Form 10-Q U S PHYSICAL THERAPY For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED June 30, 2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM _____TO _____
COMMISSION FILE NUMBER 1-11151
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
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(I.R.S. EMPLOYER IDENTIFICATION NO.)
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(ZIP CODE)
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REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713 )
297-7000
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☑
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Accelerated filer
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☐
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Non-accelerated filer
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☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 8, 2022, the number of shares outstanding (issued less treasury stock) of the
registrant’s common stock, par value $.01 per share, was: 13,004,245 .
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Item 1.
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3
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3
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4
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5
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6
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7
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8
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Item 2.
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31
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Item 3.
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46
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Item 4.
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47
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PART II—OTHER INFORMATION
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Item 1.
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47
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Item 6.
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49
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49
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Certifications
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| ITEM 1. |
FINANCIAL STATEMENTS.
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U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE DATA)
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June 30, 2022
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December 31, 2021
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|||||||
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ASSETS
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(unaudited)
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|||||||
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Current assets:
|
||||||||
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Cash and cash equivalents
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$
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$
|
|
||||
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Patient accounts receivable, less allowance for credit
losses of $
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|
|
||||||
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Accounts receivable - other
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|
|
||||||
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Other current assets
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||||||
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Total current assets
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||||||
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Fixed assets:
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||||||||
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Furniture and equipment
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||||||
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Leasehold improvements
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||||||
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Fixed assets, gross
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||||||
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Less accumulated depreciation and amortization
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||||||
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Fixed assets, net
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||||||
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Operating lease right-of-use assets
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||||||
| Investment in unconsolidated affiliate |
||||||||
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Goodwill
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||||||
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Other identifiable intangible assets, net
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||||||
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Other assets
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||||||
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Total assets
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$
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$
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|
||||
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LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST
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||||||||
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Current liabilities:
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||||||||
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Accounts payable - trade
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$
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$
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|
||||
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Accounts payable - due to seller of acquired business
|
||||||||
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Accrued expenses
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|
|
||||||
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Current portion of operating lease liabilities
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||||||
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Current portion of term loan and notes payable
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||||||
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Total current liabilities
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||||||
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Notes payable, net of current portion
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|
|
||||||
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Revolving line of credit
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|
|
||||||
| Term Loan, net of current portion and deferred financing costs |
||||||||
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Deferred taxes
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|
||||||
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Operating lease liabilities, net of current portion
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||||||
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Other long-term liabilities
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||||||
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Total liabilities
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||||||
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Redeemable non-controlling interest - temporary equity
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||||||
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Commitments and Contingencies
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||||||||
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U.S. Physical Therapy, Inc. (“USPH”) shareholders’ equity:
|
||||||||
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Preferred stock, $
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|
||||||
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Common stock, $
|
|
|
||||||
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Additional paid-in capital
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|
||||||
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Accumulated other comprehensive loss
|
( |
) | ||||||
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Retained earnings
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|
|
||||||
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Treasury stock at cost,
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(
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)
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(
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)
|
||||
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Total USPH shareholders’ equity
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|
||||||
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Non-controlling interest - permanent equity
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|
||||||
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Total USPH shareholders’ equity and non-controlling interest - permanent equity
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|
|
||||||
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Total liabilities, redeemable non-controlling interest,
|
||||||||
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USPH shareholders’ equity and non-controlling interest - permanent equity
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$
|
|
$
|
|
||||
See notes to consolidated financial statements.
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
|
Three Months Ended
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Six Months Ended
|
|||||||||||||||
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June 30, 2022
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June 30, 2021
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June 30,2022
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June 30, 2021
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|||||||||||||
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Net patient revenue
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$
|
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$
|
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$
|
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$
|
|
||||||||
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Other revenue
|
|
|
|
|
||||||||||||
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Net revenue
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|
||||||||||||
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Operating cost:
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||||||||||||||||
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Salaries and related costs
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||||||||||||
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Rent, supplies, contract labor and other
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||||||||||||
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Provision for credit losses
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||||||||||||
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Total operating cost
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||||||||||||
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Gross profit
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|
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||||||||||||
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Corporate office costs
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||||||||||||
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Operating income
|
|
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|
||||||||||||
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Other income and expense
|
||||||||||||||||
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Equity in earnings of unconsolidated affiliate
|
||||||||||||||||
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Interest and other income, net
|
|
|
|
|
||||||||||||
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Loss on revaluation of put-right liability
|
( |
) | ( |
) | ||||||||||||
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Interest expense - debt and other
|
(
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)
|
(
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)
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(
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)
|
(
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)
|
||||||||
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Total other income and expense
|
(
|
)
|
(
|
)
|
(
|
)
|
(
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)
|
||||||||
| Income before taxes | ||||||||||||||||
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Provision for income taxes
|
|
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|
||||||||||||
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Net income
|
|
|
|
|
|
|
|
|
||||||||
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Less: net income attributable to non-controlling interest:
|
||||||||||||||||
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Redeemable non-controlling interest - temporary equity
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Non-controlling interest - permanent equity
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
|||||
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Net income attributable to USPH shareholders
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
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Basic and diluted earnings per share attributable to USPH shareholders
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Shares used in computation - basic and diluted
|
|
|
|
|
||||||||||||
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Dividends declared per common share
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
See notes to consolidated financial statements.
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
|
Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
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June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
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Net income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other comprehensive loss
|
||||||||||||||||
|
Unrealized loss on cash flow hedge
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Tax effect at statutory rate (federal and state) of
|
|
|
|
|
||||||||||||
|
Comprehensive income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Comprehensive income attributable to non-controlling interest
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Comprehensive income attributable to USPH shareholders
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
(IN THOUSANDS)
(unaudited)
|
Six Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
OPERATING ACTIVITIES
|
||||||||
|
Net income including non-controlling interest and earnings from unconsolidated affiliates, net
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
|
|
||||||
|
Provision for credit losses
|
|
|
||||||
|
Equity-based awards compensation expense
|
|
|
||||||
|
Deferred income taxes
|
|
|
||||||
|
Loss on revaluation of put-right liability
|
||||||||
|
(Gain) loss on sale of clinics and fixed assets
|
( |
) | ||||||
|
Earnings in unconsolidated affiliate
|
( |
) | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Increase in patient accounts receivable
|
(
|
)
|
(
|
)
|
||||
|
(Increase) decrease in accounts receivable - other
|
(
|
)
|
|
|||||
|
(Increase) decrease in other assets
|
|
(
|
)
|
|||||
|
Decrease in accounts payable and
accrued expenses
|
(
|
)
|
(
|
)
|
||||
|
(Decrease) increase in other long-term liabilities
|
(
|
)
|
|
|||||
|
Net cash provided by operating activities
|
|
|
||||||
|
INVESTING ACTIVITIES
|
||||||||
|
Purchase of fixed assets
|
(
|
)
|
(
|
)
|
||||
|
Purchase of majority interest in businesses, net of cash acquired
|
(
|
)
|
(
|
)
|
||||
|
Purchase of redeemable non-controlling interest, temporary equity
|
(
|
)
|
(
|
)
|
||||
|
Purchase of non-controlling interest, permanent equity
|
(
|
)
|
|
|||||
|
Proceeds on sales of partnership interest, clinics and fixed assets
|
|
(
|
)
|
|||||
|
Distributions from unconsolidated affiliate
|
||||||||
|
Proceeds on sales of redeemable non-controlling interest-temporary
|
||||||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
||||
|
FINANCING ACTIVITIES
|
||||||||
|
Distributions to non-controlling interest, permanent and temporary equity
|
(
|
)
|
(
|
)
|
||||
|
Cash dividends paid to shareholders
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from revolving line of credit
|
|
|
||||||
|
Proceeds from term loan
|
||||||||
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Payments on revolving line of credit
|
(
|
)
|
(
|
)
|
||||
|
Principal payments on notes payable
|
(
|
)
|
(
|
)
|
||||
|
(Payment) receipt of Medicare Accelerated and Advance Funds
|
|
(
|
)
|
|||||
|
Payment of deferred financing costs
|
( |
) | ||||||
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Other
|
|
|
||||||
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Net cash used in financing activities
|
|
(
|
)
|
|||||
|
Net decrease in cash and cash equivalents
|
|
(
|
)
|
|||||
|
Cash and cash equivalents - beginning of period
|
|
|
||||||
|
Cash and cash equivalents - end of period
|
$
|
|
$
|
|
||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
|
Cash paid during the period for:
|
||||||||
|
Income taxes
|
$
|
|
$
|
|
||||
|
Interest paid
|
$
|
|
$
|
|
||||
|
Non-cash investing and financing transactions during the period:
|
||||||||
|
Purchase of businesses - seller financing portion
|
$
|
|
$
|
|
||||
|
Purchase of businesses - contingent consideration
|
$ |
$ |
||||||
|
Notes payable related to purchase of redeemable non-controlling interest, temporary equity
|
$ | $ | ||||||
|
Notes payable due to purchase of non-controlling interest, permanent equity
|
$
|
|
$
|
|
||||
|
Notes receivable related to sale of partnership interest
|
$ |
$ |
||||||
|
Notes receivable related to sale of partnership interest - redeemable non-controlling interest
|
$ |
$ |
||||||
See notes to consolidated financial statements.
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
(IN THOUSANDS)
(unaudited)
|
|
U.S.Physical Therapy, Inc.
|
|||||||||||||||||||||||||||||||||||||||
|
|
Common Stock
|
Additional
Paid-In Capital
|
Accumulated Other
Comprehensive Loss
|
Retained
Earnings
|
Treasury Stock
|
Total Shareholders’
Equity
|
Non-Controlling
Interests
|
Total
|
||||||||||||||||||||||||||||||||
|
For the three months ended June 30, 2022
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||||||||||||
|
Balance March 31, 2022
|
$
|
|
|
$
|
|
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
|
Issuance of restricted stock, net of cancellations
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Revaluation of redeemable non-controlling interest, net of tax
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Compensation expense - equity-based awards
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Purchase of partnership interests - non-controlling interest
|
-
|
|
(
|
)
|
|
|
-
|
|
(
|
)
|
|
|
||||||||||||||||||||||||||||
|
Dividends paid to USPH shareholders
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Distributions to non-controlling interest partners - permanent equity
|
-
|
|
|
|
|
-
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||
|
Deferred taxes related to redeeemable non-controlling interest - temporary equity
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Other
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest - permanent equity
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net income attributable to USPH shareholders
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Other comprehensive loss
|
- |
(
|
)
|
|
-
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||||||||||
|
Balance June 30, 2022
|
|
|
$
|
|
$
|
(
|
)
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
|
U.S.Physical Therapy, Inc.
|
|||||||||||||||||||||||||||||||||||||||
|
|
Common Stock
|
Additional
Paid-In Capital
|
Accumulated Other
Comprehensive Loss
|
Retained
Earnings
|
Treasury Stock
|
Total Shareholders’
Equity
|
Non-Controlling
Interests
|
Total
|
||||||||||||||||||||||||||||||||
|
For the six months ended June 30, 2022
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||||||||||||
|
Balance December 31, 2021
|
$
|
|
|
$
|
|
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
|
Issuance of restricted stock, net of cancellations
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Revaluation of redeemable non-controlling interest, net of tax
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Compensation expense - equity-based awards
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Purchase of partnership interests - non-controlling interest
|
-
|
|
(
|
)
|
|
|
-
|
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||
|
Dividends paid to USPH shareholders
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Distributions to non-controlling interest partners - permanent equity
|
-
|
|
|
|
|
-
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||
|
Deferred taxes related to redeeemable non-controlling interest - temporary equity
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Other
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest - permanent equity
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net income attributable to USPH shareholders
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Other comprehensive loss
|
- |
(
|
)
|
|
- |
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||||||||
|
Balance June 30, 2022
|
|
|
$
|
|
$
|
(
|
)
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
|
U.S.Physical Therapy, Inc.
|
|||||||||||||||||||||||||||||||||||||||
|
|
Common Stock
|
Additional
Paid-In Capital
|
Accumulated Other
Comprehensive Loss
|
Retained
Earnings
|
Treasury Stock
|
Total Shareholders’
Equity
|
Non-Controlling
Interests
|
Total
|
||||||||||||||||||||||||||||||||
|
For the three months ended June 30, 2021
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||||||||||||
|
Balance March 31, 2021
|
|
|
$
|
|
$
|
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
|
Issuance of restricted stock, net of cancellations
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Revaluation of redeemable non-controlling interest, net of tax
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Compensation expense - equity-based awards
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Dividends paid to USPT shareholders
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Distributions to non-controlling interest partners - permanent equity
|
-
|
|
|
|
|
-
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||
|
Other
|
-
|
|
(
|
)
|
|
(
|
)
|
-
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||
|
Net income attributable to non-controlling interest - permanent equity
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net income attributable to USPH shareholders
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Balance June 30, 2021
|
|
|
$
|
|
$
|
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
|
|
U.S.Physical Therapy, Inc.
|
|||||||||||||||||||||||||||||||||||||||
|
|
Common Stock
|
Additional
Paid-In Capital
|
Accumulated Other
Comprehensive Loss
|
Retained
Earnings
|
Treasury Stock
|
Total Shareholders’
Equity
|
Non-Controlling
Interests
|
Total
|
||||||||||||||||||||||||||||||||
|
For the six months ended June 30, 2021
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||||||||||||
|
Balance December 31, 2020
|
|
|
$
|
|
$
|
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
|
Issuance of restricted stock, net of cancellations
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Revaluation of redeemable non-controlling interest, net of tax
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Compensation expense - equity-based awards
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Dividends paid to USPT shareholders
|
-
|
|
|
|
(
|
)
|
-
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||||
|
Distributions to non-controlling interest partners - permanent equity
|
-
|
|
|
|
|
-
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||
|
Short swing profit settlement
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Other
|
-
|
|
|
|
|
-
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest - permanent equity
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net income attributable to USPH shareholders
|
-
|
|
|
|
|
-
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Balance June 30, 2021
|
|
|
$
|
|
$
|
|
$
|
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
See notes to consolidated financial statements.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
June 30, 2022
(unaudited)
|
1.
