~~3. REVENUE RECOGNITION~~

~~Revenues are recognized~~The results of operations of the acquisitions below have been included in the ~~period in which services are rendered. Net patient revenue consists~~Company’s unaudited consolidated financial statements since their respective date of revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenue (patient revenues less estimated contractual 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. 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 servicesacquisition. Unaudited proforma consolidated financial information for the ~~reimbursement rates stipulated~~acquisitions have not been included, as the results, individually and in the ~~payor contracts. The execution of the contract alone does~~aggregate, were 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 offsetmaterial to current operations. ~~revenue—contractual~~ ~~allowance. The payment for the services rendered is due to the Company based on the respective payor contract. Typically, we receive payment within thirty to forty-five days of 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.

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Three Months Ended

March 31, 2023 March 31, 2022
Net patient revenue $ 126,581 $ 109,538
Other revenue
799 872
Physical therapy operations
$ 127,380 $ 110,410
Management contract revenue

1,779
2,226
Industrial injury prevention services revenue 19,350 19,068
$ 148,509 $ 131,704

~~Medicare Reimbursement~~

T~~he Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2017 through 2019, a~~ ~~0.5% increase~~ ~~was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025~~ 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, Centers for Medicare and Medicaid Services (“CMS”) revised coding, documentation guidelines, and increased the code values for office/outpatient evaluation and management (“E/M”) codes and cuts to other codes to maintain budget neutrality of the MPFS beginning in 2021. Under the 2021 MPFS Final Rule, CMS increased the values for the E/M office visit codes and made cuts to other specialty codes to maintain budget neutrality. As a result, CMS projected a 9% decrease in fee schedule payment rates for therapy services set to take effect in 2021. However, Congress intervened with passage of the Consolidated Appropriations Act, 2021 and reimbursement for the codes applicable to physical/occupational therapy services provided by our clinics received an estimated 3.5% decrease in the aggregate in payment from Medicare in calendar year 2021 as compared to 2020.

In the 2022 MPFS Final Rule, 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 Medicare rate reduction for 2022 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 4.5% reduction in the Physician Fee Schedule conversion factor. However, this reduction was addressed in the Consolidated Appropriations Act, 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 of approximately 2% in 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 next~~ ten years and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. In 2013, a 2% reduction to Medicare payments was implemented. The Bipartisan Budget Act of 2015 extended the 2% reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 2018 extends the 2% reductions to Medicare payments through fiscal year 2027. T~~he CARES Act suspended the~~ 2% ~~payment reduction to Medicare payments for dates of service from May 1, 2020, through December 31, 2020, and the Consolidated Appropriations Act, 2021 further suspended the~~ 2% ~~payment reduction through March 2021. In April 2021, additional legislation was enacted that waived the~~ 2% ~~payment reduction for the remainder of calendar 2021~~. The 2021 Act included a three-month extension of the 2% sequester relief applied to all Medicare payments through March 2022, followed by three months of 1% sequester relief through June 30, 2022. Sequester relief 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 performance is assessed according to established performance standards each year and then is used to determine an adjustment factor that is applied to the professional~~’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 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%.

~~Under the Middle-Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceede~~d $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The 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 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate.

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

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

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

Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that 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 financial statements as of 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. ForDuring the three months ended March 31, ~~2023,~~2024, the Company acquired a majority interest in the following businesses:

2024 Acquisitions

		% Interest		Number of
Acquisition	Date	Acquired		Clinics
March 2024 Acquisition	March 29, 2024		50%		9

On March 29, 2024, the Company acquired a 50% equity interest in a nine-clinic physical therapy and hand therapy practice. The original owners of the practice retained the remaining 50%. The purchase price for the 50% equity interest was approximately $16.4 million, of which $0.5 million was in the form of a note payable. The note accrues interest at 4.5% per annum and the principal and the interest are payable on March 29, 2026. As part of the transaction, the Company agreed to additional contingent consideration if future operational objectives are met. There is no maximum payout. The contingent consideration is valued at $0.5 million as of March 31, ~~2022, respectively, net patient revenue from Medicare~~2024.

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Besides the multi-clinic acquisition referenced above, the Company purchased the assets and business of two physical therapy clinics, which were ~~approximately $41.9~~tucked into larger partnerships in separate transactions.

	Physical Therapy
	Operations
	(In thousands)
Cash paid, net of cash acquired	$	15,971
Seller note		500
Deferred payments		-
Contingent payments		500
Total consideration	$	16,971

Estimated fair value of net tangible assets acquired:
Total current assets	$	-
Total non-current assets		476
Total liabilities		(450	)
Net tangible assets acquired		26
Customer and referral relationships		6,790
Non-compete agreement		328
Tradenames		1,672
Goodwill		25,056
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(16,901	)
	$	16,971

~~million~~Total current assets primarily represent accounts receivable while total non-current assets consist of fixed assets and $equipment used in the practice.

For the acquisitions in 2024, the values assigned to the customer and referral relationships and non-compete agreement are being amortized on a straight-line basis over their respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For the non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment.~~35.6~~ ~~million, respectively.~~

~~Given~~2023 Acquisitions

		% Interest		Number of
Acquisition	Date	Acquired		Clinics
October 2023 Acquisition	October 31, 2023		**		*
September 2023 Acquisition 1	September 29, 2023		70%		4
September 2023 Acquisition 2	September 29, 2023		70%		1
July 2023 Acquisition	July 31, 2023		70%		7
May 2023 Acquisition	May 31, 2023		45%		4
February 2023 Acquisition	February 28, 2023		80%		1

*	IIP business.

**	On October 31, 2023, the Company concurrently acquired 100% of an IIP business and a 55% equity interest in an ergonomics software business.

On October 31, 2023, the ~~history~~Company concurrently acquired 100% of ~~frequent revisions~~an IIP business and a 55% equity interest in an ergonomics software business. The previous owner of the ergonomics software business retained a 45% equity interest. The total purchase price of the combined businesses was approximately $4.0 million and was paid in cash.

On September 29, 2023, the Company acquired a 70% equity interest in a four-clinic physical therapy practice. The original owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $6.0 million, of which $5.4 million was paid in cash, and $0.6 million was in the form of a note payable. The note accrues interest at 5.0% per annum and the principal and interest are payable in two installments. The first payment of principal and interest of $0.3 million was paid in January 2024 and the second installment of $0.3 million is due on September 30, 2025.

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In a separate transaction, on September 29, 2023, the Company acquired a 70% equity interest in a single clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $7.8 million, of which $7.4 million was paid in cash and $0.4 million is a deferred payment due on June 30, 2025.

On July 31, 2023, the Company acquired a 70% equity interest in a five-clinic practice. The practice’s owners retained a 30% equity interest. The purchase price for the 70% equity interest was approximately $2.1 million, of which $1.8 million was paid in cash and $0.3 million is a deferred payment due on June 30, 2025.

On May 31, 2023, the Company and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, the Company’s ownership interest is 45%, the Company’s local partner’s ownership interest is 30%, and the practice’s pre-acquisition owners have a 25% ownership interest. The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by the Company, $1.1 million was paid in cash by the local partner, and $0.3 million was in the form of a note payable, (of which $0.2 million will be paid by the Company and $0.1 million will be paid by the local partner). The note will be paid on July 1, 2024. The Company guaranteed full payment of $0.3 million on its due date.

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.

The aggregate purchase price for the 2023 acquisitions has been preliminarily allocated as follows:

	Physical Therapy
	IIP			Operations			Total
	(In thousands)
Cash paid, net of cash acquired	$	3,955		$	22,627		$	26,582
Seller note		-			985			985
Deferred payments		-			830			830
Contingent payments		-			200			200
Total consideration	$	3,955		$	24,642		$	28,597

Estimated fair value of net tangible assets acquired:
Total current assets	$	388		$	1,079		$	1,467
Total non-current assets		335			3,150			3,485
Total liabilities		(41	)		(3,138	)		(3,179	)
Net tangible assets acquired		682			1,091			1,773
Customer and referral relationships		757			7,285			8,042
Non-compete agreement		37			359			396
Tradenames		187			1,580			1,767
Goodwill		2,566			25,160			27,726
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(274	)		(10,833	)		(11,107	)
	$	3,955		$	24,642		$	28,597

Besides the multi-clinic acquisitions referenced in the table above, the Company purchased the assets and business of eight physical therapy clinics in separate transactions.

