest rate swap ~~agreement, effective on June 30, 2022,~~arrangement which ~~has~~is considered a ~~$150~~derivative instrument. Our indebtedness as of March 31, 2023, was the outstanding balance of seller notes from our acquisitions of $7.0 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~~outstanding balance on our ~~Consolidated Leverage Ratio.~~

~~We designated~~Credit Agreement of $185.2 million, which includes a term note with a balance of $147.2 million and $38.0 million drawn under our Revolving Facility. The Revolving Facility is subject to fluctuating interest rates. A 1% change in the interest rate ~~swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related~~would yield an additional $0.4 million of interest expense. See Note 9 to the ~~fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.~~unaudited consolidated financial statements.

4640

Index

ITEM 4.

CONTROLS AND PROCEDURES.

~~(a)~~

~~Evaluation of Disclosure Controls and Procedures~~

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~~

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.

ITEM 1A.

RISK FACTORS.

~~Our debt and financial obligations could adversely affect~~Except as provided below, there have been no material changes to 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.~~

~~Index~~

~~Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other~~ risk factors ~~described~~as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 and filed with the SEC on ~~March 1, 2022. If~~February 28, 2023.

Actual or perceived events involving banking volatility or limited liability, defaults or other adverse developments that affect the U.S. or international financial systems, may result in market wide liquidity problems which could have a material and adverse impact on our available cash and results of operations.

At any point in time, the funds in our operating accounts with financial institutions or financial services industry companies with which we ~~do not generate enough~~have financial, or business relationships may exceed the applicable Federal Deposit Insurance Corporation (“FDIC”) limits. While we monitor the cash ~~flow to pay~~balances in our ~~debt service obligations, we may~~operating accounts and adjust the cash balances as appropriate, these cash balances could be ~~required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity.~~impacted if the underlying institutions fail. There is no guarantee that the FDIC will provide access to all or some uninsured funds in the event of the closure, default, or non-performance of the financial institution or financial services industry companies with which they have relationships, if such parties may be unable to satisfy their obligations with us. To date, we have not experienced losses of cash in our operating accounts or our invested cash and cash equivalents as a result of any banking volatility; however, we can provide no assurances that access to our operating cash or cash and cash equivalents will not be ~~able~~impacted by adverse conditions in the financial markets. Further, banking volatility or adverse developments impacting financial systems may make equity or debt financing more difficult to ~~take any of these actions~~obtain, and additional debt or equity financing might not be available on ~~a timely basis, on~~reasonable terms, ~~satisfactory to us, or~~if at all.

~~If we fail to satisfy~~ Difficulties obtaining debt or equity financing could have a material adverse effect on our ~~debt service obligations or the other restrictions~~financial condition and ~~requirements in our loan agreements, we could be in default. Unless cured or waived, a default would permit lenders to accelerate the maturity~~results of ~~the debt under the credit agreement and to foreclose upon the collateral securing the debt.~~

4841

Index

ITEM 6.

EXHIBITS.

Exhibit Number	Description
99.1
~~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 SecuritiesU. S. Physical Therapy, Inc. ~~and Regions Capital Markets as Joint Load Arrangers, BofA Securities Inc., as Sole Bookrunner and the lenders named therein.~~Objective Long-Term Incentive Plan for Senior Management for 2023, effective March 2, 2023 [incorporated by reference to Exhibit ~~10.1~~99.1 to the ~~Company's~~Company Current Report on Form ~~10-Q~~8-K filed with the SEC on ~~June 21, 2022.]~~March 2, 2023].
99.2	U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for 2023, effective March 2, 2023 [incorporated by reference to Exhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC on March 2, 2023].
99.3	U. S. Physical Therapy, Inc. Objective Cash/RSA Bonus Plan for Senior Management for 2023, effective March 2, 2023 [incorporated by reference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on March 2, 2023].
99.4	U. S. Physical Therapy, Inc. Discretionary Cash/RSA Bonus Plan for Senior Management for 2023, effective March 2, 2023 [incorporated by reference to Exhibit 99.4 to the Company Current Report on Form 8-K filed with the SEC on March 2, 2023].
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32*	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

*	Filed herewith

Index

SIGNATURES

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: ~~August 8, 2022~~May 5, 2023	By:	/s/ CAREY HENDRICKSON
		Carey Hendrickson
		Chief Financial Officer
		(Principal financial and accounting officer)

4943

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	3

	Consolidated Statements of Net Income for the ~~three~~Three Months Ended March 31, 2023 and ~~six months ended June 30,~~ 2022 ~~and 2021~~	4

	Consolidated Statements of Comprehensive Income for the ~~three~~Three Months Ended March 31, 2023 and ~~six months ended June 30,~~ 2022 ~~and 2021~~	5

	Consolidated Statements of Cash Flows for the ~~six months ended June 30,~~Three Months Ended March 31, 2023 and 2022 ~~and 2021~~	6

	Consolidated Statements of Changes in Equity for the ~~three~~Three Months Ended March 31, 2023 and ~~six months ended June 30,~~ 2022 ~~and 2021~~	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3130

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	4640

Item 4.	Controls and Procedures	4741

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	4741

Item 1A.	Risk Factors	41

Item 6.	Exhibits	4942

	Signatures	4943

	Certifications

	Three Months Ended						For the Six Months Ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021

Net income	$	15,256		$	17,472		$	27,238		$	29,358
Other comprehensive loss
Unrealized loss on cash flow hedge		(531	)		0			(531	)		0
Tax effect at statutory rate (federal and state) of 25.55%		136			0			136			0
Comprehensive income	$	14,861		$	17,472		$	26,843		$	29,358

Comprehensive income attributable to non-controlling interest		(4,061	)		(5,036	)		(7,244	)		(8,749	)
Comprehensive income attributable to USPH shareholders	$	10,800		$	12,436		$	19,599		$	20,609

Acquisition	Date	Acquired			Clinics
March 2022 Acquisition	March 31, 2022		70	%		6
December 2021 Acquisition	December 31, 2021		75	%		3
November 2021 Acquisition	November 30, 2021		70	%	0	IIPS*
September 2021 Acquisition	September 30, 2021		100	%	0	IIPS*
June 2021 Acquisition	June 30, 2021		65	%		8
March 2021 Acquisition	March 31, 2021		70	%		6

	Physical Therapy Operations
Cash paid, net of cash acquired	$	11,799
Seller notes		374
Contingent payments		100
Total consideration	$	12,273

Estimated fair value of net tangible assets acquired:
Total current assets	$	466
Total non-current assets		2,655
Total liabilities		(2,664	)
Net tangible assets acquired		457
Customer and referral relationships		3,742
Non-compete agreements		247
Tradenames		659
Goodwill		12,114
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(4,946	)
	$	12,273