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated financial statements include the accounts of U.S. Physical Therapy, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions
and balances have been eliminated.
The Company operates its business through two reportable business segments. The Company’s reportable segments include the physical therapy operations segment and the
industrial injury prevention services segment. The Company’s physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders,
sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance
optimization and ergonomic assessments.
During the 2021 year and the six months ended June 30, 2022, the Company completed the acquisitions of four
multi-clinic practices and two industrial injury prevention businesses as detailed below.
|
Acquisition
|
Date
|
Acquired
|
Clinics
|
|||||||
|
March 2022 Acquisition
|
|
|
%
|
|
||||||
|
December 2021 Acquisition
|
|
|
%
|
|
||||||
|
November 2021 Acquisition
|
|
|
%
|
|
IIPS* | |||||
|
September 2021 Acquisition
|
|
|
%
|
|
IIPS* | |||||
|
June 2021 Acquisition
|
|
|
%
|
|
||||||
|
March 2021 Acquisition
|
|
|
%
|
|
||||||
|
*
|
|
As of June 30, 2022, the Company operated 608
clinics in 39 states. The Company also manages physical therapy facilities for third parties, primarily hospital and physicians, with
33 third-party facilities under management as of June 30, 2022.
During the six months ended June 30, 2022, the Company closed three clinics and sold five clinics.
Physical Therapy Operations
The physical therapy operations segment primarily operates through subsidiary clinic partnerships, in
which the Company generally owns a 1 % general partnership interest in the Clinic Partnerships. Our limited partnership interests
generally range from 65 % to 75 %
in the Clinic Partnerships. The managing therapist of each clinic owns, directly or indirectly, the remaining limited partnership interest in most of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, the Company
operates some clinics, through wholly-owned subsidiaries, under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”).
The Company continues to seek to attract for employment physical therapists who have established relationships with physicians and other referral sources, by offering these
therapists a competitive salary and incentives based on the profitability of the clinic that they manage. For multi-site clinic practices in which a controlling interest is acquired by the Company, the prior owners typically continue as employees to
manage the clinic operations, retain a non-controlling ownership interest in the clinics and receive a competitive salary for managing the clinic operations. In addition, the Company has developed satellite clinic facilities as part of existing
Clinic Partnerships and Wholly-Owned Facilities, with the result that a substantial number of Clinic Partnerships and Wholly-Owned Facilities operate more than one clinic location.
Clinic Partnerships
For non-acquired Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly or
indirectly, are recorded within the balance sheets as non-controlling interest – permanent equity and within the income statements as net income attributable to non-controlling interest – permanent equity.
For acquired Clinic Partnerships with redeemable non-controlling interest, the earnings attributable to the redeemable non-controlling interest are recorded within the
consolidated statements of income line item – net income attributable to non-controlling interest – redeemable non-controlling interest – temporary equity and
the equity interest is recorded on the consolidated balance sheet as redeemable non-controlling interest – temporary equity. In accordance with current
accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but charged directly to retained earnings and is included in the basic and diluted earnings per share calculation.
Wholly-Owned Facilities
For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the profit sharing therapists. The
amount is expensed as compensation and included in operating cost – salaries and related costs. The respective liability is included in current liabilities – accrued expenses on the balance sheets.
Industrial Injury Prevention Services
Services provided in the industrial injury prevention services segment include onsite services for clients’ employees including injury prevention and rehabilitation,
performance optimization, post offer employment testing, functional capacity evaluations, and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies.
Other clients include large insurers and their contractors. The Company performs these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and certified athletic trainers.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q.
However, the statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes this report contains all
necessary adjustments (consisting only of normal recurring adjustments) to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. For further information
regarding the Company’s accounting policies, please read the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2021 filed with the Securities and Exchange Commission on March 1, 2022.
The Company believes, and the Chief Executive Officer and Chief Financial Officer have certified, that the financial statements included in this report present fairly, in
all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented.
Operating results for the three and
six months ended June 30, 2022, are not necessarily indicative of the results the Company expects for the entire year.
In addition to the risk factors described in our Annual Report on Form 10-K for the year ended December 31,
2021 filed with the SEC on March 1, 2022, see Item 1A in Part II of this report.
Impact of COVID-19
Medicare Accelerated and Advance
Payment Program (“MAAPP Funds”)
On March 27, 2020, in response to the COVID-19 pandemic, the federal government
approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provided waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for
preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19.
The CARES Act allowed for qualified healthcare providers to receive advanced payments under the MAAPP
Funds during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. The Company
applied for and received approval from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. The Company recorded the $14.1
million in advance payments received as a liability. During the three months ended March 31, 2021, the Company repaid the MAAPP Funds of $14.1
million rather than applying them to future services performed. During the six months ended June 30, 2022, and 2021, the Company did no
Significant Accounting Policies
Cash Equivalents
The Company maintains its cash and cash equivalents at financial institutions. The Company considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. The combined account balances at several institutions typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related on
deposits in excess of FDIC insurance coverage. Management believes that the risk is not significant.
Long-Lived Assets
Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for furniture
and equipment range from to eight years and for purchased software from to seven years . Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets, which is generally to five years .
The Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence of certain events or circumstances which indicate that
the amounts may be impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company did no
Goodwill
Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the
fair value of the acquired business assets, which include certain identifiable intangible assets. Historically, goodwill has been derived from acquisitions and, prior to 2009,
from the purchase of some or all of a particular local management’s equity interest in an existing clinic. Effective January 1, 2009, if the purchase price of a
non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.
Goodwill and other indefinite-lived intangible assets are not amortized but are instead subject to periodic
impairment evaluations. The fair value of goodwill and other identifiable intangible assets with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events or conditions and are written down to fair
value if considered impaired. These events or conditions include but are not limited to: a significant adverse change in the business environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined
with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence of one of these
events or conditions could significantly impact an impairment assessment, necessitating an impairment charge. The Company evaluates indefinite lived tradenames in conjunction with its annual goodwill impairment test.
The Company has a two operating segment business which is made up of various clinics within partnerships, and an industrial injury prevention services business. The partnerships are components of regions
and are aggregated to the operating segment level for the purpose of determining the Company’s reporting units when performing its annual goodwill impairment test. In 2021 and 2020, there were six six regions, the impairment analysis included a separate analysis for the industrial injury prevention services
business, as a separate reporting unit.
As part of the impairment analysis, the Company is first required to assess qualitatively if it can conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, the Company is then required to complete a quantitative analysis of whether
a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers relevant events or circumstances that
affect the fair value or carrying amount of a reporting unit. The Company considers both the income and market approach in determining the fair value of its reporting units when performing a quantitative analysis.
An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting
unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated fair value of the reporting unit. The evaluation of goodwill in 2021 and 2020 did not result in any goodwill amounts that were deemed impaired.
As part of the annual assessment, the Company evaluated whether events or circumstances indicated that it was more likely than not that
the fair value of the reporting units were reduced below their carrying value as of December 31, 2021. As a result of the assessment, the Company determined that it was not more likely than not that goodwill and tradenames of the reporting
units were impaired as of December 31, 2021.
The Company will continue to monitor for any triggering events or other indicators of impairment.
Redeemable Non-Controlling Interest
The non-controlling interests that are reflected as redeemable non-controlling interest in the consolidated financial statements consist of those that the owners and the
Company have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met.
The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements. The redemption rights can be triggered by the owner or the
Company at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction,
typically to five years ,
as defined in the limited partnership agreement. The redemption rights are not automatic or mandatory (even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemption rights have been
satisfied.
On the date the Company acquires a controlling interest in a partnership, and the limited partnership agreement for such partnership contains redemption rights not under
the control of the Company, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption – Redeemable non-controlling interest – temporary equity. Then, in each reporting period thereafter until it
is purchased by the Company, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial carrying value, based on the predetermined formula defined in the respective limited partnership
agreement. As a result, the value of the non-controlling interest is not adjusted below its initial carrying value. The Company records any adjustments in the redemption value, net of tax, directly to retained earnings and the adjustments are not
reflected in the consolidated statements of income. Although the adjustments are not reflected in the consolidated statements of income, current accounting rules require that the Company reflects the adjustments, net of tax, in the earnings per
share calculation. The amount of net income attributable to redeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statements of net income. Management believes the redemption value (i.e.
the carrying amount) and fair value are the same.
Non-Controlling Interest
The Company recognizes non-controlling interest, in which the Company has no obligation but the right to purchase the non-controlling interest, as permanent equity in the
consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interest is included in consolidated net income on the face of the statements of net income. Changes in a parent
entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling equity investment on the deconsolidation date.
When the purchase price of a non-controlling interest by the Company exceeds the book value at the time of purchase, any excess or shortfall is recognized as an adjustment
to additional paid-in capital. Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner.
Revenue Recognition
Revenues are recognized in the period in which services are rendered. See Note 3- Revenue Recognition, for further discussion of revenue recognition.
Provision for Credit Losses
The Company determines provisions for credit losses based on the specific agings and payor classifications at
each clinic. The provision for credit losses is included in operating cost in the consolidated statements of net income. Net accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and
provisions for credit losses, includes only those amounts the Company estimates to be collectible.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority.
The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of
interest expense and depreciation. ASC 740, Income Taxes requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which
the legislation is enacted. The legislation had no effect on the Company’s deferred income taxes and current income taxes payable during the three and six months ended June 30,
2022.
The Company did no no
Fair Value of Financial Instruments
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes
the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3
measurement).
The three levels of the fair value hierarchy
are as follows:
Level 1 – Quoted prices in active markets for
identical assets or liabilities;
Level 2 – Quoted prices for similar instruments
in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
Level 3 – Unobservable inputs in which there is
little or no market data which require the reporting entity to develop its own assumptions.
The carrying amounts reported in the balance sheets for cash and cash equivalents, contingent earn-out payments, accounts receivable, accounts payable and notes payable approximate their fair values
due to the short-term maturity of these financial instruments. The carrying amount of the debt under the Third Amended and Restated Credit Agreement (defined as “Credit Agreement” in Note 9) approximates the fair value. The interest rate on the
debt under the Third Amended and Restated Amended Credit Agreement is tied to the Secured Overnight Financing Rate (“SOFR”).
The redeemable non-controlling interest included on the consolidated balance sheets and the put right
associated with the potential future purchase of the separate company in the November 2021 acquisition (as described in Note 2) are both marked to fair value on a recurring basis using Level 3 inputs. The redemption value of redeemable
non-controlling interests approximates the fair value. The put right associated with the potential future purchase of the separate company in the November 2021 acquisition is determined using a Monte Carlo simulation model utilizing unobservable
inputs such as asset volatility and discount rates. The unobservable inputs in the valuation include asset volatility of 25 % and a
discount rate of 10.49 %. See Note 5 for the changes in the fair value of redeemable non-controlling interest. The put right increased $0.6 million for the three months ended June 30, 2022 and was valued at $3.5 million on June 30, 2022.
The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been
adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement. The carrying and fair value of the Company’s interest rate derivative as of June 30, 2022, was $0.5 million, which is included in current liabilities in the Company’s consolidated balance sheet. See Note 10 for changes in the fair value of the
interest rate swap.
Segment Reporting
Operating segments are components of an enterprise for which separate financial information is available
that is evaluated regularly by chief operating decision makers in determining the allocation of resources and in assessing performance. The Company currently operates through two segments: physical therapy operations and industrial injury prevention services.
Use of Estimates
In preparing the Company’s consolidated financial statements, management makes certain estimates and
assumptions, especially in relation to, but not limited to, goodwill impairment, tradenames and other intangible assets, allocations of purchase price, provision for credit losses, tax provision and contractual allowances, that affect the amounts
reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates.
Self-Insurance Program
The Company utilizes a self-insurance plan for its employee group health insurance coverage administered by a third party. Predetermined loss limits have been arranged with
an insurance company to minimize the Company’s maximum liability and cash outlay. Accrued expenses include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims. Management believes that the current accrued
amounts are sufficient to pay claims arising from self-insurance claims incurred through June 30, 2022.
Restricted Stock
Restricted stock issued to employees and directors is subject to continued employment or continued service on the board, respectively. Generally, restrictions on the stock
granted to employees lapse in equal annual installments on the following anniversaries of the date of grant. For those shares granted
to directors, the restrictions will lapse in equal quarterly installments during the year after the date of grant. For those granted
to officers, the restriction will lapse in equal quarterly installments during the four years following the date of grant. Compensation
expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the vesting period. The Company recognizes any forfeitures as they occur. The restricted stock issued is included in basic and
diluted shares for the earnings per share computation.