Total current assets primarily represent accounts receivable while total non-current assets consist of fixed assets and equipment used in the practice.

For the acquisitions in 2023, the values assigned to the ~~Medicare program~~customer and ~~its reimbursement rates~~referral relationships and ~~rules,~~non-compete agreements are being amortized on a straight-line basis over their respective estimated lives. For customer and referral relationships, the ~~Company may not continue~~weighted-average amortization period is 12.0 years. For the non-compete agreements, the weighted-average amortization period is 5.1 years. The values assigned to ~~receive reimbursement rates from Medicare that sufficiently compensate it~~tradenames are tested annually for ~~the Company~~’~~s services or, in some instances, cover the Company~~’~~s operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on the Company~~’s revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect the Company’~~s business, financial condition and results of operations.~~impairment.

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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~~Contractual Allowances~~

4. Redeemable Non-Controlling Interest

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 March 31, 2023.~~

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.Physical Therapy Practice Acquisitions

The Company’s performance obligations are satisfied at a point in time. After the clinic has provided services and satisfied its obligation to the customer for the reimbursement rates stipulated in the payor contracts (i.e. the transaction price), the Company recognizes the revenue, net of contractual allowances, in the period in which the services are rendered. The Company recognizes the full amount of revenue and reports the contractual allowances as a contra (or offset) revenue account to report a net revenue number based on the expected collections.

~~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).

~~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~~When the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic ~~business~~ (referred to as “Therapy Practice”), these ~~Acquisitions~~Therapy Practice transactions 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 acquired Therapy Practice and provide physical therapy services to patients.

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~~

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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~~mileage radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in competing ~~businesses~~Therapy Practices or activities outside the ~~defined mileage~~designated geography (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~~Therapy Practice or activities outside the ~~defined mileage.~~designated geography.

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

a)a.

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

b)b.

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

c)c.

In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the ~~Specified~~fifth anniversary of the Closing Date, the Seller Entity ~~shall have~~has 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

a)a.

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

b)b.

In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after ~~Specified~~the fifth anniversary of the Closing Date, the Company ~~shall have~~has 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,~~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~~

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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~~IIP 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 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”).

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 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:

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:

2120

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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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~~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~~Rights

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”).~~NewCo. 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.

For 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.

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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Carrying Amounts of Redeemable Non-Controlling Interests~~For the~~ ~~dates indicated,~~

~~the~~The following table details the changes in the carrying amount (fair value) of the Company’sredeemable non-controlling ~~interest (in~~ ~~thousands):~~interests:

	Three Months Ended			Year Ended			Three Months Ended				Year Ended
	March 31, 2023			December 31, 2022				March 31, 2024				December 31, 2023
								(In thousands)
Beginning balance	$	167,515		$	155,262			$	174,828			$	167,515
Operating results allocated to redeemable non-controlling interest partners		2,720			6,902
Net income allocated to redeemable non-controlling interest partners									2,227				4,426
Distributions to redeemable non-controlling interest partners		(2,158	)		(10,102	)			(2,100	)			(11,533	)
Changes in the fair value of redeemable non-controlling interest		(119	)		3,862				1,439				13,565
Purchases of redeemable non-controlling interest		(6,156	)		(16,061	)			(2,777	)			(12,073	)
Acquired interest		1,754			26,746				16,901				11,007
Contributed Capital		-			231
Sales of redeemable non-controlling interest - temporary equity		639			1,982
Notes receivable related to sales of redeemable non-controlling interest - temporary equity		532			(1,901	)
Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity		(444	)		594
Sales of redeemable non-controlling interest									382				5,012
Changes in notes receivable related to redeemable non-controlling interest									(167	)			(3,091	)
Ending balance	$	164,283		$	167,515			$	190,733			$	174,828

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

	March 31, 2023		December 31, 2022		March 31, 2024			December 31, 2023
						(In thousands)
Contractual time period has lapsed but holder’s employment has not terminated	$	70,321	$	75,688		$	76,938		$	96,876
Contractual time period has not lapsed and holder’s employment has not terminated		93,962		91,827			113,795			77,952
Holder’s employment has terminated and contractual time period has expired		-		-			-			-
Holder’s employment has terminated and contractual time period has not expired		-		-			-			-
	$	164,283	$	167,515		$	190,733		$	174,828

~~6. GOODWILL~~5. Goodwill

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

Three Months Ended Year Ended
March 31, 2023 December 31, 2022

Beginning balance $ 494,101 $ 434,679
Goodwill acquired 5,424 72,674
Goodwill adjustments for purchase price allocation of businesses acquired in prior year 1,822 (4,140 )
Goodwill impairment
- (9,112 )
Ending balance $ 501,347 $ 494,101

	Three Months Ended			Year Ended
	March 31, 2024			December 31, 2023
	(In thousands)
Beginning balance	$	509,571		$	494,101
Acquisitions		25,056			28,083
Adjustments for purchase price allocation of businesses acquired in prior year		(356	)		3,187
Impairment of goodwill		-			(15,800	)
Ending balance	$	534,271		$	509,571

For the three months ended March 31, 2024 and 2023, no triggering events or indicators were identified that would require impairment assessments as of such periods. During the year ended December 31, ~~2022,~~2023, the Company recorded a charge for goodwill impairment of ~~$9.1~~$15.8 million related to ~~the~~an 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.acquisition.

~~7. INTANGIBLE ASSETS, NET~~6. Intangible Assets, Net

~~Intangible~~The Company’s intangible assets, net, ~~as of March 31, 2023, and December 31, 2022~~ consisted of the ~~following (in thousands):~~following:

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

	March 31, 2024							December 31, 2023
	Gross Amount		Accumulated Amortization			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Customer and referral relationships	$	100,914	$	(32,231	)	$	68,683	$	93,658	$	(30,414	)	$	63,244
Tradenames		46,145		-			46,145		44,573		-			44,573
Non-compete agreements		9,818		(7,758	)		2,060		9,459		(7,594	)		1,865
	$	156,877	$	(39,989	)	$	116,888	$	147,690	$	(38,008	)	$	109,682

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 77.0 to 1614.0 years. Non-compete agreements are amortized over the respective term of the agreements which range from 55.0 to 66.0 years. For the three months ended March 31, 2024, the weighted average amortization period for customer and referral relationships was 12.7 years and the weighted average amortization period for non-compete agreements was 5.5 years. During the year ended December 31, 2023, the Company recognized a charge of $1.7 million related to the impairment of a tradename related to an IIP acquisition.

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

					Three Months Ended
	Three Months Ended		Three Months Ended		March 31, 2024		March 31, 2023
	March 31, 2023		March 31, 2022		(In thousands)
Customer and referral relationships	$	1,664	$	2,050	$	1,818	$	1,664
Non-compete agreements		153		147		163		153
	$	1,817	$	2,197	$	1,981	$	1,817

Based on the balance of referral relationships and non-compete agreements as of March 31,~~2023,~~ 2024, the expected amount to be amortized in ~~2023~~2024 and thereafter by year is as ~~follows (in~~ ~~thousands):~~follows:

Customer and Referral Relationships Non-Compete Agreements
Years Annual Amount Years Annual Amount
Ending December 31, Ending December 31,
2023 (excluding the three months ended March 31, 2023)
$ 5,096
2023 (excluding the three months ended March 31, 2023)
$ 464
2024 $ 6,636 2024 $ 576
2025 $ 6,492 2025 $ 505
2026 $ 6,023 2026 $ 365
2027 $ 5,860 2027 $ 157
Thereafter $ 33,053

For the Year Ended December 31,	Customer and Referral Relationships		Non-Compete Agreements
	(In thousands)
2024 (excluding the three months ended March 31, 2024)	$	5,645	$	497
2025		7,428		605
2026		6,960		465
2027		6,797		303
2028		6,528		169
Thereafter	$	35,325	$	21