Recently Adopted Accounting Guidance
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)–Simplifying the Accounting for Income
Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of
financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and early adoption was permitted. The Company adopted this pronouncement as of January 1, 2021. The adoption of ASU 2020-06 did not
have a material impact on the Company’s financial statements.
In August 2020, the FASB issued ASU 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of
liabilities and equity, including convertible instruments and contracts on an entity’s own equity. As part of this update, convertible instruments are to be included in diluted earnings per share using the if-converted method, rather than the
treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive,
regardless of whether the entity or the counterparty can choose between cash and share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy.
This pronouncement was effective for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2021.The Board specified that an entity should adopt the guidance at the beginning of its annual fiscal year. The Company adopted this pronouncement as of January 1, 2022. The use of either the modified retrospective or
fully retrospective method of transition is permitted. The adoption of ASU 2020-06 did not have a material impact on the Company’s financial statements.
Recently Issued Accounting Guidance
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market
transition from LIBOR and other interbank offered rates to alternative reference rates. The new guidance was effective upon issuance, and the Company has elected to apply the amendments prospectively through December 31, 2022. Borrowings under
the Third Amended and Restated Credit Agreement bear interest based on SOFR. The interest rate applicable to the Third Amended and Restated Credit Agreement is tied to SOFR.
2. ACQUISITIONS OF BUSINESSES
On
March 31, 2022, the Company acquired a 70 % interest in a six -clinic physical therapy practice. The practice’s owners retained 30 % of the equity interests. The
purchase price for the 70 % equity interest was approximately $11.5 million, of which $11.2 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 3.5 % per annum and the principal and interest are payable on March 31, 2024.
The
purchase price for the 2022 acquisition has been preliminarily allocated as follows (in thousands):
|
Physical Therapy
Operations
|
||||
|
Cash paid, net of cash acquired
|
$
|
|
||
|
Seller notes
|
|
|||
|
Contingent payments
|
|
|||
|
Total consideration
|
$
|
|
||
|
Estimated fair value of net tangible assets acquired:
|
||||
|
Total current assets
|
$
|
|
||
|
Total non-current assets
|
|
|||
|
Total liabilities
|
(
|
)
|
||
|
Net tangible assets acquired
|
|
|||
|
Customer and referral relationships
|
|
|||
|
Non-compete agreements
|
|
|||
|
Tradenames
|
|
|||
|
Goodwill
|
|
|||
|
Fair value of non-controlling interest (classified as redeemable non-controlling interest)
|
(
|
)
|
||
|
$
|
|
|||
On December 31, 2021, the Company acquired a 75 % interest in a three -clinic physical therapy practice with
the practice founder retaining 25 %. The purchase price for the 75 % interest was approximately $3.6 million, of which $3.4 million was paid in cash and $0.2
million in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest are payable on
December 31, 2023.
On November 30, 2021, the Company acquired an approximate 70 % interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The purchase price for the approximate 70 % equity interest, not inclusive of a $2.0
million contingent payment, was approximately $65.2 million of which $60.7 million was paid in cash and $1.0 million in the form of a
note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on November 30, 2023. As part of
the transaction, the Company also agreed to the potential future purchase of a separate company under the same ownership that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market
area. The current owners have the right to put this transaction to the Company in approximately five years , with such right having an
initial fair value of $3.5 million value on December 31, 2021, as reflected on the Company’s consolidated balance sheet in Other
long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in value reflected in the Company’s consolidated statement of income. The Company does not currently possess any of the controlling
interests in this separate company, does not control this company through contract or governance rights and currently does not exercise significant influence over this separate company. Due to these reasons, and based on current accounting
guidance, the Company did not consolidate the separate company through the variable interest or voting interest model. On June 30, 2022, the fair value of this put right was $3.5 million. The increase was reflected in the consolidated statement of income in the line item – Loss
on revaluation of put-right liability.
On September 30, 2021, the Company
acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The Company acquired the company’s assets at a purchase price of approximately $3.3 million (which includes the obligation to pay an amount up to $0.6
million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met) and contributed those assets to the industrial injury services business. The initial purchase price, not inclusive
of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and $0.3 million is in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest are payable on September 30, 2023.
On June 30, 2021, the Company
acquired a 65 % interest in an eight -clinic
physical therapy with the previous owners retaining 35 %. The purchase price was approximately $10.7 million, of which $8.6 million was
paid in cash, $1.0 million was payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable. The business criteria were met and accordingly $1.0 million was paid in July 2022. The note accrues interest at 3.25 %
per annum and the principal and interest are payable on June 30, 2023. Additionally, the Company has an obligation to pay an additional amount up to $0.8
million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the
contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date.
On March 31, 2021, the Company
acquired a 70 % interest in a five -clinic
physical therapy practice with the previous owners retaining 30 %. When acquired, the practice was developing a sixth clinic which has
been completed. The purchase price for the 70 % interest was approximately $11.6 million, of which $11.3 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest are payable on March 31, 2023.
The purchase price for the 2021 acquisitions has been preliminarily allocated as follows (in thousands):
|
Physical Therapy
|
||||||||||||
|
IIPS*
|
Operations
|
Total
|
||||||||||
|
Cash paid, net of cash acquired
|
$
|
|
$
|
|
$
|
|
||||||
|
Seller notes
|
|
|
|
|||||||||
|
Contingent payments
|
|
|
|
|||||||||
|
Other payable
|
|
|
|
|||||||||
|
Seller put right
|
|
|
|
|||||||||
|
Total consideration
|
$
|
|
$
|
|
$
|
|
||||||
|
Estimated fair value of net tangible assets acquired:
|
||||||||||||
|
Total current assets
|
$
|
|
$
|
|
$
|
|
||||||
|
Total non-current assets
|
|
|
|
|||||||||
|
Total liabilities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net tangible assets acquired
|
$
|
|
$
|
|
$
|
|
||||||
|
Customer and referral relationships
|
|
|
|
|||||||||
|
Non-compete agreements
|
|
|
|
|||||||||
|
Tradenames
|
|
|
|
|||||||||
|
Goodwill
|
|
|
|
|||||||||
|
Fair value of non-controlling interest (classified as redeemable non-controlling interest)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
$
|
|
$
|
|
$
|
|
|||||||
|
*
|
|
The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition.
For the 2022 and 2021 acquisitions, a majority of total current assets primarily represents accounts receivable. Total non-current assets are fixed assets and equipment
used in the practice.
The purchase prices plus the fair value of the non-controlling interests for the acquisitions in 2021 were allocated to the fair value of the assets acquired, inclusive of
identifiable intangible assets, i.e. trade names, referral relationships and non-compete agreements, and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values being recorded as goodwill.
For the acquisitions in 2021, the values assigned to the customer and referral relationships and
non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period was 13.8 years. For non-compete agreements, the weighted-average amortization period was 5.6 years at the end of the year. The values assigned to tradenames are tested annually for impairment.
The consideration paid for each of the
acquisitions was derived through arm’s length negotiations. Funding for the cash portions was derived from proceeds from the Company’s revolving credit facility. The results of operations of the acquisitions have been included in the Company’s
consolidated financial statements since their respective date of acquisition. Unaudited proforma consolidated financial information for the acquisitions in 2022 and 2021 have not been included, as the results, individually and in the aggregate,
were not material to current operations.
The purchase price plus the fair
value of the non-controlling interest for the acquisitions in 2022 and those acquired after June 30, 2021 was allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. tradenames, referral relationships
and non-compete agreements, and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation
analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates
used on June 30, 2022 based on additional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimated valuation of the tangible assets acquired, the completion of the valuation of
identifiable intangible assets and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments
to goodwill. The Company does not expect the adjustments to be material. The purchase price allocation for the March 2021 and the June 2021 Acquisitions have been finalized. The Company continues to evaluate the components for the purchase price
allocations for other acquisitions in 2021.
For the acquisitions in 2022, the
values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period is
12.0 years. For non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment.
3. REVENUE RECOGNITION
Categories
Revenues are recognized in the period in which services are rendered.
Net patient revenue consists of revenue for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related
disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenue (patient revenue less estimated contractual adjustments) is recognized at the estimated net realizable
amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between us and the patient upon each patient visit. Generally, this
occurs as the Company provides physical and occupational therapy services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience.
Management contract revenue, which is included in other revenue in the consolidated statements of net income, is derived from contractual arrangements whereby the Company
manages a clinic owned by a third party. The Company does not have any ownership interest in these clinics. Typically, revenue is determined based on the number of visits conducted at the clinic and recognized at the point in time when services are
performed. Costs, typically salaries for our employees, are recorded when incurred.
Revenue from the industrial injury prevention services segment, which is included in other revenue in the consolidated statements of net income, is derived from onsite
services the Company provides to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention services segment is recognized when obligations under
the terms of the contract are satisfied. Revenue is recognized at an amount equal to the consideration the Company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based
on the number of hours and respective rate for services provided in a given period.
Additionally, other revenue includes services the Company provides on-site, such as schools, for physical or occupational therapy services, and fees from athletic trainers.
Contract terms and rates are agreed to in advance between the Company and the third parties. Services are typically performed over the contract period and revenue is recorded at the point of service. If the services are paid in advance, revenue is
recorded as a liability over the period of the agreement and recognized at the point in time, when the services are performed.
The Company determines credit losses based on the specific agings and payor classifications at each clinic.
The provision for credit losses is included in clinic operating cost in the statements of net income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and provision for credit
losses, includes only those amounts the Company estimates to be collectible.
The following table details the revenue related to the various categories (in thousands):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Net patient revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other revenue
|
|
|
|
|
||||||||||||
|
Physical therapy operations
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Management contract revenue
|
|
|
|
|
|
|
|
|
||||||||
|
Industrial injury prevention services revenue
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
Medicare Reimbursement
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee
Schedule (“MPFS”). For services provided in 2017 through 2019, a 0.5 % increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025 no adjustment is expected to be applied each year to the fee schedule payment rates, before applying the mandatory budget
neutrality adjustment.
In the 2020 MPFS Final Rule, the Centers for Medicare and Medicaid Services (“CMS”) revised coding, documentation guidelines, and increased the code values for
office/outpatient evaluation and management (“E/M”) codes and cuts to other codes to maintain budget neutrality of the MPFS beginning in 2021. Under the 2021 MPFS Final Rule, CMS increased the values for the E/M office visit codes and made cuts to
other specialty codes to maintain budget neutrality. As a result, CMS projected a 9 % decrease in fee schedule payment rates for therapy services set to take effect in 2021.
However, Congress intervened with passage of the Consolidated Appropriations Act, 2021 and reimbursement for the codes applicable to physical/occupational therapy services provided by our clinics received an
estimated 3.5 % decrease in the aggregate in payment from Medicare
in calendar year 2021 as compared to 2020.
In the 2022 MPFS Final Rule published on November 2, 2021, there was to be an approximately 3.75 % reduction to Medicare payments for physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by Congress in
2021 under the Consolidated Appropriations Act, 2021. However, this reduction was addressed in the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 Act”) signed into law on December 10, 2021. Based on various provisions in
the 2021 Act, the Company now estimates that the Medicare rate reduction for the full year of 2022 will be approximately 0.75 %. The
2021 Act did not address the 15 % reduction in Medicare payments for services performed by a physical or occupational therapist
assistant, which began on January 1, 2022.
In the 2023 MPFS Proposed Rule published on July 7, 2022, CMS proposed a 4.4 % reduction in the Physician Fee Schedule conversion factor. In addition, the Consolidated Appropriations Act, 2021 included a reduction in Medicare payment rates of approximately 3 % in 2024. These payment reductions are expected to take effect unless regulatory or Congressional action results in modifications to such rates as
has occurred in 2021 and 2022.
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over
the next ten years and requires automatic reductions in federal
spending by approximately $1.2 trillion. Payments to Medicare
providers are subject to these automatic spending reductions, subject to a 2 % cap. On April 1, 2013, a 2 % reduction to Medicare
payments was implemented. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2 % reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2 % reductions to Medicare payments through fiscal year 2027. The CARES Act suspended the 2 % payment reduction to Medicare payments for dates of service from May 1, 2020, through
December 31, 2020. The Consolidated Appropriations Act, 2021 further suspended the 2 % payment reduction until March 31, 2021. On April 14, 2021, additional legislation was enacted that waived the 2 % payment reduction for the remainder of calendar 2021. The 2021 Act, which was signed into law on December 10, 2021, included a three-month extension of the 2 % sequester relief applied to all Medicare
payments through March 31, 2022, followed by three months of 1 % sequester relief through June 30, 2022. Sequester relief is scheduled to
then end on June 30, 2022.
Beginning in 2021, payments to individual therapists (Physical/Occupational Therapist in Private Practice)
paid under the fee schedule may be subject to adjustment based on performance in the Merit Based Incentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health
records. Therapists eligible to participate in MIPS include only those therapists who are enrolled with Medicare as private practice providers, and does not include therapists in facility-based providers, such as our clinics enrolled as certified
rehabilitation agencies. Less than 3 % of the Company’s therapist
providers currently participate in MIPS. Under the MIPS requirements, a provider’s performance is assessed according to established performance standards each year and then is used to determine an adjustment factor that is applied to the
professional’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 will determine the payment adjustment in 2021. For those therapist providers who actually participated in MIPS during 2019, the resulting average
payment adjustment was an increase of 1 %.