~~8. ACCRUED EXPENSES~~7. Accrued Expenses

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

					March 31, 2024		December 31, 2023
	March 31, 2023		December 31, 2022		(In thousands)
Salaries and related costs	$	16,975	$	22,912	$	17,104	$	25,641
Credit balances due to patients and payors		7,962		8,094		7,905		8,847
Dividend payable						6,630		-
Group health insurance claims		2,930		1,666		2,658		2,301
Federal income taxes payable						1,915		1,006
Contingency payable						10,074		12,285
Other property taxes payable						386		355
Purchase of redeemable non-controlling interests						1,495		-
Interest payable						255		235
Closure costs		230		243		251		231
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		-		5,076		4,443
Total	$	45,220	$	37,413	$	53,749	$	55,344

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8. Borrowings

Amounts outstanding under the Company’s Senior Credit Facilities (as defined below) and notes payable consisted of the following:

~~9. BORROWINGS~~

	March 31, 2024							December 31, 2023
	Principal Amount		Unamortized discount and debt issuance cost			Net Debt		Principal Amount		Unamortized discount and debt issuance cost			Net Debt
	(In thousands)
Term Facility	$	143,437	$	(1,350	)	$	142,087	$	144,375	$	(1,468	)	$	142,907
Revolving Facility		-		-			-		-		-			-
Other (1)		3,884		-			3,884		3,775		-			3,775
Total debt		147,321		(1,350	)		145,971		148,150		(1,468	)		146,682
Less: Current portion of long-term debt		9,642		(420	)		9,222		8,111		(420	)		7,691
Long-term debt, net of current portion	$	137,679	$	(930	)	$	136,749	$	140,039	$	(1,048	)	$	138,991

(1)	The long-term portion is included as part of Other Long-Term Liabilities in the unaudited Consolidated Balance Sheet.

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, 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~~

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

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
Revolving Facilitiy $ 38,000 $ - $ 38,000 $ 31,000 $ - $ 31,000
Term Facility 147,188 1,757 145,431 148,125 1,861 146,264
Other Debt 6,980 - 6,980 6,430 - 6,430
Total Debt $ 192,168 $ 1,757 $ 190,411 $ 185,555 $ 1,861 $ 183,694
Less: Current portion of long-term debt 7,730 -
7,730 8,271 408 7,863
Total long-term debt, net of current portion $ 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.

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The Company 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~~

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

As of March 31, ~~2023,~~2024, $~~185.2~~143.4 million was outstanding on the ~~Senior Credit Facilities,~~Term Facility while none was outstanding under the Revolving Facility resulting in $~~137.0~~175.0 million of ~~availability on the Revolving Facility.~~credit availability. As of March 31, ~~2023,~~2024, the Company was in compliance with all of the covenants contained in the Credit Agreement.

The interest rate on the Company’s term loan was 4.7% for the three months ended March 31, 2024, and 4.9% for the three months ended March 31, 2023, with an all-in effective interest rate, including all associated costs, of 5.3% and 5.5% over the same periods, respectively.

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~~acquisitions in the years ended December 31, 2022, 2023 and ~~2022,~~2024, the Company entered into notes payable in the aggregate amount of ~~$7.4~~$3.9 million, of which ~~an aggregate principal payment of $0.4 million was paid in the three months ended March 31, 2023,~~ ~~$4.1 million~~ ~~is due later in 2023,~~ ~~$1.9 million~~ ~~is due in~~ ~~2024 and $1.0~~$3.1 million is due in ~~2025.~~2025 and $0.8 million is due in 2026. Interest accrues in the range of ~~3.25%~~3.5% to ~~8.0%~~8.5% per annum and is payable with each principal installment.

~~10.~~9. ~~DERIVATIVE INSTRUMENTS~~
Derivative Instruments

The Company is exposed to certain market risks ~~during~~in 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~~had 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.

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

							Three Months Ended
	For the Three Months Ended						March 31, 2024			March 31, 2023
	March 31, 2023			March 31, 2022			(In thousands)
Net income	$	11,427		$	11,982		$	11,617		$	11,427
Other comprehensive loss
Unrealized loss on cash flow hedge		(1,817	)		-
Other comprehensive gain (loss):
Unrealized gain (loss) on cash flow hedge								1,781			(1,817	)
Tax effect at statutory rate (federal and state)		464			-			(455	)		464
Comprehensive income	$	10,074		$	11,982			12,943			10,074

Comprehensive income attributable to non-controlling interest		(4,017	)		(3,183	)		(3,571	)		(4,017	)
Comprehensive income attributable to USPH shareholders	$	6,057		$	8,799		$	9,372		$	6,057

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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 ~~derivatives (included~~derivatives (included in ~~Other~~other current assets and ~~Other assets~~)other assets) were as ~~follows~~:follows.

	March 31, 2024		March 31, 2023
Interest rate swap:	(In thousands)
Other current assets	$	2,979	$	2,614
Other assets		2,538		947
	$	5,517	$	3,561

March 31, 2023 March 31, 2022
Interest rate swap:
Other current assets

$
2,614

$
-

Other assets
$
947 $
-

~~11. LEASES~~10. 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. 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. 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 months ended March 31, 2023, and 2022, the~~The components of lease expense were as ~~follows (in thousands):~~follows.

						Three Months Ended
	Three Months Ended				March 31, 2024			March 31, 2023
	March 31, 2023		March 31, 2022			(In thousands)
Operating lease cost	$	9,365	$	8,404		$	9,953		$	9,365
Short-term lease cost		274		321			265			274
Variable lease cost		2,132		1,932			2,369			2,132
Total lease cost *	$	11,771	$	10,657		$	12,587		$	11,771

* Sublease income was immaterial

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

~~Supplemental~~The supplemental cash flow information related to leases was as ~~follows (in thousands):~~

follows.

	Three Months Ended					Three Months Ended
	March 31, 2023		March 31, 2022		March 31, 2024			March 31, 2023
						(In thousands)
Cash paid for amounts included in the measurement of operating lease liabilities	$	9,646	$	8,617		$	10,338		$	9,646

Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,281	$	6,011		$	7,727		$	6,281

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

The aggregate future lease payments for operating leases as of March 31, ~~2023~~2024, were as ~~follows (in thousands):~~follows.

Fiscal Year	Amount		Amount (In thousands)
2023	$	27,967
2024		31,548
2024 (excluding the three months ended March 31, 2024)			$	29,610
2025		23,584		32,448
2026		16,065		24,492
2027 and therafter		16,836
2027				16,571
2028 and thereafter				16,512
Total lease payments	$	116,000	$	119,633
Less: imputed interest		6,890		9,254
Total operating lease liabilities	$	109,110	$	110,379

Average lease terms and discount rates were as ~~follows:~~follows.

Three Months Ended

March 31, 2023

March 31, 2022

March 31, 2024

March 31, 2023

Weighted-average remaining lease term - Operating leases

4.0 Years

4.1 Years

3.9 years

4.0 years

Weighted-average discount rate - Operating leases

3.1%

2.7%

4.2%

3.1%

~~12. SEGMENT INFORMATION~~11. Segment Information

The Company’s reportable segments include the physical therapy operations segment and the ~~industrial injury prevention services~~IIP 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~~athletic trainers for schools.

Physical Therapy Operations

The physical therapy operations segment primarily operates through subsidiary clinic partnerships (“Clinic Partnerships”), in which the Company generally owns a 1% general partnership interest in all the Clinic Partnerships. The Company’s limited partnership interests generally range from 65% to 75% (the range is 10% - 99%) 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”).

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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 on 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 one clinic location.

Besides the multi-clinic acquisitions referenced in the table above, during the three months ended March 31, 2024 and the year ended December 31, 2023, the Company purchased the assets and businesses of two and eight physical therapy clinics, respectively, in separate transactions.

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 and income statements as non-controlling interest—permanent equity. For acquired Clinic Partnerships with redeemable non-controlling interests, the earnings attributable to the redeemable non-controlling interests are recorded within the consolidated balance sheets and income statements as redeemable non-controlling interest—temporary equity.

Wholly-Owned Facilities

For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due the clinic partners/directors. The amount is expensed as compensation and included in clinic operating costs—salaries and related costs. The respective liability is included in current liabilities—accrued expenses on the consolidated balance sheets.

Industrial Injury Prevention Services

Services provided in the IIP segment include onsite 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 primarily of specialized certified athletic ~~trainers.~~trainers (“ATCs”).

Segment Financials

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.