Under the Middle-Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who
met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The MACRA directed CMS to
modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the $3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate.
The Bipartisan Budget Act of 2018 extends the targeted medical review indefinitely but reduces the threshold to $3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare
Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.
CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient
therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100 % of the practice expense component of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense
component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2013, the practice expense
component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50 %.
Medicare claims for outpatient therapy services furnished by therapist assistants on or after January 1, 2020 must include a modifier indicating the service was furnished
by a therapist assistant. Outpatient therapy services furnished on or after January 1, 2022, in whole or part by a therapist assistant are paid at an amount equal to 85 % of the payment amount otherwise applicable for the service.
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company
believes that the Company is in compliance, in all material respects, with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material
effect on the Company’s financial statements as of June 30, 2022. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and
exclusion from the Medicare program. For the six months ended June 30, 2022, and 2021, respectively, net patient revenue from Medicare was approximately $74.9
million and $62.1 million, respectively.
Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, the Company may not continue to receive reimbursement rates from
Medicare that sufficiently compensate us for the Company’s services or, in some instances, cover the Company’s operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on the
Company’s revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect the Company’s
business, financial condition and results of operations.
Contractual Allowances
Contractual allowances result from the differences between the rates charged for services performed and
expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third-party payors and managed care contracts are often complex and may include multiple
reimbursement mechanisms payable for the services provided in Company clinics. The Company estimates contractual allowances based on its interpretation of the applicable regulations, payor contracts and historical calculations. Each month the
Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable
balances for each payor of the clinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow the Company to provide the necessary detail and accuracy with
its collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from the Company’s estimates. Payor terms are periodically revised
necessitating continual review and assessment of the estimates made by management. The Company’s billing system does not capture the exact change in its contractual allowance reserve estimate from period to period in order to assess the accuracy
of its revenues and hence its contractual allowance reserves. Management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, historically the
difference between net revenues and corresponding cash collections has generally reflected a difference within approximately 1.0 % to 1.5 %
of net revenue. Additionally, analysis of subsequent periods’ contractual write-offs on a payor basis reflects a difference within approximately 1.0 % to 1.5 %
between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, the Company believes that a change in the contractual
allowance reserve estimate would not likely be more than 1.0 % to
1.5 % on June 30, 2022.
A contract’s transaction price is allocated to each distinct performance obligation and recognized when, or as, the performance obligation is satisfied. To determine the
transaction price, the Company includes the effects of any variable consideration, such as the probability of collecting that amount. The Company applies established rates to the services provided, and adjusts for the terms of payor contracts, as
applicable. These contracted amounts are different from the Company’s established rates. The Company has established a “contractual allowance” for this difference. The allowance is based on the terms of payor contracts, historical and current
reimbursement information and current experience with the clinic and partners. The Company’s established rates less the contractual allowance is the revenue that is recognized in the period in which the service is rendered. This revenue is deemed
the transaction price and stated as “Net Patient Revenue” on the Company’s consolidated statements of income.
The Company’s performance obligations are satisfied at a point in time. After the clinic has provided
services and satisfied its obligation to the customer for the reimbursement rates stipulated in the payor contracts (i.e. the transaction price), the Company recognizes the revenue, net of contractual allowances, in the period in which the
services are rendered. The Company recognizes the full amount of revenue and reports the contractual allowances as a contra (or offset) revenue account to report a net revenue number based on the expected collections.
4. EARNINGS PER SHARE
In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 5 – Redeemable Non-Controlling Interest), net of tax,
charged directly to retained earnings is included in the earnings per basic and diluted share calculation. The following table provides a detail of the basic and diluted earnings per share computation (in thousands, except per share data).
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Computation of earnings per share - USPH shareholders:
|
||||||||||||||||
|
Net income attributable to USPH shareholders
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
(Charges) credit to retained earnings:
|
||||||||||||||||
|
Revaluation of redeemable non-controlling interest
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Tax effect at statutory rate (federal and state) of
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
|
Earnings per share (basic and diluted)
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Shares used in computation:
|
||||||||||||||||
|
Basic and diluted earnings per share - weighted-average shares
|
|
|
|
|
||||||||||||
5. REDEEMABLE NON-CONTROLLING INTEREST
Since October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic business (referred to as “Therapy Practice”), these
Acquisitions occur in a series of steps which are described below.
| 1. |
Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity is owned by one or more individuals
(the “Selling Shareholders”) most of whom are physical therapists that work in the Therapy Practice and provide physical therapy services to patients.
|
| 2. |
In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limited partnership (“NewCo”), in exchange for one
hundred percent (
|
| 3. |
The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (ranges from
|
| 4. |
The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the
limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo.
|
| 5. |
As noted above, the Company does not purchase
|
| 6. |
In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”) with NewCo with an initial term that
ranges from to
|
| 7. |
The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary and commensurate with his or her responsibilities
based on other employees in similar capacities within NewCo, the Company and the industry.
|
| 8. |
The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete
agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). A Non-Compete Agreement is executed with the Selling
Shareholders in all cases. That is, even if the Selling Shareholder does not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competing business during the Non-Compete Term.
|
| 9. |
The Non-Compete Term commences as of the date of the Acquisition and expires on the later
of :
|
| a. |
|
| b. |
to
|
| 10. |
The Non-Compete Agreement applies to a restricted region which is a defined mile radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in
competing businesses or activities outside the defined mileage (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is not employed by NewCo immediately is permitted to engage in the
competing business or activities outside the defined mileage.
|
The Partnership Agreement contains provisions for the redemption of the Seller Entity Interest, either at the option of the Company (the “Call Right”) or at the option
of the Seller Entity (the “Put Right”) as follows:
| 1. |
Put Right
|
| a) |
In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to a specified date (the “Specified Date”), the Seller Entity thereafter may have an
irrevocable right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below.
|
| b) |
In the event that any Selling Shareholder is not employed by NewCo as of the Specified Date and the Company has not exercised its Call Right with respect to the Terminated Selling
Shareholder’s Allocable Percentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller
Entity’s Interest at the purchase price described in “3” below.
|
| c) |
In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the Specified Date, the Seller Entity shall have the Put Right, and upon the
exercise of the Put Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.
|
| 2. |
Call Right
|
| a) |
If any Selling Shareholder’s employment by NewCo is terminated prior to the Specified Date, the Company thereafter shall have an irrevocable right to purchase from Seller Entity the
Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below.
|
| b) |
In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after Specified Date, the Company shall have the Call Right, and upon the exercise of
the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.
|
| 3. |
For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes,
depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within
NewCo. Therefore, the undistributed earnings amount is small, if any.
|
| 4. |
The Purchase Price for the initial equity interest purchased by the Company is, in almost all cases, also based on the same specified multiple of the trailing twelve-month earnings that
is used in the Put Right and the Call Right noted above.
|
| 5. |
The Put Right and the Call Right do not have an expiration date, and the Seller Entity Interest is not required to be purchased by the Company or sold by the Seller Entity unless either
the Put Right or the Call Right is exercised.
|
| 6. |
The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since the Company requires that such Selling Shareholders sell their entire
ownership interest in the Seller Entity at the closing of the Acquisition.
|
ProgressiveHealth
Acquisition
On November 30, 2021, the Company acquired a
majority interest in ProgressiveHealth Companies, LLC (“Progressive”), which owns a majority interest in certain subsidiaries (“Progressive Subsidiaries”) that operate in the industrial injury prevention and therapy services businesses. The
Progressive transaction was completed in a series of steps which are described below.
| 1. |
Prior to the acquisition, the Progressive Subsidiaries were owned by a legal entity (“Progressive Parent”) controlled by its individual owners (the “Progressive Selling Shareholders”), who work in and manage the
Progressive business.
|
| 2. |
In conjunction with the acquisition, the Selling Shareholders caused the Progressive Parent to transfer its ownership of the Progressive Subsidiaries into a newly-formed limited liability company (“Progressive
NewCo”), in exchange for one hundred percent (
|
| 3. |
The Company entered into an agreement (the “Progressive Purchase Agreement”) to acquire from the Selling Shareholders a majority of the membership interest in NewCo. The consideration for the acquisition is
primarily payable in the form of cash at closing, a relatively small portion paid in cash after the closing contingent on certain performance criteria, and a small note in lieu of an escrow (the “Progressive Purchase Price”).
|
| 4. |
The Company and the Selling Shareholders also executed an operating agreement (the “Progressive Operating Agreement”) for NewCo that sets forth the rights and obligations of the members of NewCo.
|
| 5. |
As noted above, the Company did not purchase
|
| 6. |
The Company and the Selling Shareholders executed a non-compete agreement (the “Progressive Non-Compete Agreement”) which restricts the Selling Shareholders from competing for a specified period of time (the
“Progressive Non-Compete Term”).
|
| 7. |
The Non-Compete Term commences as of the date of the Acquisition and expires on the later of:
|
| a. |
|
| b. |
|
| 8. |
The Non-Compete Agreement applies to the entire United States.
|
| 9. |
The Put Right (as defined below) and the Call Right (as defined below) do not have an expiration date.
|
The Operating Agreement contains provisions
for the redemption of the Selling Shareholder’s Interest, either at the option of the Company (the “Progressive Call Right”) or at the option of the Selling Shareholder (the “Progressive Put Right”) as follows:
| 1. |
Put Right
|
|
a.
|
Each of the Selling Shareholders has the right to sell
|
|
b.
|
In the event that any Selling Shareholder terminates his management relationship with NewCo for any reason on or after the seventh anniversary of the Closing Date, the Selling
Shareholder has the Put Right, and upon the exercise of the Put Right, the Selling Shareholder’s Interest shall be redeemed by the Company at the purchase price described in “3” below.
|
| 2. |
Call Right
|
|
a.
|
If any Selling Shareholder’s ceases to perform management services on behalf of NewCo, the Company thereafter shall have an irrevocable right to purchase from such Selling
Shareholder his Interest, in each case at the purchase price described in “3” below.
|
|
3.
|
For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest,
taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on
available cash within NewCo; therefore, the undistributed earnings amount is small, if any.
|
|
4.
|
The Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month earnings that is used in
the Put Right and the Call Right noted above.
|
|
5.
|
The Put Right and the Call Right do not have an expiration date.
|
Neither the Operating Agreement nor the
Non-Compete Agreement contain any provision to escrow or “claw back” the equity interest in NewCo held by the Selling Shareholders, in the event of a breach of the operating agreement or non-compete terms, or the management services agreement
pursuant to which the Selling Shareholders perform services on behalf of NewCo. The Company’s only recourse against the Selling Shareholder for breach of any of these agreements is to seek damages and other legal remedies under such agreements.
There are no conditions in any of the arrangements with a Selling Shareholder that would result in a forfeiture of the equity interest in NewCo held by a Selling Shareholder.
An Employed Selling
Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and the Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do not contain any provision
to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the
Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any
portion of the Seller Entity Interest. The Company’s only recourse against the Employed Selling Shareholder for breach of either the Employment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements.
There are no conditions in any of the arrangements with an Employed Selling Shareholder that would result in a forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest.
For the dates indicated, the following table
details the changes in the carrying amount (fair value) of the redeemable non-controlling interest (in thousands):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Beginning balance
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Operating results allocated to redeemable non-controlling interest partners
|
|
|
|
|
||||||||||||
|
Distributions to redeemable non-controlling interest partners
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Changes in the fair value of redeemable non-controlling interest
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Purchases of redeemable non-controlling interest
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Acquired interest
|
|
|
|
|
||||||||||||
|
Sales of redeemable non-controlling interest - temporary equity
|
|
|
|
|
||||||||||||
|
Notes receivable related to sales of redeemable non-controlling interest - temporary equity
|
(
|
)
|
|
(
|
)
|
(
|
)
|
|||||||||
|
Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity
|
|
|
|
|
||||||||||||
|
Ending balance
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interest (in thousands):
|
|
Six Months Ended
|
|||||||
|
|
June 30, 2022
|
June 30, 2021
|
||||||
|
|
||||||||
|
Contractual time period has lapsed but holder’s employment has not terminated
|
$
|
|
$
|
|
||||
|
Contractual time period has not lapsed and holder’s employment has not terminated
|
|
|
||||||
|
Holder’s employment has terminated and contractual time period has expired
|
|
|
||||||
|
Holder’s employment has terminated and contractual time period has not expired
|
|
|
||||||
|
|
$
|
|
$
|
|
||||
6. GOODWILL
The changes in the carrying amount of goodwill consisted of the following (in thousands):
|
Six Months Ended
|
Year Ended
|
|||||||
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Goodwill acquired
|
|
|
||||||
|
Goodwill adjustments for purchase price allocation of businesses acquired in prior year
|
(
|
)
|
(
|
)
|
||||
|
Ending balance
|
$
|
|
$
|
|
||||
7. INTANGIBLE ASSETS, NET
Intangible assets, net as of June 30, 2022, and December 31, 2021 consisted of the following (in thousands):
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
Tradenames
|
$
|
|
$
|
|
||||
|
Customer and referral relationships, net of accumulated amortization of $
|
|
|
||||||
|
Non-compete agreements, net of accumulated amortization of $
|
|
|
||||||
|
$
|
|
$
|
|
|||||
Tradenames, referral relationships and non-compete agreements are related to the businesses acquired. The value assigned to tradenames has an indefinite life and is tested
at least annually for impairment using the relief from royalty method in conjunction with the Company’s annual goodwill impairment test. The value assigned to referral relationships is being amortized over their respective estimated useful lives
which range from to fourteen years .