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

	Three Months Ended				Three Months Ended
	March 31, 2023		March 31, 2022			March 31, 2024		March 31, 2023
Net operating revenue:
						(In thousands)
Net revenue:
Physical therapy operations	$	129,159	$	112,636		$	134,425	$	129,159
Industrial injury prevention services		19,350		19,068			21,250		19,350
Total Company						$	155,675	$	148,509

Operating Costs:
Salaries and related costs:
Physical therapy operations						$	79,774	$	73,886
Industrial injury prevention services							13,957		12,154
Total salaries and related costs						$	93,731	$	86,040
Rent supplies, contract labor and other:
Physical therapy operations						$	28,960	$	26,672
Industrial injury prevention services							2,956		3,428
Total rent, supplies, contract labor and other						$	31,916	$	30,100
Provision for credit losses:
Physical therapy operations						$	1,627	$	1,512
Industrial injury prevention services							-		-
Total provision for credit losses						$	1,627	$	1,512
Total Company	$	148,509	$	131,704		$	127,274	$	117,652

Gross profit:
Physical therapy operations	$	27,089	$	22,436		$	24,064	$	27,089
Industrial injury prevention services		3,768		4,152			4,337		3,768
Total Company	$	30,857	$	26,588		$	28,401	$	30,857

Total Assets:
Physical therapy operations	$	726,422	$	608,240		$	872,976	$	726,422
Industrial injury prevention services		141,705		155,623			144,280		141,705
Total Company	$	868,127	$	763,863		$	1,017,256	$	868,127

~~Index~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~13. INVESTMENT IN UNCONSOLIDATED AFFILIATE~~12. Investment in Unconsolidated Affiliate

Through one of 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 company, the Company’s investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of March 31, ~~2023,~~2024, is $12.2 million and the earnings amounted to approximately $0.3 ~~million for the three months ended March 31,2023.~~million.

~~14. SUBSEQUENT EVENT~~13. Subsequent Events

~~The~~On May 7, 2024, the Company’s Board of Directors declared a quarterly dividend of ~~$0.43~~$0.44 per share payable on June ~~9, 2023,~~14, 2024, to shareholders of record on May ~~18, 2023.~~ 23, 2024.

On April 30, 2024, one of the Company’s primary IIP businesses, Briotix Health Limited Partnership, acquired 100% of an IIP business for a closing purchase price of $24.0 million, with provision for additional purchase price based on the financial performance of the acquired business during the 12-month period after closing.

~~Index~~Table of Contents

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following ~~is a~~ discussion and analysis of ~~our historical consolidated financial condition~~U.S. Physical Therapy, Inc. and ~~results of operations, and~~its subsidiaries (herein referred to as “we,” “us,” “our” or the “Company”) 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; and (ii) our Annual Report on Form 10-K for the year ended December 31, ~~2022~~2023 filed with the Securities and Exchange Commission (the “SEC”) on February ~~28,~~ 29, 2024 (“2023 ~~(“2022~~ Annual Report”)~~; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 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 below.

~~Forward-Looking Statements~~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 following.~~to:

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 future public health crises and epidemics/pandemics, such as was the case with the novel strain of COVID-19 and its variants;

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

the impact of ~~COVID-19 related vaccination~~future vaccinations 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:~~operations;

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~~

contingent consideration provisions in certain 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~~employees;

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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;

our ability to identify and complete 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;~~Act, or may interfere with our ability to file and process claims for payment which could interfere with our collection of revenues from third party payors;

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;

if our noncompetition covenants with employed therapists are nullified, we may lose staff to competitors;

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~~our business through our reportable segments which include (1) the physical therapy ~~clinics that provide pre-~~operations segment 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~~(2) the 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 therapy operations consist of physical therapy and occupational therapy clinics that provide ~~pre-and~~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, post-offer employment testing, functional 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. These services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers.

OnDuring the three months ended March 31, 2024 (“2024 First Quarter”) and for the year ended December 31, 2023, we ~~operated 647 clinics in 40 states. In addition to our ownership~~completed the acquisitions of clinic practices 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.IIP businesses detailed below:

		% Interest	Number of
Acquisition	Date	Acquired	Clinics
March 2024 Acquisition	March 29, 2024	50%	9
October 2023 Acquisition	October 31, 2023	**	*
September 2023 Acquisition 1	September 29, 2023	70%	4
September 2023 Acquisition 2	September 29, 2023	70%	1
July 2023 Acquisition	July 31, 2023	70%	7
May 2023 Acquisition	May 31, 2023	45%	4
February 2023 Acquisition	February 28, 2023	80%	1

*	IIP business.

**	On October 31, 2023, we concurrently acquired 100% of an IIP business and a 55% equity interest in an ergonomics software business.

~~Index~~Table of Contents

~~During the three months ended~~ ~~March 31, 2023 (“2023 First Quarter) and~~The following table provides a roll forward of our clinic count for the ~~year ended December 31, 2022, we completed the acquisitions of six clinic practices as detailed below.~~periods presented.

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

	Three Months Ended
	March 31, 2024			March 31, 2023
Number of clinics, beginning of period		671			640
Additions (1)		14			8
Closed or sold		(6	)		(1	)
Number of clinics, end of period		679			647

(1)	Includes clinics added through acquisitions.

~~During~~Our strategy is to continue acquiring outpatient physical therapy practices, develop outpatient physical therapy clinics as satellites in existing partnerships, and continue acquiring companies that provide or serve our IIP sector.

Our Board of Directors declared a quarterly dividend of $0.44 per share payable on June 14, 2024 to shareholders of record on May 23, 2024.

Regulatory Changes

The following is a discussion of some of the significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our 2023 ~~First Quarter, the Company closed one clinic.~~Annual Report.

Medicare Reimbursement

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). Outpatient rehabilitation providers may enroll in Medicare as institutional outpatient rehabilitation facilities (i.e., rehab agencies) or individual physical or occupational therapists in private practice. The majority of our clinicians are enrolled as individual physical or occupational therapists in private practice while the remaining balance of providers are reimbursed through enrolled rehab agencies. The following is a summary of significant regulatory changes which have affected our results of operations as well as the policies and payment rates that may affect our future results of operations.

For calendar years 2021, 2022 and 2023, CMS’s expected decreases in Medicare reimbursement were partially offset by one-time increases in payments as a result of other legislation passed by Congress., resulting in decreases of approximately 3.5%, 0.75% and 2.0% in each of these years, respectively. For January 1 through March 8 of 2024, CMS’s final rule resulted in an approximate 3.5% decrease in Medicare payments for the therapy specialty. However, effective as of March 9, 2024, pursuant to the Consolidated Appropriations Act, 2024, Congress minimized the reduction in Medicare payments for therapy services for the balance of 2024, resulting in an approximate 1.8% reduction in Medicare payments for therapy services (rather than the 3.5% decrease).

In the final 2020 MPFS rule, CMS clarified that when the physical therapist is involved for the entire duration of the service and the physical therapist assistant (“PTA”) provides skilled therapy alongside the physical therapist, an identification of the PTA’s participation (as denoted by a “CQ modifier”) is not required. Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS applies the de minimis standard to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service. For dates of service on and after January 1, 2022, CMS pays for physical therapy and occupational therapy services provided by PTAs and occupational therapist assistants (“OTAs”) at 85% of the otherwise applicable Part B payment amount. CMS allows a timed service to be billed without a CQ (for PTA’s) or CO (for OTA’s) modifier when a PTA or OTA participates in providing care, but the physical therapist or occupational therapist meets the Medicare billing requirements without including the PTA’s or OTA’s minutes. This occurs when the physical therapist or occupational therapist provides more minutes than the 15-minute midpoint. The calendar year 2024 MPFS final rule did not contain any policy changes concerning the modifiers for services provided by physical therapy and occupational therapy assistants.

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RESULTS OF OPERATIONS

The defined terms, with their respective descriptions, used in the following discussions are listed below.

•	Mature clinics are clinics opened or acquired prior to January 1, 2023, and are still operating as of March 31, 2024.

•	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 daily visits 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.

•	2024 First Quarter refers to the three months ended March 31, 2024.

•	2023 First Quarter refers to the three months ended March 31, 2023.