Non-compete agreements are amortized over the respective term of the agreements which range from to six years .
The following table details the amount of amortization expense recorded for intangible
assets for the three months ended June 30, 2022, and 2021 (in thousands):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Customer and referral relationships
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Non-compete agreements
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
Based on the balance of referral relationships and non-compete agreements as of June 30, 2022, the expected
amount to be amortized in 2022 and thereafter by year is as follows (in thousands):
|
Customer and Referral Relationships
|
Non-Compete Agreements
|
||||||||||
|
Years
|
Annual Amount
|
Years
|
Annual Amount
|
||||||||
|
Ending December 31,
|
Ending December 31,
|
||||||||||
|
2022 (excluding the six months ended June 30, 2022)
|
$
|
|
2022 (excluding the six months ended June 30, 2022)
|
$
|
|
||||||
|
2023
|
$
|
|
2023 |
$
|
|
||||||
|
2024
|
$
|
|
2024 |
$
|
|
||||||
|
2025
|
$
|
|
2025 |
$
|
|
||||||
|
2026
|
$
|
|
2026 |
$
|
|
||||||
|
Thereafter
|
$
|
|
Thereafter
|
$
|
|
||||||
8. ACCRUED EXPENSES
Accrued expenses as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
Salaries and related costs
|
$
|
|
$
|
|
||||
|
Credit balances due to patients and payors
|
|
|
||||||
|
Group health insurance claims
|
|
|
||||||
|
Closure costs
|
|
|
||||||
|
Federal taxes payable
|
|
|
||||||
|
Contingent payments related to acquisition
|
|
|
||||||
| Settlement of a legal matter |
||||||||
|
Other
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
In January 2022, to avoid the legal fees and discovery costs in defending a legal matter and the uncertainty of protracted litigation, the Company entered into a settlement agreement. The Company admitted no
liability or wrongdoing. Under the terms of the settlement, the Company agreed to make payments which amounted to $2.75
million, of which $2.6 million was recorded as an expense in 2021.
9. NOTES PAYABLE AND AMENDED CREDIT AGREEMENT
Effective December 5, 2013, the Company entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility. This agreement was amended
and/or restated in August 2015, January 2016, March 2017, November 2017, January and 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.
Amounts outstanding under the Amended Credit Agreement and Credit Agreement (as
defined above) and notes payable as of June 30, 2022 and
December 31, 2021 consisted of the following (in
thousands):
|
|
June 30, 2022
|
December 31, 2021
|
||||||||||||||||||||||
|
|
Principal
Amount
|
Unamortized discount
and debt issuance cost
|
Net Debt
|
Principal
Amount
|
Unamortized discount
and debt issuance cost
|
Net Debt
|
||||||||||||||||||
|
Revolving Facilitiy
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Term Facility
|
|
|
|
|
|
|
||||||||||||||||||
|
Other Debt
|
|
|
|
|
|
|
||||||||||||||||||
|
Total Debt
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Less: Current portion of long-term debt
|
|
|
$
|
|
|
|
|
|||||||||||||||||
|
Total long-term debt, net of current portion
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
The Credit Agreement, which matures on June 17, 2027 , provides for loans in an aggregate principal amount of $325 million. Such loans were made available through the following
facilities (collectively, the “Senior Credit Facilities”):
|
1)
|
Revolving Facility: $ |
|
2)
|
Term Facility: $
|
The proceeds of the Revolving Facility shall be used by the Company for working capital and other general corporate purposes of the Company and
its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by the Company to refinance the indebtedness outstanding under the Amended Credit Agreement, to pay fees and
expenses incurred in connection with the transactions involving the loan facilities, for working capital and other general corporate purposes of the Company and its subsidiaries.
The Company is permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $100 million plus (ii) an unlimited additional amount, provided that (in the case of clause (ii)), after giving effect to
such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0 :1.0, and the aggregate amount of all incremental increases under the
Revolving Facility does not exceed $50,000,000 .
The interest rates per annum applicable to the Senior Credit Facilities (other
than in respect of Swingline Loans) will be Term SOFR (as defined in the Credit Agreement) plus an applicable margin or, at the option of the Company, an alternate base rate plus an applicable margin. Each Swingline Loan shall bear interest at
the base rate plus the applicable margin. The applicable margin for Term SOFR borrowings ranges from 1.50 % to 2.25 %, and the applicable margin for alternate
base rate borrowings ranges from 0.50 % to 1.25 %, in each case, based on the Consolidated Leverage Ratio of the Company and its subsidiaries. Interest is payable at the
end of the selected interest period but no less frequently than quarterly and on the date of maturity.
The Company will also pay to the Administrative Agent, for the account of each
lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). Such unused fee will range between 0.25 % and 0.35 % per annum and is also based on the Consolidated Leverage Ratio of the Company and
its subsidiaries. The Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any 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.
The Company’s obligations under the Credit Agreement are guaranteed by its
wholly-owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by a perfected first
priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions.
As of June 30, 2022, $150.0
million was outstanding on the Senior Credit Facilities, resulting in $175.0 million of availability. As of June 30, 2022, the Company was in compliance with all of the covenants contained in the Credit Agreement.
The Company generally enters into various notes payable as a means of financing a
portion of its acquisitions and purchasing of non-controlling interests. In conjunction with these transactions in 2022 and 2021, the Company entered into notes payable in the aggregate amount of $4.9 million of which an aggregate principal payment of $0.8 million is due in 2022, $4.1 million
is due in 2023. Interest accrues in the range of 3.25 % to 3.50 % per annum and is payable with each principal installment.
10. DERIVATIVE INSTRUMENTS
The Company is
exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use
derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk
management activities do not eliminate these risks.
Interest Rate Swap
In May 2022, the Company entered into an interest rate swap agreement, effective on
June 30, 2022, with Bank of America, N.A, which has a $150 million notional value, and a maturity date of June 30, 2027 . Beginning in July 2022, the Company receives 1-month SOFR, and pays a fixed rate of interest of 2.815 % on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on the Company’s consolidated
leverage ratio.
In connection with the swap, no cash was exchanged between the Company and the
counterparty.
The Company designated its interest rate swap as a cash flow hedge and structured
it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.
The impacts of the Company’s derivative instruments on the accompanying
Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2022 are presented in the table below (in thousands):
|
|
Three Months Ended
|
For the Six Months Ended
|
||||||||||||||
|
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
||||||||||||
|
Unrealized loss on cash flow hedge
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Tax effect at statutory rate (federal and state) of
|
|
|
|
|
||||||||||||
|
Other Comprehensive loss
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||
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 in
current liabilities) were as follows:
|
|
June 30, 2022
|
June 30, 2021
|
||||||
|
|
||||||||
|
Interest rate swap
|
$
|
(
|
)
|
$
|
|
|||
11. LEASES
The Company has operating leases for its corporate offices and operating facilities. The Company determines if an arrangement is a lease at the inception of a contract.
Effective January 1, 2019, right- of-use assets and operating lease liabilities are included in the consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease
liabilities represent net present value of the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the net present value of the fixed
lease payments over the lease term. The Company’s operating lease terms are generally five years or less. The Company’s lease terms
include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. Operating fixed lease expense is recognized on a straight-line basis over the lease term.
In accordance with ASC 842, the Company records on its consolidated balance sheet leases with a term greater than 12 months. The Company has elected, in compliance with
current accounting standards, not to record leases with an initial term of 12 months or less in the consolidated balance sheet. ASC 842 requires the separation of the fixed lease components from the variable lease components. The Company has elected
the practical expedient to account for separate lease components of a contract as a single lease cost thus causing all fixed payments to be capitalized. Non-lease and variable cost components are not included in the measurement of the right-of-use
assets or operating lease liabilities. The Company also elected the package of practical expedients permitted within ASC 842, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment
amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage are not included in the right-of- use assets or operating lease liabilities. These are expensed as
incurred and recorded as variable lease expense.
For the three and six months ended June 30, 2022, the components of lease expense were as follows (in thousands):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Operating lease cost
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Short-term lease cost
|
|
|
|
|
||||||||||||
|
Variable lease cost
|
|
|
|
|
||||||||||||
|
Total lease cost *
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
*Sublease
income was immaterial
Lease cost is reflected in the consolidated statement of net income in the line item – rent, supplies, contract labor and other.
Supplemental information related to leases was as follows (in thousands):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands)
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The aggregate future lease payments for operating leases as of June 30,
2022 were as follows (in thousands):
|
Fiscal Year
|
Amount
|
|||
|
2022
(excluding the six months ended June 30, 2022)
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027 and
therafter
|
|
|||
|
Total lease payments
|
$
|
|
||
|
Less: imputed interest
|
|
|||
|
Total operating lease liabilities
|
$
|
|
||
Average lease terms and discount rates were as follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Weighted-average remaining lease term - Operating leases
|
|
|
|
|
||||||||||||
|
Weighted-average discount rate - Operating leases
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
12. SEGMENT INFORMATION
The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Also included in the physical
therapy operations segment are revenues from management contract services and other services which include services the Company provides on-site, such as schools for athletic trainers.
The Company evaluates performance of the segments based on gross profit. The Company has provided additional information regarding its reportable segments which contributes
to the understanding of the Company and provides useful information.
The following table summarizes selected financial data for the Company’s reportable segments.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
Net operating revenue:
|
||||||||||||||||
|
Physical therapy operations
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Industrial injury prevention services
|
|
|
|
|
||||||||||||
|
Total Company
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
|
||||||||||||||||
|
Gross profit:
|
||||||||||||||||
|
Physical therapy operations
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Industrial injury prevention services
|
|
|
|
|
||||||||||||
|
Gross profit
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
|
||||||||||||||||
|
Total Assets:
|
||||||||||||||||
|
Physical therapy operations
|
$
|
|
$
|
|
||||||||||||
|
Industrial injury prevention services
|
|
|
||||||||||||||
|
Total Company
|
$
|
|
$
|
|
||||||||||||
13. INVESTMENT IN UNCONSOLIDATED
AFFILIATE
Through one of the subsidiaries, the Company has a 49 %
joint venture interest in a company which provides physical therapy services for patients at hospitals. Since the Company is deemed to not have a controlling interest in the joint venture, the Company’s investment is accounted for using the equity
method of accounting. The investment balance of this joint venture as of June 30, 2022, is $12.3 million. For the six months ended June
30, 2022, the earnings amounted to$679 thousand and $548 thousand was distributed to the Company.
14. COMMON STOCK
From September 2001 through December 31, 2008, the Board authorized the Company to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of the Company’s common stock. In March 2009, the Board authorized the repurchase of up to 10 % or approximately 1,200,000 shares of its common stock (“March
2009 Authorization”). The Amended Credit Agreement permits share repurchases of up to $15,000,000 , subject to compliance with covenants.
The Company is required to retire shares purchased under the March 2009 Authorization.
Under the March 2009 Authorization, the Company has purchased a total of 859,499
shares. There is no expiration date for the share repurchase program. There are currently an additional estimated 137,363 shares (based on
the closing price of $109.20 on June 30, 2022) that may be purchased from time to time in the open market or private transactions depending
on price, availability and the Company’s cash position. The Company did no
15. RECLASSIFICATION OF PRIOR PERIOD
PRESENTATION
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of
operations.
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes
thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022 (“2021 Annual Report”); and
(iii) our management’s discussion and analysis of financial condition and results of operations included in our 2021 Annual Report. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may
differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and in Part II, Item 1A. Risk Factors of this report.
References to “we,” “us,” “our” and the “Company” shall mean U.S. Physical Therapy, Inc. and its subsidiaries.
EXECUTIVE SUMMARY
Our Business
We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and
rehabilitation of injured workers. We also operate an industrial injury prevention services (“IIPS”) business which includes onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments services.
Selected Operating and Financial Data
Our reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Our physical operations consist of physical therapy and occupational therapy clinics that
provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by industrial injury prevention services
segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.
At June 30, 2022, we operated 608 clinics in 39 states. In addition to our ownership and operation of outpatient physical therapy clinics, we also manage physical therapy facilities for third parties, such as physicians
and hospitals, with 33 such third-party facilities under management as of June 30, 2022.
During the 2021 year and for the six months ended June 30, 2022, we completed the acquisitions of four multi-clinic practices and two industrial injury services businesses as detailed below.
|
Acquisition
|
Date
|
Acquired
|
Clinics
|
|||
|
March 2022 Acquisition
|
March 31, 2022
|
70%
|
6
|
|||
|
December 2021 Acquisition
|
December 31, 2021
|
75%
|
3
|
|||
|
November 2021 Acquisition
|
November 30, 2021
|
70%
|
IIPS*
|
|||
|
September 2021 Acquisition
|
September 30, 2021
|
100%
|
IIPS*
|
|||
|
June 2021 Acquisition
|
June 30, 2021
|
65%
|
8
|
|||
|
March 2021 Acquisition
|
March 31, 2021
|
70%
|
6
|
*Industrial injury prevention services business
During the six months ended June 30, 2022, we closed three clinics and sold five clinics.
Employees
Our strategy is to acquire physical therapy practices, develop outpatient physical therapy clinics as satellites within existing partnerships, acquire industrial injury prevention services businesses,
and to continue to support the growth of our existing businesses requires a talented workforce that can grow with us. As of June 30, 2022 we employed approximately 5,809 people nationwide, of which approximately 3,158 were full-time employees.
It is crucial that we continue to attract and retain top talent. To attract and retain talented employees, we strive to make our corporate office and all of our practices and businesses a diverse and
healthy workplace, with opportunities for our employees to receive continuing education, skill development, encouragement to grow and develop their career, all supported by competitive compensation, incentives, and benefits. Our clinical
professionals are all licensed and a vast majority have advanced degrees. Our operational leadership teams have long-standing relationships with local and regional universities, professional affiliations, and other applicable sources that provide our
practices with a talent pipeline.
We provide competitive compensation and benefits programs to help meet our employees’ needs in the practices and communities in which they serve. These programs (which can vary by practice and
employment classification) include incentive compensation plans, a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, education assistance, mental health, and other employee
assistance benefits.
We invest resources to develop the talent needed to support our business strategy. Resources include a multitude of training and development programs delivered internally and externally, online and
instructor-led, and on-the-job learning formats.
We expect to continue adding personnel in the future as we focus on potential acquisition targets and organic growth opportunities.
RESULTS OF OPERATIONS
Summary of 2022 Second Quarter Compared to the 2021 Second Quarter Results
For the three months ended June 30, 2022 (“2022 Second Quarter”), our net income attributable to our shareholders was $11.2 million as compared to $12.4 million for the three months ended June 30, 2021 (“2021 Second
Quarter”). In accordance with Generally Accepted Accounting Principles (“GAAP”), the revaluation of redeemable non-controlling interest, net of taxes, is not included in net income but charged directly to retained earnings; however, the charge for
this change is included in the earnings per basic and diluted share calculation. Inclusive of the charge for revaluation of non-controlling interest, net of taxes, the amount is $11.4 million, or $0.87 per diluted share, for the 2022 Second Quarter,
and $10.5 million, or $0.82 per diluted share, for the 2021 Second Quarter.
For the 2022 Second Quarter, our Operating Results, a non-GAAP measure, was $11.7 million, or $0.90 per diluted share, the second highest quarterly amount in our Company’s history, as compared to $12.4 million, or $0.96 per
diluted share, for the 2021 Second Quarter, the highest quarterly amount in our Company’s history.
For the six months ended June 30, 2022 (“2022 Six Months”), our net income attributable to our shareholders was $20.0 million and was $20.6 million for the six months ended June 30, 2022 (“2021 Six Months”). Inclusive of
the charge for revaluation of non-controlling interest, net of taxes, the amount is $20.0 million, or $1.55 per diluted share, for the 2022 Six Months, and $13.3 million, or $1.03 per diluted share, for the 2021 Six Months.
For the 2022 Six Months, our Operating Results, a non-GAAP measure, was $20.0 million, or $1.54 per diluted share, a decrease of 3.0%, as compared to $20.6 million, or $1.60 per diluted share, for the 2021 Second Quarter.
We believe providing Operating Results is useful to investors for comparing our period-to-period results and for comparing with other similar businesses since most do not have redeemable instruments and therefore have
different equity structures. We use Operating Results, which eliminates certain items described above that can be subject to volatility and unusual costs, as one of the principal measures to evaluate and monitor financial performance.
Operating Results is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the
consolidated financial statements.
The following tables provide detail of the diluted earnings per share computation and reconcile net income attributable to our shareholders calculated in accordance with GAAP to Operating Results (in thousands, except per
share data):
|
Three Months Ended June 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
Computation of earnings per share - USPH shareholders:
|
||||||||
|
Net income attributable to USPH shareholders
|
$
|
11,195
|
$
|
12,436
|
||||
|
Credit (charges) to retained earnings:
|
||||||||
|
Revaluation of redeemable non-controlling interest
|
210
|
(2,549
|
)
|
|||||
|
Tax effect at statutory rate (federal and state) of 25.55%
|
(54
|
)
|
651
|
|||||
|
$
|
11,351
|
$
|
10,538
|
|||||
|
Earnings per share (basic and diluted)
|
$
|
0.87
|
$
|
0.82
|
||||
|
Adjustments:
|
||||||||
|
Change in revaluation of put-right liability
|
617
|
-
|
||||||
|
Revaluation of redeemable non-controlling interest
|
(210
|
)
|
2,549
|
|||||
|
Tax effect at statutory rate (federal and state)
|
(104
|
)
|
(651
|
)
|
||||
|
Operating Results (a non-GAAP measure)
|
$
|
11,654
|
$
|
12,436
|
||||
|
Basic and diluted Operating Results per share (a non-GAAP measure)
|
$
|
0.90
|
$
|
0.96
|
||||
|
Shares used in computation - basic and diluted
|
12,998
|
12,902
|
||||||
|
Six Months Ended June 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
Computation of earnings per share - USPH shareholders:
|
||||||||
|
Net income attributable to USPH shareholders
|
$
|
19,994
|
$
|
20,609
|
||||
|
Credit (charges) to retained earnings:
|
||||||||
|
Revaluation of redeemable non-controlling interest
|
57
|
(9,819
|
)
|
|||||
|
Tax effect at statutory rate (federal and state) of 25.55%
|
(15
|
)
|
2,508
|
|||||
|
$
|
20,036
|
$
|
13,298
|
|||||
|
Earnings per share (basic and diluted)
|
$
|
1.55
|
$
|
1.03
|
||||
|
Adjustments:
|
||||||||
|
Change in revaluation of put-right liability
|
14
|
-
|
||||||
|
Revaluation of redeemable non-controlling interest
|
(57
|
)
|
9,819
|
|||||
|
Tax effect at statutory rate (federal and state)
|
11
|
(2,508
|
)
|
|||||
|
Operating Results (a non-GAAP measure)
|
$
|
20,004
|
$
|
20,609
|
||||
|
Basic and diluted Operating Results per share (a non-GAAP measure)
|
$
|
1.54
|
$
|
1.60
|
||||
|
Shares used in computation - basic and diluted
|
12,968
|
12,886
|
||||||
The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements (in thousands):
|
Three Months Ended June 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
Net operating revenue:
|
||||||||
|
Physical therapy operations
|
$
|
121,219
|
$
|
116,895
|
||||
|
Industrial injury prevention services
|
19,437
|
10,033
|
||||||
|
Total Company
|
$
|
140,656
|
$
|
126,928
|
||||
|
Gross profit:
|
||||||||
|
Physical therapy operations
|
$
|
26,698
|
$
|
31,761
|
||||
|
Industrial injury prevention services
|
4,123
|
2,543
|
||||||
|
Gross profit
|
$
|
30,821
|
$
|
34,304
|
||||
|
Total Assets:
|
||||||||
|
Physical therapy operations
|
$
|
414,172
|
$
|
545,449
|
||||
|
Industrial injury prevention services
|
382,272
|
203,977
|
||||||
|
Total Company
|
$
|
796,444
|
$
|
749,426
|
||||
Revenue
Reported total revenue for the 2022 Second Quarter was $140.7 million, an increase of 10.8% as compared to $126.9 million for the 2021 Second Quarter. See table below for a detail of reported total
revenue (in thousands):
|
Three Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
Revenue related to Mature Clinics
|
$
|
108,582
|
$
|
110,105
|
||||
|
Revenue related to 2022 Clinic Additions
|
3,117
|
-
|
||||||
|
Revenue related to 2021 Clinic Additions
|
6,191
|
2,414
|
||||||
|
Revenue from clinics sold or closed in 2022
|
306
|
592
|
||||||
|
Revenue from clinics sold or closed in 2021
|
-
|
127
|
||||||
|
Net patient revenue from physical therapy operations
|
118,196
|
113,238
|
||||||
|
Other revenue
|
898
|
918
|
||||||
|
Revenue from physical therapy operations
|
119,094
|
114,156
|
||||||
|
Revenue - Management contracts
|
2,125
|
2,739
|
||||||
|
Revenue - Industrial injury prevention services
|
19,437
|
10,033
|
||||||
|
Total Revenue
|
$
|
140,656
|
$
|
126,928
|
||||
Revenue from physical therapy operations increased $4.9 million, or 4.3%, to $119.1 million for the 2022 Second Quarter from $114.2 million for the 2021 Second Quarter. Net patient revenue related to
clinics opened or acquired prior to 2021 and still in operation on June 30, 2022 (“Mature Clinics”) decreased $1.5 million, or 1.4%, to $108.6 million for the 2022 Second Quarter compared to $110.1 million for the 2021 Second Quarter, due mostly to
the decrease in average net patient revenue per visit. Visits for Mature Clinics (same store) for the 2022 Second Quarter decreased slightly (0.2%) as compared to the 2021 Second Quarter.
The average net patient revenue per visit was $103.18 for the 2022 Second Quarter as compared to $104.46 for the 2021 Second Quarter. Total patient visits increased 5.7% to 1,145,554 for the 2022 Second Quarter from
1,084,070 for the 2021 Second Quarter. Net patient revenue is based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenue is determined after contractual and other
adjustments relating to patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.
Revenue from the industrial injury prevention services business increased 93.7% to $19.4 million for the 2022 Second Quarter as compared to $10.0 million for the 2021 Second Quarter. Excluding $6.8 million of revenue
related to the IIPS acquisition in November 2021, IIPS revenue increased 25.5% in the 2022 Second Quarter as compared to the 2021 Second Quarter.
Revenue from management contracts decreased 22.4% to $2.1 million for the 2022 Second Quarter as compared to $2.7 million for the 2021 Second Quarter due to the termination of five management contracts.
Operating Cost
Total operating cost was $109.8 million for the 2022 Second Quarter, or 78.1% of total revenue, as compared to $92.6 million, or 73.0% of total revenue, for the 2021 Second Quarter. Operating cost
related to Mature Clinics increased by $4.0 million or 5.0%, for the 2022 Second Quarter compared to the 2021 Second Quarter. In addition, operating cost related to the IIPS business increased by $7.8 million of which $5.7 million related to our
November 2021 IIPS acquisition. Physical therapy total operating costs were $81.09 per visit in the 2022 Second Quarter as compared to $76.50 per visit in the 2021 Second Quarter, an increase of 6.0%. See table below for a detail of operating cost
(in thousands):
|
Three Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
Operating cost related to Mature Clinics
|
$
|
84,216
|
$
|
80,205
|
||||
|
Operating cost related to 2022 Clinic Additions
|
2,692
|
-
|
||||||
|
Operating cost related to 2021 Clinic Additions
|
5,996
|
2,063
|
||||||
|
Operating cost related to clinics sold or closed in 2022
|
324
|
555
|
||||||
|
Operating cost related to clinics sold or closed in 2021
|
-
|
107
|
||||||
|
Operating cost related to physical therapy operations
|
92,898
|
82,930
|
||||||
|
Operating cost related to management contracts
|
1,622
|
2,203
|
||||||
|
Operating cost related to industrial injury prevention services
|
15,315
|
7,491
|
||||||
|
Total operating cost
|
$
|
109,835
|
$
|
92,624
|
||||
Each component of operating cost is discussed below:
Operating Cost—Salaries and Related Costs
Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, was 56.8% of net revenue for the 2022 Second Quarter versus 54.3% for the 2021 Second Quarter.
Salaries and related costs for the physical therapy operations was $66.7 million in the 2022 Second Quarter, or 56.1% of physical therapy operations revenue, as compared to $60.6 million in the 2021 Second Quarter, or 53.1% of physical therapy
operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 Second Quarter was $4.9 million related to 2022 and 2021 Clinic Additions. Adjusted for the salaries and related costs for clinics closed or
sold in 2022 and 2021 of $0.2 million in the Second Quarter and $0.4 million in 2021 Second Quarter, salaries and related costs related to Mature Clinics increased by $2.7 million in the 2022 Second Quarter compared to the 2021 Second Quarter.
Physical therapy salaries and related costs were $58.29 per visit in the 2022 Second Quarter as compared to $55.95 per visit in the Second Quarter 2021, an increase of 4.2%. Salaries and related costs related to management contracts decreased by $0.4
million for the 2022 Second Quarter.
Salaries and related costs for the industrial injury prevention services business was $11.6 million in the 2022 Second Quarter, or 59.9% of industrial injury prevention services revenue, as compared to $6.2 million in the
2021 Second Quarter, or 62.2% of industrial injury prevention services revenue.
Operating Cost—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs, including physical therapy operations and the IIPS business, was 20.2% of net revenue in the 2022 Second Quarter versus 17.6% in the 2021 Second Quarter. Rent, supplies,
contract labor and other costs for the physical therapy operations was $24.7 million in the 2022 Second Quarter, or 20.7% of physical therapy operations revenue, as compared to $20.9 million in the 2021 Second Quarter, or 18.3% of physical therapy
operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 Second Quarter was $2.7 million related to 2022 and 2021 Clinic Additions. Adjusted for the rent, supplies, contract
labor and other costs for clinics related to the clinics closed or sold in 2022 and 2021 of $0.1 million in the 2022 Second Quarter and $0.2 million in the 2021 Second Quarter, rent, supplies, contract labor and other costs for Mature Clinics
increased by $1.9 million in the 2022 Second Quarter compared to the 2021 Second Quarter. Rent, supplies, contract labor and other costs, related to management contracts decreased $0.1 million in the 2022 Second Quarter.