2024 First Quarter versus 2023 First Quarter

	Three Months Ended										Variance
	March 31, 2024					March 31, 2023					$			%
	(In thousands, except percentages)

Net patient revenue	$	131,075		84.2	%	$	126,581		85.2	%	$	4,494			3.6	%
Other revenue		24,600		15.8	%		21,928		14.8	%		2,672			12.2	%
Net revenue		155,675		100.0	%		148,509		100.0	%		7,166			4.8	%

Operating Cost:
Salaries and related costs		93,731		60.2	%		86,040		57.9	%		7,691			8.9	%
Rent, supplies, contract labor and other		31,916		20.5	%		30,100		20.3	%		1,816			6.0	%
Provision for credit losses		1,627		1.0	%		1,512		1.0	%		115			7.6	%
Total operating cost		127,274		81.8	%		117,652		79.2	%		9,622			8.2	%

Gross Profit		28,401		18.2	%		30,857		20.8	%		(2,456	)		-8.0	%

Corporate office costs		14,085		9.0	%		13,859		9.3	%		226			1.6	%
Operating Income		14,316		9.2	%		16,998		11.4	%		(2,682	)		-15.8	%

Other (expense) income:
Interest expense, debt and other		(1,968	)	-1.3	%		(2,560	)	-1.7	%		592			-23.1	%
Interest income from investments		1,543		1.0	%		64		0.0	%		1,479			2310.9	%
Change in fair value of contingent earn-out consideration		612		0.4	%		(698	)	-0.5	%		1,310			-187.7	%
Change in revaluation of put-right liability		(80	)	-0.1	%		(149	)	-0.1	%		69			-46.3	%
Equity in earnings of unconsolidated affiliate		271		0.2	%		274		0.2	%		(3	)		-1.1	%
Relief Funds		-		0.0	%		467		0.3	%		(467	)		-100.0	%
Other		62		0.0	%		-		0.0	%		62			*	(1)
Total other (expense) income		440		0.3	%		(2,602	)	-1.8	%		3,042			-116.9	%

Income before taxes		14,756		9.5	%		14,396		9.7	%		360			2.5	%

Provision for income taxes		3,139		2.0	%		2,969		2.0	%		170			5.7	%
Net income		11,617		7.5	%		11,427		7.7	%		190			1.7	%

Less: Net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity		(2,227	)	-1.4	%		(2,720	)	-1.8	%		493			-18.1	%
Non-controlling interest - permanent equity		(1,344	)	-0.9	%		(1,297	)	-0.9	%		(47	)		3.6	%
		(3,571	)	-2.3	%		(4,017	)	-2.7	%		446			-11.1	%

Net income attributable to USPH shareholders	$	8,046		5.2	%	$	7,410		5.0	%	$	636			8.6	%

(1)	Not meaningful.

Total net revenue for the 2024 First Quarter increased $7.2 million, or 4.8%, to $155.7 million from $148.5 million for the 2023 First Quarter while operating costs increased $9.6 million, or 8.2%, to $127.3 million from $117.7 million over the same periods, respectively. Total operating cost was $127.3 million for the 2024 First Quarter, or 81.8% of total revenue, as compared to $117.7 million or 79.2% of total revenue for the 2023 First Quarter. Gross profit for the 2024 First Quarter was $28.4 million, or 18.2% of net revenue, compared to $30.9 million for the 2023 First Quarter, or 20.8% of net revenue.

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Net income attributable to our shareholders, a Generally Accepted Accounting Principle (“GAAP”) measure, was $8.0 million for the 2024 First Quarter compared to $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.Quarter. In accordance with ~~Generally Accepted Accounting Principles (“GAAP”),~~GAAP, the revaluation of redeemable 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,~~for the 2024 First Quarter was $0.46 compared to $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.~~The following table provides a calculation of earnings per share.

	Three Months Ended
	March 31, 2024			March 31, 2023
	(In thousands, except per share data)
Earnings per share
Computation of earnings per share - USPH shareholders:
Net income attributable to USPH shareholders	$	8,046		$	7,410
Charges to retained earnings:
Revaluation of redeemable non-controlling interest		(1,439	)		119
Tax effect at statutory rate (federal and state)		368			(30	)
	$	6,975		$	7,499

Earnings per share (basic and diluted)	$	0.46		$	0.58

Shares used in computation - basic and diluted		15,017			13,025

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~~The following tables provide details of the basic and diluted earnings 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, equalscomputation and reconcile net income attributable to our ~~diluted~~ shareholders ~~per the consolidated statements of income, less a change~~calculated in ~~revaluation of the put-right liability, Relief Funds, changes in fair value of contingent earn-out consideration,~~accordance with GAAP to Adjusted EBITDA 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~~(non-GAAP measures). Management believes providing Adjusted EBITDA 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~~investors 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. Management uses Adjusted EBITDA and Operating Results, which eliminate certain items described above that can be subject to volatility and unusual costs, as the principal measures to evaluate and monitor financial performance period over period.

Adjusted EBITDA is defined as net income attributable to our shareholders before interest income, interest expense, taxes, depreciation, amortization, change in fair value of contingent earn-out consideration, Relief Funds, changes in revaluation of put-right liability, equity-based awards compensation expense, other income and related portions for non-controlling interests.

Operating Results equals net income attributable to our shareholders less, changes in revaluation of a 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 share also excludes the impact of the revaluation of redeemable non-controlling interest and the associated tax impact.

Adjusted EBITDA and Operating Results 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.

3234

~~Index~~Table of Contents

	Three Months Ended
	March 31, 2024			March 31, 2023
	(In thousands, except per share data)
Adjusted EBITDA (a non-GAAP measure)
Net income attributable to USPH shareholders	$	8,046		$	7,410
Adjustments:
Provision for income taxes		3,139			2,969
Depreciation and amortization		4,095			3,788
Interest expense, debt and other, net		1,968			2,560
Interest income from investments		(1,543	)		(64	)
Equity-based awards compensation expense		1,997			1,806
Change in revaluation of put-right liability		80			149
Change in fair value of contingent earn-out consideration		(612	)		698
Relief Funds		-			(467	)
Other income		(62	)		-
Allocation to non-controlling interests		(432	)		(371	)
	$	16,676		$	18,478

Operating Results (a non-GAAP measure)
Net income attributable to USPH shareholders	$	8,046		$	7,410
Adjustments:
Change in fair value of contingent earn-out consideration		(612	)		698
Change in revaluation of put-right liability		80			149
Relief Funds		-			(467	)
Allocation to non-controlling interests		-			33
Tax effect at statutory rate (federal and state)		136			(105	)
	$	7,650		$	7,718

Operating Results per share (a non-GAAP measure)	$	0.51		$	0.59

~~The following tables provide detail~~

Adjusted EBITDA was $16.7 million for the 2024 First Quarter compared to $18.5 million in the 2023 First Quarter, with the variance due to the Medicare rate reductions that took effect at the beginning of the ~~diluted earnings per share computation~~year and ~~reconcile net income attributable to our shareholders calculated~~the adverse impact of weather events in ~~accordance with GAAP to~~January 2024. The Medicare rate reductions decreased 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 presentationby approximately $1.7 million while the adverse weather resulted in a decrease in Adjusted EBITDA of approximately $1.3 million.

33Operating Results was $7.7 million, or $0.51 per share, in the 2024 First Quarter as compared to $7.7 million, or $0.59 per share, in the 2023 First Quarter, with the decrease attributable to the increase in shares outstanding associated with the Company's secondary offering completed in May 2023, as well as the Medicare rate reduction and adverse impact of weather events in January 2024.

~~Index~~Table of Contents

~~2023 First Quarter Compared to 2022 First Quarter Results~~Physical Therapy Operations

~~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						Variance
	March 31, 2024			March 31, 2023			$			%
	(In thousands, except percentages)
Revenue related to:
Mature Clinics (1)	$	123,267		$	125,485		$	(2,218	)		(1.8	)%
Clinic additions (2)		7,561			371			7,190			*	(6)
Clinics sold or closed (3)		247			725			(478	)		*	(6)
Net Patient Revenue		131,075			126,581			4,494			3.6	%
Other (4)		3,350			2,578			772			29.9	%
Total		134,425			129,159			5,266			4.1	%
Operating costs (4)		110,361			102,070			8,291			8.1	%
Gross profit	$	24,064		$	27,089		$	(3,025	)		(11.2	)%


Financial and operating metrics (not in thousands):
Net rate per patient visit (1)	$	103.37		$	103.12		$	0.25			0.2	%
Patient visits (1)		1,268,002			1,227,490			40,512			3.3	%
Average daily visits per clinic (1)		29.5			29.8			(0.3	)		(1.0	)%
Gross margin		17.9	%		21.0	%
Salaries and related costs per visit, clinics (5)	$	61.42		$	59.14		$	2.28			3.9	%
Operating costs per visit, clinics (5)	$	85.50		$	81.97		$	3.53			4.3	%

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 - Revenue Metrics for definitions.