Rent, supplies, contract labor and other costs for the industrial injury prevention services business was $3.5 million in the 2022 Second Quarter, or 18.2% of industrial injury prevention services
revenue, as compared to $1.2 million in the 2021 Second Quarter, or 12.5% of net industrial injury prevention services revenue.
Operating Cost—Provision for Credit Losses
The provision for credit losses as a percentage of net revenue was 1.1% in the 2022 Second Quarter and for the comparable period in 2021.
Our provision for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 5.51% on June 30, 2022, as compared to 5.64% on December 31, 2021. Our days’ sales outstanding was 33
days on June 30, 2022 and 32 days on December 31, 2021.
Gross Profit
Gross profit for the 2022 Second Quarter, was $30.8 million, a decrease of $3.5 million, or approximately 10.2%, as compared to $34.3 million for the 2021 Second Quarter. The gross profit percentage was 21.9% of total
revenue for the 2022 Second Quarter as compared to 27.0% for the 2021 Second Quarter. The gross profit percentage for our
physical therapy operations was 22.0% for the 2022 Second Quarter as compared to 27.4% for the 2021 Second Quarter. The gross profit percentage on management contracts was 23.7% for the 2022 Second Quarter as compared to
19.6% for the 2021 Second Quarter. The gross profit percentage for the industrial injury prevention services business was 21.2% for the 2022 Second Quarter as compared to 25.3% for the 2021 Second Quarter. The IIPS margin in 2022 has been impacted
by the lower margin profile of the Company’s November 2021 IIPS acquisition The table below details the gross profit (in thousands):
|
Three Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
|
||||||||
|
Physical therapy operations
|
$
|
26,196
|
$
|
31,226
|
||||
|
Management contracts
|
503
|
536
|
||||||
|
Industrial injury prevention services
|
4,122
|
2,542
|
||||||
|
Gross profit
|
$
|
30,821
|
$
|
34,304
|
||||
Corporate Office Costs
Corporate office costs were $10.7 million for the 2022 Second Quarter compared to $12.1 million for the 2021 Second Quarter. Corporate office costs were 7.6% of total revenue for the 2022 Second Quarter as compared to 9.5%
for the 2021 Second Quarter. The decrease was primarily due to lower estimated bonus expense in the 2022 Second Quarter compared to the 2021 Second Quarter.
Operating Income
Operating income for the 2022 Second Quarter was $20.1 million and $22.2 million for the 2021 Second Quarter. Operating income as a percentage of total revenue was 14.3% for the 2022 Second Quarter as compared to 17.5% for
the 2021 Second Quarter.
Loss on Revaluation of Put-Right Liability
The loss on revaluation of put-right liability was $617,000. As part of the IIPS business acquisition on November 30, 2021, we also agreed to the potential future purchase of a separate company under the same ownership
that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The owners have the right to put this transaction to us in approximately five years, with such right having a $3.5
million value at June 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate.
Provision for Income Taxes
The provision for income tax was $4.2 million for the 2022 Second Quarter and $4.6 million for the 2021 Second Quarter. The provision for income tax as a percentage of income before taxes less net income attributable to
non-controlling interest (effective tax rate) was 27.5% for the 2022 Second Quarter and 26.9% for the 2021 Second Quarter. See table below ($ in thousands):
See table below detailing calculation of the provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):
|
Three Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
Income before taxes
|
$
|
19,495
|
$
|
22,039
|
||||
|
Less: net income attributable to non-controlling interest:
|
||||||||
|
Redeemable non-controlling interest - temporary equity
|
(2,626
|
)
|
(3,611
|
)
|
||||
|
Non-controlling interest - permanent equity
|
(1,435
|
)
|
(1,425
|
)
|
||||
|
$
|
(4,061
|
)
|
$
|
(5,036
|
)
|
|||
|
Income before taxes less net income attributable to non-controlling interest
|
$
|
15,434
|
$
|
17,003
|
||||
|
Provision for income taxes
|
$
|
4,239
|
$
|
4,567
|
||||
|
Percentage
|
27.5
|
%
|
26.9
|
%
|
||||
Net Income Attributable to Non-controlling Interest
Net income attributable to redeemable non-controlling interest (temporary equity) was $2.6 million for the 2022 Second Quarter and $3.6 million for the 2021 Second Quarter. Net income attributable to non-controlling
interest (permanent equity) was $1.4 million for the 2022 Second Quarter and million for the 2021 Second Quarter.
2022 Six Months Compared to 2021 Six Months
The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements (in thousands):
|
Six Months Ended June 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
Net operating revenue:
|
||||||||
|
Physical therapy operations
|
$
|
233,855
|
$
|
219,253
|
||||
|
Industrial injury prevention services
|
38,505
|
20,043
|
||||||
|
Total Company
|
$
|
272,360
|
$
|
239,296
|
||||
|
Gross profit:
|
||||||||
|
Physical therapy operations
|
$
|
49,135
|
$
|
54,935
|
||||
|
Industrial injury prevention services
|
8,274
|
5,265
|
||||||
|
Gross profit
|
$
|
57,409
|
$
|
60,200
|
||||
|
Total Assets:
|
||||||||
|
Physical therapy operations
|
$
|
414,172
|
$
|
545,449
|
||||
|
Industrial injury prevention services
|
382,272
|
203,977
|
||||||
|
Total Company
|
$
|
796,444
|
$
|
749,426
|
||||
Revenue
Reported total revenue for the 2022 Six Months was $272.4 million, an increase of 13.8% as compared to $239.3 million for the 2021 Six Months. See table below for a detail of
reported total revenue (in thousands):
|
For the Six Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
Revenue related to Mature Clinics
|
$
|
211,215
|
$
|
208,531
|
||||
|
Revenue related to 2022 Clinic Additions
|
3,312
|
-
|
||||||
|
Revenue related to 2021 Clinic Additions
|
12,346
|
2,465
|
||||||
|
Revenue from clinics sold or closed in 2022
|
861
|
1,104
|
||||||
|
Revenue from clinics sold or closed in 2021
|
-
|
392
|
||||||
|
Net patient revenue from physical therapy operations
|
227,734
|
212,492
|
||||||
|
Other revenue
|
1,770
|
1,464
|
||||||
|
Revenue from physical therapy operations
|
229,504
|
213,956
|
||||||
|
Revenue - Management contracts
|
4,351
|
5,297
|
||||||
|
Revenue - Industrial injury prevention services
|
38,505
|
20,043
|
||||||
|
Total Revenue
|
$
|
272,360
|
$
|
239,296
|
||||
Revenue from physical therapy operations increased $15.5 million, or 7.3%, to $229.5 million for the 2022 Six Months from $214.0 million for the 2021 Six Months.
The average net patient revenue per visit was $103.09 for the 2022 Six Months as compared to $104.58 for the 2021 Six Months. Total patient visits increased 8.7% to 2,209,073 for the 2022 Six Months from 2,031,858 for the
2021 Six Months. Net patient revenue is based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenue is determined after contractual and other adjustments relating to
patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.
Net patient revenue related to Mature Clinics increased $2.7 million, or 1.3%, to $211.2 million for the 2022 Six Months compared to $208.5 million for the 2021 Six Months. Visits
for Mature Clinics (same store) for the 2022 Six Months increased 3.0% as compared to the 2021 Six Months. The increase in visits was partially offset by a reduction in the net patient revenue per visit.
Revenue from the industrial injury prevention services business increased 92.1% to $38.5 million for the 2022 Six Months as compared to $20.0 million for the 2021 Six Months. Excluding $13.7 million of revenue related to
the IIPS acquisition in November 2021, IIPS revenue increased 24.0% in the 2022 Six Months as compared to the 2021 Six Months.
Revenue from management contract revenue decreased 17.9% to $4.4 million for the 2022 Six Months as compared to $5.3 million for the 2021 Six Months due to the termination of certain management contracts.
Operating Cost
Total operating cost was $215.0 million for the 2022 Six Months, or 78.9% of total revenue, as compared to $179.1 million, or 74.8% of total revenue, for the 2021 Six Months. Operating cost related to Mature Clinics
increased by $10.1 million for the 2022 Six Months compared to the 2021 Six Months. In addition, operating cost related to the industrial injury prevention services business increased by $15.5 million of which $11.3 million related to the recent
IIPS acquisition. See table below for a detail of operating cost (in thousands):
|
Six Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
Operating cost related to Mature Clinics
|
$
|
166,468
|
$
|
156,321
|
||||
|
Operating cost related to 2022 Clinic Additions
|
3,083
|
-
|
||||||
|
Operating cost related to 2021 Clinic Additions
|
11,466
|
2,128
|
||||||
|
Operating cost related to clinics sold or closed in 2022
|
251
|
979
|
||||||
|
Operating cost related to clinics sold or closed in 2021
|
-
|
442
|
||||||
|
Operating cost related to physical therapy operations
|
181,268
|
159,870
|
||||||
|
Operating cost related to management contracts
|
3,453
|
4,448
|
||||||
|
Operating cost related to industrial injury prevention services
|
30,230
|
14,778
|
||||||
|
Total operating cost
|
$
|
214,951
|
$
|
179,096
|
||||
Each component of operating cost is discussed below:
Operating Cost—Salaries and Related Costs
Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, was 56.9% of net revenue for the 2022 Six Months versus 55.4% for the 2021 Six Months. Salaries and
related costs for the physical therapy operations was $129.2 million in the 2022 Six Months, or 56.3% of physical therapy operations revenue, as compared to $116.2 million in the 2021 Six Months, or 54.3% of physical therapy operations revenue.
Included in salaries and related costs for the physical therapy operations for the 2022 Six Months was $8.1 million related to 2022 and 2021 Clinic Additions. Adjusted for the salaries and related costs for clinics closed or sold in 2022 and 2021 of
$0.1 million in the 2022 Six Months and $0.9 million in 2021 Six Months, salaries and related costs related to Mature Clinics increased by $6.6 million in the 2022 Six Months compared to the 2021 Six Months. Salaries and related costs related to
management contracts decreased by $0.8 million for the 2022 Six Months.
Salaries and related costs for the industrial injury prevention services business was $22.7 million in the 2022 Six Months, or 59.0% of industrial injury prevention services revenue, as compared to $12.5 million in the 2021
Six Months, or 62.3% of industrial injury prevention services revenue.
Operating Cost—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, was 20.9% of net revenue in the 2022 Six Months versus 18.3% in the 2021 Six
Months. Rent, supplies, contract labor and other costs for the physical therapy operations was $49.3 million in the 2022 Six Months, or 21.5% of physical therapy operations revenue, as compared to $41.0 million in the 2021 Six Months, or 19.2% of
physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 Six Months was $4.7 million related to 2022 and 2021 Clinic Additions. Adjusted for the rent,
supplies, contract labor and other costs for clinics related to the clinics closed or sold in 2022 and 2021 of $0.3 million in the 2022 Six Months and $0.5 million in the 2021 Six Months, rent, supplies, contract labor and other costs for Mature
Clinics increased by $4.6 million in the 2022 Six Months compared to the 2021 Six Months. Rent, supplies, contract labor and other costs, related to management contracts decreased $0.2 million in the 2022 Six Months.
Rent, supplies, contract labor and other costs for the industrial injury prevention services business was $7.4 million in the 2022 Six Months, or 19.1% of industrial injury prevention services revenue,
as compared to $2.3 million in the 2021 Six Months, or 11.4% of net industrial injury prevention services revenue.
Operating Cost—Provision for Credit Losses
The provision for credit losses as a percentage of net revenue was 1.0% in the 2022 Second Quarter and 1.1% for the comparable period in 2021.
Our provision for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 5.51% at June 30, 2022, as compared to 5.64% at December 31, 2021. Our days’ sales outstanding was 33
days at June 30, 2022 and 32 days at December 31, 2021.
Gross Profit
Gross profit for the 2022 Six Months, was $57.4 million, a decrease of $2.8 million, or approximately 4.6%, as compared to $60.2 million for the 2021 Six Months. The gross profit percentage was 21.1% of total revenue for
the 2022 Six Months as compared to 25.2% for the 2021 Six Months. The gross profit percentage for our physical therapy operations was 21.0% for the 2022 Six Months as compared to 25.3% for the 2021 Six Months. The gross profit percentage on
management contracts was 20.6% for the 2022 Six Months as compared to 16.0% for the 2021 Six Months. The gross profit percentage for industrial injury prevention services was 21.5% for the 2022 Six Months as compared to 26.3% for the 2021 Six
Months. The IIPS margin in 2022 has been impacted by the lower margin profile of our November 2021 IIPS acquisition. The table below details the gross profit (in thousands):
|
Six Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
|
||||||||
|
Physical therapy operations
|
$
|
48,236
|
$
|
54,086
|
||||
|
Management contracts
|
898
|
849
|
||||||
|
Industrial injury prevention services
|
8,275
|
5,265
|
||||||
|
Gross profit
|
$
|
57,409
|
$
|
60,200
|
||||
Corporate Office Costs
Corporate office costs were $22.3 million for the 2022 Six Months compared to $22.9 million for the 2021 Six Months. Corporate office costs were 8.2% of total revenue for the 2022 Six Months as compared to 9.6% for the 2021
Six Months. The decrease was primarily due to lower estimated bonus expense in the 2022 Six Months than the 2021 Six Months.