~~(1)~~

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

(2) Includes 14 clinics added during the 2024 First Quarter and 46 clinic added during the year ended December 31, 2023.

(3) Includes six clinics closed during the 2024 First Quarter and 15 clinics closed during the year ended December 31, 2023.

(4) Includes revenues and costs from management contracts.

(5) Per visit costs excludes management contract costs.

(6) Not meaningful.

~~(2)~~

~~Not meaningful.~~

~~Revenue~~Revenues

Net revenue from physical therapy operations increased ~~$17.0~~$5.3 million, or ~~15.4%~~4.1%, to ~~$127.4~~$134.4 million for the 2024 First Quarter from $129.2 million for the 2023 First Quarter. This increase was primarily due to the increase in visits from the 32 net new clinics added since the comparable prior year period partially offset by an approximate $3.6 million adverse impact of weather in January 2024. Additionally, net rate per patient visit increased to $103.37 for the 2024 First Quarter from $103.12 for the 2023 First Quarter. This increase was mainly driven by higher reimbursement rates from commercial and other payors as a result of contract negotiations and an increase in workers compensation as a percent of the Company’s total net patient revenues, partially offset by the Medicare rate reductions that took effect at the beginning of the year which decreased net patient revenues by approximately $1.9 million for the 2024 First Quarter. The Medicare rate reductions will be less impactful in future quarters as the Consolidated Appropriations Act of 2024 adjusted the Medicare rate reduction to 1.8% from 3.5%, effective on March 9, 2024. Other revenues increased $0.8 million, or 29.9%, to $3.4 million for the 2024 First Quarter from $2.6 million for the 2023 First Quarter ~~from $110.4 million for the 2022 First Quarter primarily~~ due to ~~a 15.4%~~the increase in the number of management contracts since the comparable prior year period.

Average daily visits per clinic was 29.5 for the 2024 First Quarter compared to 29.8 in the comparable prior year quarter. Total patient visits were 1,268,002 in the 2024 First Quarter, a 3.3% increase from 2023 First Quarter. Average daily visits per clinic in January 2024 of 27.4 were lower than the prior year of 28.9, while average daily visits per clinic in February and March of 2024 were higher than the prior year, the highest volumes for those two months in the Company’s history.

Operating costs

Operating costs from physical therapy operations increased by $8.3 million or 8.1% to ~~1,227,490 for~~$110.4 million in the ~~2023~~2024 First Quarter from ~~1,063,519 in the 2022 First Quarter. Net patient revenue per visit increased to $103.12~~$102.1 million in the 2023 First Quarter ~~from $103.00 in~~primarily driven by costs associated with the ~~2022 First Quarter.~~

~~IIP services revenue increased to $19.4 million for~~32 net new clinics added since the ~~2023 First Quarter as compared to $19.1 million for the 2022 First Quarter.~~

comparable prior year period. 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%~~costs were 82.1% of net revenue for the ~~2022~~2024 First ~~Quarter. Salaries and related costs were 57.9%~~Quarter compared to 79.0% of net revenue for the 2023 First ~~Quarter versus 57.1%~~Quarter. On a per visit basis (excluding management contracts), operating costs increased to $85.50 for the ~~2022~~2024 First ~~Quarter. Rent, supplies, contract labor and other costs as a percentage of total revenue were 20.3%~~Quarter from $81.97 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.

3436

~~Index~~Table of Contents

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 salariesSalaries and related costs related to ~~a 6.0% increase in patient visits at mature clinics.~~

~~IIP services operating costs~~clinics (excluding management contracts) increased ~~by $0.7 million, or 4.5%,~~ to ~~$15.6 million as compared to $14.9~~$77.9 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~~2024 First Quarter ~~versus $75.1 million or 57.1% for the 2022 First Quarter. Salaries and related costs for the physical therapy operations was~~from $72.6 million, in the 2023 First Quarter, an increase of $5.3 million, 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.~~7.3%. Salaries and related costs per visit, related to clinics increased to $61.42 for the ~~IIP business was $12.1 million in~~2024 First Quarter from $59.14 for 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.~~Quarter.

~~Operating Cost—Rent, Supplies, Contract Labor and Other~~

Rent, supplies, contract labor and other costs ~~as a percentage of total revenue were $30.1~~related to clinics (excluding management contracts) increased to $28.9 million ~~or 20.3% for~~in the 2024 First Quarter from $26.5 million in the 2023 First Quarter, ~~versus $28.7~~an increase of $2.4 million, or ~~21.8% for~~9.0% mostly due to the ~~2022 First Quarter.~~32 net new clinics added since the comparable prior year period. Rent, supplies, contract labor and other costs, increased on a per visit basis to $22.80 for the ~~physical therapy operations was $26.5~~2024 First Quarter compared to $21.60 for the 2023 First Quarter. Operating costs related to management contracts increased $0.5 million from $1.4 million in the 2023 First Quarter ~~or 20.8% of physical therapy operations revenue, as compared~~ to ~~$24.6~~$1.9 million in the ~~2022~~2024 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.Quarter.

~~Operating Cost—Provision for Credit Losses~~

The provision for credit losses aswas $1.6 million for the 2024 First Quarter and $1.5 million for the 2023 First Quarter. As a percentage of net ~~revenue were~~revenues, the provision for credit losses was 1.0% infor both the 2024 First Quarter and 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%~~5.0% on both March 31, 2024, and December 31, 2023.

Gross Profit

Gross profit from physical therapy operations in the 2024 First Quarter decreased $3.0 million, or 11.2%, to $24.1 million from $27.1 million in the 2023 First Quarter. The gross profit margin from physical therapy operations decreased to 17.9% in the 2024 First Quarter from 21.0% in the 2023 First Quarter.

Industrial Injury Prevention Services

	Three Months Ended						Variance
	March 31, 2024			March 31, 2023			$		%
	(In thousands, except percentages)
Net revenue	$	21,250		$	19,350		$	1,900		9.8	%
Operating costs		16,913			15,582			1,331		8.5	%
Gross profit	$	4,337		$	3,768		$	569		15.1	%

Gross margin		20.4	%		19.5	%

IIP revenues increased $1.9 million, or 9.8%, to $21.3 million for the 2024 First Quarter 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~~$19.4 million for the 2023 First Quarter. IIP operating costs increased $1.3 million, or 8.5%, versus the comparable prior year period. Gross profit from IIP operations in the 2024 First Quarter increased $0.6 million, or 15.1%, to $4.3 million from $3.8 million in the 2023 First Quarter. The gross profit margin from IIP operations increased to 20.4% in the 2024 First Quarter from 19.5% in the 2023 First Quarter.

Corporate Office Costs

Corporate costs increased $0.2 million, or ~~16.1%~~1.6%, to ~~$30.9~~$14.1 million in the 2024 First Quarter from ~~$26.6~~$13.9 million in 2023 First Quarter due to an increase in support costs related to the larger number of clinics and the timing of certain expenses.

Operating Income

Operating income was $14.3 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~~2024 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.

Table of Contents

Other (Expenses) Income

Interest Expense, Debt and Other

Interest expense decreased $0.6 million to $2.0 million (net of $0.9 million savings from the Company’s interest rate swap arrangement discussed below in the “Liquidity and Capital Resources – Interest Rate Swap”) for the 2024 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~~(net of ~~$0.4~~$0.6 million savings from the interest rate swap arrangement) in ~~2022 First Quarter.~~

~~During~~ the 2023 First Quarter due to a lower outstanding balance on our revolver, which we ~~recognized $0.5 million of Relief Funds.~~paid down in May 2023. The ~~Relief Funds were received in prior years but were subject to certain compliance requirements which were met in 2023~~interest rate on the Company’s term loan was 4.7% for the 2024 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~~Quarter and 4.9% for the 2023 First Quarter, wewith an all-in effective interest rate, including all associated costs, of 5.3% and 5.5% over the same periods, respectively.

Interest income from investment

Interest income from investing excess cash (primarily proceeds from the secondary offering sale of the Company’s stock completed in May 2023) in a high-yield savings account was $1.5 million during the 2024 First Quarter.

Change in fair value of contingent earn-out consideration

We revalued ~~the~~ contingent earn-out consideration related to certain acquisitions resulting in a gain of $0.6 million for the 2024 First Quarter compared to an ~~acquisition and recognized an increase in the related liability~~expense of $0.7 ~~million.~~million for the 2023 First Quarter.

Change in Revaluation of Put-Right Liability

~~The revaluation of the put-right liability resulted in~~We recorded an ~~increase~~expense of $0.1 million toon the ~~related~~revaluation of a put right liability for ~~the~~both 2024 First Quarter and 2023 First Quarter. The put-right relates to a prior IIP acquisition and 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~~Equity in earnings of ~~$0.6 million savings from~~unconsolidated affiliate

For both the ~~interest rate swap arrangement discussed below, was $2.6 million for the~~2024 First Quarter and 2023 First Quarter, ~~compared to $0.5~~we recognized an income of $0.3 million ~~in the 2022 First Quarter. The increase in interest expense was primarily due to~~from 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~~taxes was $3.1 million in the 2024 First Quarter compared to $3.0 million ~~for~~during the 2023 First Quarter ~~compared to $3.5 million for~~while the ~~2022 First Quarter. The provision for income~~effective tax ~~as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was~~rates were 28.1% and 28.6% ~~for~~over 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:~~same periods, respectively.

	First Quarter Ended March 31,						Three Months Ended
	2023			2022			March 31, 2024			March 31, 2023
	(In thousands, except percentages)						(In thousands, except percentages)
Income before taxes	$	14,396		$	15,480		$	14,756		$	14,396

Less: net loss (income) attributable to non-controlling interest:
Less: Net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity		(2,720	)		(2,557	)		(2,227	)		(2,720	)
Non-controlling interest - permanent equity		(1,297	)		(626	)		(1,344	)		(1,297	)
	$	(4,017	)	$	(3,183	)	$	(3,571	)	$	(4,017	)

Income before taxes less net income attributable to non-controlling interest	$	10,379		$	12,297		$	11,185		$	10,379

Provision for income taxes	$	2,969		$	3,498		$	3,139		$	2,969

Percentage		28.6	%		28.4	%
Effective income tax rate								28.1	%		28.6	%

Table of Contents

Net Income Attributable to Non-controlling Interest

Net income attributable to redeemable non-controlling interest (temporary equity) was $2.2 million in the 2024 First Quarter compared to $2.7 million ~~for~~in 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 both the 2024 First Quarter and 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~~Total cash and cash ~~equivalents.~~ equivalents were $132.3 million as of March 31, 2024 and $152.8 million as of December 31, 2023. Additionally, we had $143.4 million of outstanding borrowings and $175.0 million in available credit under our Revolving Facility as of March 31, 2024, compared to $144.4 million of outstanding borrowings and $175.0 million in available credit under our Revolving Facility as of December 31, 2023.

We believe that our cash and cash equivalents and availability under our Senior 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).

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”):

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.

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.

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.~~existing 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 our cash, financing, or a combination of ~~cash and financing. Any large acquisition would likely require financing.~~the two.

~~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. As of March 31, 2024, we have accrued $7.9 million related to credit balances, a portion of which is due to patients and payors. The credit balances are expected to be resolved or paid in the next twelve months.

Cash Flow

A summary of our operating, investing and financing activities is discussed below.

	Three Months Ended
	March 31, 2024			March 31, 2023

Net cash provided by operating activities	$	4,419		$	11,349
Net cash used in investing activities		(20,464	)		(12,681	)
Net cash (used in) provided by financing activities		(4,490	)		2,343

Operating Activities

Cash provided by operating activities was $4.4 million for the 2024 First Quarter as compared to $11.3 million for the 2023 First Quarter. This decrease in cash provided was mostly due to the timing of payments related to payroll.

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Investing Activities

Cash used in investing activities for the 2024 First Quarter totaled $20.5 million and consisted of $19.2 million used in the purchase of interests in businesses and non-controlling interests (temporary and permanent), and $1.8 million of fixed assets purchases. These uses were partially offset by $0.1 million proceeds from the sale of non-controlling interests (temporary and permanent) and $0.4 million distributions received from an unconsolidated affiliate.

Financing Activities

Cash used in financing activities for the 2024 First Quarter, totaled $4.5 million and was comprised primarily of $3.2 million in distributions to non-controlling interests (temporary and permanent) and payments of $1.3 million related to notes payable and the term note.

Senior Credit Facilities

On December 5, 2013, we 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, and January 2021. 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.

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”).

We are 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. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity.

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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.

As of March 31, 2024, $142.1 million, net of unamortized debt issuance costs of $1.4 million, was outstanding on the Term Facility while none was outstanding under the Revolving Facility resulting in $175.0 million of credit availability. As of March 31, 2024, we were in compliance with all of the covenants contained in the Credit Agreement. The interest rate on the Company’s term loan was 4.7% for the 2024 First Quarter and 4.9% for the 2023 First Quarter, with an all-in effective interest rate, including all associated costs, of 5.3% and 5.5% over the same periods, respectively.

Interest Rate Swap

In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A. It has a $150 million notional value adjusted concurrently with scheduled 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.

As of March 31, 2024, the fair value of the interest rate swap was $5.5 million, an increase of $1.3 million, net of a $0.5 million, income tax effect, as compared to December 31, 2023. The fair value of the interest rate swap is included in Other assets (current and long term) in our consolidated balance sheet while the increase in fair value is presented as unrealized gain in our unaudited consolidated statements of comprehensive income. The interest rate swap arrangement has generated $0.9 million in interest savings for the period March 31, 2024. The average interest rate for the term facility, net of the savings from the swap, in the 2024 First Quarter was 4.7%.

Notes Payable and Deferred Payments Related to Acquisitions

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 such businesses. At March 31, ~~2023,~~2024, our remaining outstanding balance on these notes aggregated ~~$7.0 million. $6.0~~$3.9 million, of ~~the outstanding notes payable are payable in 2023 and 2024 and $1.0~~which $3.1 million is payable in ~~2025.~~2025, and $0.8 million is payable in 2026. 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%~~3.5% to ~~8.0%~~8.5% per annum.

On March 29, 2024, we acquired a 50% equity interest in a nine-clinic physical therapy and hand therapy practice. The original owners of the practice retained the remaining 50%. The purchase price for the 50% equity interest was approximately $16.4 million, of which $0.5 million was in the form of a note payable. The note accrues interest of 4.5% per annum and the principal and the interest are payable on March 29, 2026. Additionally, we have an obligation to pay an additional amount based on certain future operational objectives being met. There is no maximum payout.

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On September 29, 2023, we acquired a 70% equity interest in a four-clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $6.0 million, of which $5.4 million was paid in cash, and $0.6 million was in the form of a note payable. The note accrues interest at 5.0% per annum and the principal and interest are payable in two installments. The first payment of principal and interest of $0.3 million was paid January 2024, and the second installment of $0.3 million is due on September 30, 2025.

In a separate transaction, on September 29, 2023, we acquired a 70% equity interest in a single clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $7.8 million, of which $7.4 million was paid in cash and $0.4 million is a deferred payment due on June 30, 2025.

On July 31, 2023, we acquired a 70% equity interest in a five-clinic practice. The practice’s owners retained a 30% equity interest. The purchase price for the 70% equity interest was approximately $2.1 million, of which $1.8 million was paid in cash and $0.3 million is a deferred payment due on June 30, 2025.

On May 31, 2023, we and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, our ownership interest is 45%, our local partner’s ownership interest is 30%, and the practice’s pre-acquisition owners have a 25% ownership interest. The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by us, $1.1 million was paid in cash by the local partner, and $0.3 million was in the form of a note payable, (of which $0.2 million will be paid by us and $0.1 million will be paid by the local partner). The note will be paid on July 1, 2024. We guaranteed the full payment of $0.3 million on its due date.

On February 28, 2023, we 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.

Redeemable Non-Controlling Interest

Certain limited partnership agreements, as amended, provide that, upon the triggering events, we have a ~~Call Right~~call right and the selling entity or individual has a ~~Put Right~~put right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the ~~Put Right~~put right and the ~~Call Right~~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~~put right or the ~~Call Right~~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~~interests on March 31, ~~2023~~2024, was ~~$164.3~~$190.7 million.

In ~~conjunction with the above-mentioned acquisitions, in~~ the event that a limited ~~minority~~non-controlling 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 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.

We maintain an interest rate swap arrangement which is considered a derivative instrument. Our indebtedness as of March 31, ~~2023,~~2024 was the outstanding balance of seller notes from our acquisitions of ~~$7.0~~$3.9 million, and an outstanding balance on our term note related to the Credit Agreement of ~~$185.2 million, which includes a term note with~~$143.4 million. The Revolving Facility does not have a balance as of ~~$147.2 million~~March 31, 2024, 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 would yield anno additional ~~$0.4 million~~interest expense on the facility because of the interest ~~expense.~~rate swap described above. See ~~Note 9 to the unaudited consolidated financial statements.~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for more information.

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~~Index~~Table of Contents

ITEM 4.

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.

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~~quarter ended March 31, 2024 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.

ITEM 1A.

RISK FACTORS.

~~Except as provided below, there have been no material changes~~

The Company added the following risk factor in addition to our previously disclosed risk factors ~~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~~2023, and filed with the SEC on February ~~28, 2023.~~29, 2024.

~~Actual or perceived events involving banking volatility or limited liability, defaults or other adverse developments that affect~~

If our noncompetition covenants with employed therapists are nullified, we may lose staff to competitors.

Many of our employed therapists have contractual non-competition agreements and covenants with the ~~U.S. or international financial systems, may result in market wide liquidity problems~~Company which, ~~could have~~under certain circumstances, limit the employee's ability to terminate their employment with the Company to perform similar services for competing organizations within a ~~material~~defined geography for a specified period time after such termination. The Federal Trade Commission recently passed a Rule which purports to prohibit many forms of non-competition agreements with employees 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 have financial, or business relationships may exceed the applicable Federal Deposit Insurance Corporation (“FDIC”) limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the ~~underlying institutions fail. There~~Rule becomes effective in its current form, also would require the Company, subject to certain exceptions, to nullify certain existing noncompetition agreements with employees. While the Rule is ~~no guarantee that~~being challenged in federal court and is not effective, if the ~~FDIC will provide access to all~~Rule in its current form or ~~some uninsured funds~~ in a substantially similar form becomes effective, the ~~event~~Company could suffer a loss of ~~the closure, default, or non-performance of the financial institution or financial services industry companies with~~staff 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 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 obtain, and additional debt or equity financing might not be available on reasonable terms, if at all. Difficulties obtaining debt or equity financing could have a material adverse effect on operations.

ITEM 5.

OTHER INFORMATION.

Rule 105b-1 Trading Plans

The Company’s directors and executive officers do not currently have 10b5-1plans. During the three months ended March 31, 2024, none of our ~~financial condition and results~~directors or executive officers adopted or terminated any contract, instruction, or written plan for the purchase or sale of ~~operations.~~our securities to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.

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ITEM 6.

EXHIBITS.

Exhibit Number	Description
99.1	U. S. Physical Therapy, Inc. Objective Long-Term Incentive Plan for Senior Management for ~~2023,~~2024, effective March ~~2, 2023~~6, 2024 [incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on March ~~2, 2023]~~7, 2024].
99.2	U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for ~~2023,~~2024, effective March ~~2, 2023~~6, 2024 [incorporated by reference to Exhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC on March ~~2, 2023]~~7, 2024].
99.3	U. S. Physical Therapy, Inc. Objective Cash/RSA Bonus Plan for Senior Management for ~~2023,~~2024, effective March ~~2, 2023~~6, 2024 [incorporated by reference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on March ~~2, 2023]~~7, 2024].
99.4	U. S. Physical Therapy, Inc. Discretionary Cash/RSA Bonus Plan for Senior Management for ~~2023,~~2024, effective March ~~2, 2023~~6, 2024 [incorporated by reference to Exhibit 99.4 to the Company Current Report on Form 8-K filed with the SEC on March ~~2, 2023]~~7, 2024].
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

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~~Index~~Table of Contents

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: May ~~5, 2023~~8, 2024	By:	/s/ ~~CAREY HENDRICKSON~~Carey Hendrickson
		Carey Hendrickson
		Chief Financial Officer
		(Principal financial and accounting officer)

4345

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)

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

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

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets as of March 31, ~~2023~~2024, and December 31, ~~2022~~2023	3

	Unaudited Consolidated Statements of Net Income for the Three Months Ended March 31, ~~2023~~2024, and ~~2022~~2023	4

	Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, ~~2023~~2024, and ~~2022~~2023	5

	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2023~~2024, and ~~2022~~2023	6

	Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, ~~2023~~2024, and ~~2022~~2023	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	40 42

Item 4.	Controls and Procedures	41 43

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	41 43

Item 1A.	Risk Factors	41 43

Item 5.	Other Information	43

Item 6.	Exhibits	42 44

	Signatures	43

	~~Certifications~~	45

	U.S.Physical Therapy, Inc.																											U.S.Physical Therapy, Inc.
	Common Stock				Additional		Accumulated Other			Retained			Treasury Stock						Total Shareholders’			Non-Controlling						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			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
Balance December 31, 2023																													17,202	$	172	$	281,096		$	2,782	$	223,772			(2,215	)	$	(31,628	)	$	476,194		$	1,216		$	477,410
Net income attributable to USPH shareholders																													-		-		-			-		8,046			-			-			8,046			-			8,046
Net income attributable to non-controlling interest - permanent equity																													-		-		-			-		-			-			-			-			1,344			1,344
Issuance of restricted stock, net of cancellations		61		-		-		-			-			-			-			-			-			-			81		-		-			-		-			-			-			-			-			-
Revaluation of redeemable non-controlling interest, net of tax		-		-		-		-			(119	)		-			-			(119	)		-			(119	)
Revaluation of redeemable non-controlling interest																													-		-		-			-		(1,439	)		-			-			(1,439	)		-			(1,439	)
Compensation expense - equity-based awards		-		-		1,806		-			-			-			-			1,806			-			1,806			-		-		1,997			-		-			-			-			1,997			-			1,997
Sale of non-controlling interest																													-		-		198			-		-			-			-			198			-			198
Purchase of partnership interests - non-controlling interest																													-		-		(345	)		-		-			-			-			(345	)		(38	)		(383	)
Dividends payable to USPH shareholders		-		-		-		-			(5,617	)		-			-			(5,617	)		-			(5,617	)		-		-		-			-		(6,630	)		-			-			(6,630	)		-			(6,630	)
Distributions to non-controlling interest partners - permanent equity		-		-		-		-			-			-			-			-			(1,139	)		(1,139	)		-		-		-			-		-			-			-			-			(1,060	)		(1,060	)
Deferred taxes related to redeemable non-controlling interest - temporary equity		-		-		-		-			137			-			-			137			-			137			-		-		-			-		(175	)		-			-			(175	)		-			(175	)
Other comprehensive gain																													-		-		-			1,326		-			-			-			1,326			-			1,326
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans																													-		-		600			-		-			-			-			600			-			600
Other		-		-		-		-			1			-			-			1			-			1			-		-		-			-		(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
Balance March 31, 2024																													17,283	$	172	$	283,546		$	4,108	$	223,573			(2,215	)	$	(31,628	)	$	479,771		$	1,462		$	481,233

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

Customer and Referral Relationships			Non-Compete Agreements
Years	Annual Amount		Years	Annual Amount
Ending December 31,			Ending December 31,
2023 (excluding the three months ended March 31, 2023)	$	5,096	2023 (excluding the three months ended March 31, 2023)	$	464
2024	$	6,636	2024	$	576
2025	$	6,492	2025	$	505
2026	$	6,023	2026	$	365
2027	$	5,860	2027	$	157
Thereafter	$	33,053

	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