Operating Income
Operating income for the 2022 Six Months were $35.1 million and $37.3 million for 2021 Six Months. Operating income as a percentage of total revenue was 12.9% for the 2022 Six Months
as compared to 15.6% for the 2021 Six Months.
Loss on Revaluation of Put-Right Liability
The loss on revaluation of the put-right liability was $14,000. As part of the IIPS business acquisition on November 30, 2021, we also agreed to the potential future purchase of a separate company under the same ownership
that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The owners have the right to put this transaction to us in approximately five years, with such right having a $3.5
million value at June 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate.
Provision for Income Taxes
The provision for income tax was $7.7 million for the 2022 Six Months and $7.5 million for the 2021 Six Months. The provision for income tax as a percentage of income before taxes less net income attributable to
non-controlling interest (effective tax rate) was 27.9% for the 2022 Six Months and 26.7% for the 2021 Six Months. See table below detailing calculation of the provision for income taxes as a percentage of income before taxes less net income
attributable to non-controlling interest ($ in thousands):
|
Six Months Ended
|
||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
Income before taxes
|
$
|
34,975
|
$
|
36,869
|
||||
|
Less: net income attributable to non-controlling interest:
|
||||||||
|
Redeemable non-controlling interest - temporary equity
|
(5,183
|
)
|
(6,064
|
)
|
||||
|
Non-controlling interest - permanent equity
|
(2,061
|
)
|
(2,685
|
)
|
||||
|
$
|
(7,244
|
)
|
$
|
(8,749
|
)
|
|||
|
Income before taxes less net income attributable to non-controlling interest
|
$
|
27,731
|
$
|
28,120
|
||||
|
Provision for income taxes
|
$
|
7,737
|
$
|
7,511
|
||||
|
Percentage
|
27.9
|
%
|
26.7
|
%
|
||||
Net Income Attributable to Non-controlling Interest
Net income attributable to redeemable non-controlling interest (temporary equity) was $5.2 million for the 2022 Six Months and $6.1 million for the 2021 Six Months. Net income attributable to non-controlling interest
(permanent equity) was $2.1 million for the 2022 Six Months and $2.7 million for the 2021 Six Months.
Other Comprehensive Loss
Concurrently with the Credit Agreement (as defined below), we entered into an interest rate swap agreement in May 2022, which has a $150 million notional value, a maturity date of June 30, 2027 and was
effective on June 30, 2022. Beginning in July 2022, we pay a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on our consolidated leverage ratio.
Currently, our interest rate including the applicable margin is 4.665%. Unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. The fair value of the
interest rate swap at June 30, 2022, was $0.5 million, which has been included within current liabilities in the accompanying Consolidated Balance Sheet. The impact of the interest rate swap on the accompanying Consolidated Statement of Comprehensive
Income for the three and six months ended June 30, 2022 was an unrealized loss of $0.4 million, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. At June 30, 2022 and December 31, 2021, we had $48.6 million and $28.6 million, respectively, in cash. We believe that
our cash and cash equivalents and availability under our Credit Facilities are sufficient to fund the working capital needs of our operating subsidiaries through at least June 30, 2023.
Cash and cash equivalents increased by $20.4 million from December 31, 2021 to June 30, 2022. During the 2022 Six Months, $27.5 million was provided by operations and $211.0 million from proceeds on our Amended Credit
Agreement (described below). The major uses of cash for investing and financing activities included: payments on our Revolving Facility ($175.0 million), distributions to non-controlling interests inclusive of those classified as redeemable
non-controlling interest ($7.2 million), dividends paid to shareholders ($10.7 million), purchase of business and non-controlling interest ($20.4 million), and purchase of fixed assets ($4.6 million).
On June 17, 2022, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and the lenders from time-to-time
party thereto.
The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans will be available through the following facilities (collectively, the “Senior Credit
Facilities”):
| 1) |
Revolving Facility: $175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit for the issuance of standby letters of credit and a $15 million sublimit for
swingline loans (each, a “Swingline Loan”).
|
| 2) |
Term Facility: $150 million term loan facility (the “Term Facility”). The Term Facility amortizes in quarterly installments of: (a) 0.625% in each of the first two years, (b) 1.250% in the third and fourth year, and
(c) 1.875% in the fifth year of the Credit Agreement. The remaining outstanding principal balance of all term loans is due on the maturity date.
|
The proceeds of the Revolving Facility shall be used by us for working capital and other general corporate purposes of the Company and its subsidiaries, including to fund future acquisitions and
invest in growth opportunities. The proceeds of the Term Facility were used by us to refinance the indebtedness outstanding under the Second Amended and Restated Credit Agreement, to pay fees and expenses incurred in connection with the loan
facilities transactions, for working capital and other general corporate purposes of our Company and its subsidiaries.
We will be permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $100 million plus (ii)
an unlimited additional amount, provided that (in the case of clause (ii)), after giving effect to such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0:1.0, and the aggregate amount of
all incremental increases under the Revolving Facility does not exceed $50,000,000.
The interest rates per annum applicable to the Senior Credit Facilities (other than in respect of Swingline Loans) will be Term SOFR as defined in the agreement plus an applicable margin or, at our
option, an alternate base rate plus an applicable margin. Currently, our interest rate including the applicable margin is 4.665%. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date
of maturity.
We will also pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its
outstanding credit exposure under the Revolving Facility (“unused fee”). The Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any time without premium
or penalty, subject to certain conditions.
The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and
dissolutions, sales of assets, dividends and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement includes
certain financial covenants which include the Consolidated Fixed Charge Coverage Ratio and the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary events of default.
Our obligations under the Credit Agreement are guaranteed by its wholly-owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by
a perfected first priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions.
On June 30, 2022, $150.0 million was outstanding on the Term Loan and the Revolving Facility remains available resulting in $175.0 million of availability. As of June 30, 2022, we were in compliance with all of the
covenants thereunder.
On March 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $11.5
million, of which $11.2 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.5% per annum and the principal and interest are payable on March 31, 2024.
On December 31, 2021, we acquired a 75% interest in a three-clinic physical therapy practice with the practice founder retaining 25%. The purchase price for the 75% interest was approximately $3.7 million, of which $3.5
million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on December 31, 2023.
On November 30, 2021, we acquired an approximate 70% interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The
initial purchase price for the 70% equity interest, not inclusive of the $2.0 million contingent payment in conjunction with the acquisition if specified future operational objectives are met, was approximately $63.2 million, of which $62.2 million
was paid in cash, and $1.0 million is in the form of a note payable. The note accrues interest at 3.25% and the principal and interest is payable on November 30, 2023. The business generates approximately $27.0 million in annual revenue at a margin
of approximately 20%. As part of the transaction, we also agreed to the future purchase of a separate company under the same ownership that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct
market area. The current owners have the right to put this transaction to us in approximately five years, with such put right having an initial $3.5 million fair value on June 30, 2022, as reflected on the Company’s consolidated balance sheet in
Other long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in fair value reflected in the Company’s consolidated statement of income.
On September 30, 2021, the Company acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The business generates more than $2.0 million in annual revenue. We acquired the
company’s assets at a purchase price of approximately $3.3 million (which includes the obligation to pay an amount up to $0.6 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives
are met) and contributed those assets to industrial injury prevention services subsidiary. The initial purchase price, not inclusive of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and
$0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on September 30, 2023.
On June 30, 2021, the Company acquired a 65% interest in an eight-clinic physical therapy practice with the practice founders retaining 35%. The purchase price was approximately $10.3 million, of which $9.0 million was paid
in cash, $1.0 million was payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable. The business criteria were met and accordingly $1.0 million was paid in July 2022. The note accrues interest at
3.25% per annum and the principal and interest are payable on June 30, 2023. Additionally, the Company has an obligation to pay an additional amount up to $0.8 million in contingent payment consideration in conjunction with the acquisition if
specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair
value each reporting date.
On March 31, 2021, the Company acquired a 70% interest in a five-clinic physical therapy practice with the practice founders retaining 30%. When acquired, the practice was developing a sixth clinic which has been
completed. The purchase price for the 70% interest was approximately $12.0 million, of which $11.7 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and
interest are payable on March 31, 2023.
On March 27, 2020, in response to the COVID-19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”). The CARES Act provided waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the
Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health
care related expenses that are attributable to COVID-19.
The CARES Act allowed for qualified healthcare providers to receive advanced payments under the Medicare Accelerated and Advance Payment Program
(“MAAPP Funds”) during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. The Company applied for and received
approval from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. The Company recorded the $14.1 million in advance
payments received as a liability. During the 2021 First Quarter, the Company repaid the MAAPP Funds of $14.1 million rather than applying them to future services performed.
Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have from
time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected
to be accomplished using a combination of cash and financing. Any large acquisition would likely require financing.
We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or
monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may
be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting payor credentialing approval initially may be
delayed for a relatively short transition period. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay
payor type receivables, the write-off generally occurs after the accounts receivable has been outstanding for at least 120 days.
We generally enter into various notes payable as a means of financing our acquisitions. Our outstanding notes payable as of June 30, 2022 relate to certain of the acquisitions of businesses and purchases of redeemable
non-controlling interest that occurred in 2018 through June 2022. Typically, the notes are payable over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 5.5% per annum, subject to
adjustment. At June 30, 2022, the balance on these notes payable was $5.7 million. In addition, we assumed leases with remaining terms of 1 month to 6 years for the operating facilities.
In conjunction with the above-mentioned acquisitions, in the event that a limited minority partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition
date, we have agreed to certain contractual provisions which enable such minority partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.
As of June 30, 2022, we have accrued $7.9 million related to credit balances due to patients and payors. This amount is expected to be paid in the next twelve months.
From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March
2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). Our Amended Credit Agreement permits share repurchases of up to $15,000,000, subject to compliance with
covenants. We are required to retire shares purchased under the March 2009 Authorization.
There is no expiration date for the share repurchase program. As of June 30, 2022, there are currently an additional estimated 137,363 shares (based on the closing price of $109.20 on June 30, 2022) that may be purchased
from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during the six months ended June 30, 2022.
FACTORS AFFECTING FUTURE RESULTS
The risks related to our business and operations include:
| • |
the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19 and its variants, for which the total financial magnitude cannot be currently estimated;
|
| • |
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;
|
| • |
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
|
| • |
changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients;
|
| • |
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
|
| • |
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or
write-off of goodwill and other intangible assets;
|
| • |
the impact of COVID-19 related vaccination and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations;
|
| • |
changes as the result of government enacted national healthcare reform;
|
| • |
business and regulatory conditions including federal and state regulations;
|
| • |
governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs;
|
| • |
revenue and earnings expectations;
|
| • |
legal actions, which could subject us to increased operating costs and uninsured liabilities;
|
| • |
general economic conditions, including but not limited to inflationary and recessionary periods;
|
| • |
availability and cost of qualified physical therapists;
|
| • |
personnel productivity and retaining key personnel;
|
| • |
competitive environment in the industrial injury prevention services business, which could result in the termination or nonrenewal of contractual service arrangements and other adverse financial consequences for
that service line;
|
| • |
acquisitions, and the successful integration of the operations of the acquired businesses;
|
| • |
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests);
|
| • |
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
|
| • |
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability
and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
|
| • |
maintaining clients for which we perform management and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;
|
| • |
maintaining adequate internal controls;
|
| • |
maintaining necessary insurance coverage;
|
| • |
availability, terms, and use of capital; and
|
| • |
weather and other seasonal factors.
|
In addition to the above, see Risk Factors in Part 2 - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and the additional risk factor below:
Our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing, and our ability to
operate our business.
We have outstanding debt obligations that could adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time
to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating
performance, the condition of the capital markets, and other factors. We cannot assure that additional financing will be available to us on favorable terms when required, or at all.
Our loan agreements contain certain restrictions and requirements that among other things:
| • |
require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;
|
| • |
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;
|
| • |
limit our future ability to refinance our indebtedness on terms acceptable to us or at all;
|
| • |
limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and
|
| • |
impose on us financial and operational restrictions.
|
Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in our Annual Report on Form 10-K
filed on March 1, 2022. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we
will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.
If we fail to satisfy our debt service obligations or the other restrictions and requirements in our loan agreements, we could be in default. Unless cured or waived, a default would
permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.
Our outstanding loans bear interest at variable rates. In response to the variable rates, we entered into entered into an interest rate swap agreement. See above for further
discussion of this swap agreement.
Forward-Looking Statements
We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”,
“intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics,
availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a
result of certain risks, uncertainties, and factors, which include, but are not limited to the risks listed above.
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with
the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation
to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
The Company is exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results
from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes.
Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.
In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, which has a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, we receive 1-month SOFR, and
pay a fixed rate of interest of 2.815% plus an additional margin on a quarterly basis. The total interest rate in any period will also include an applicable margin based on our Consolidated Leverage Ratio.
We designated the interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated
other comprehensive income (loss), net of tax.
| ITEM 4. |
CONTROLS AND PROCEDURES.
|
| (a) |
Evaluation of Disclosure Controls and Procedures
|
As of the end of the period covered by this report, the Company’s management completed an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded (i) that our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure
and (ii) that our disclosure controls and procedures are effective.
| (b) |
Changes in Internal Control over Financial Reporting
|
There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II—OTHER INFORMATION
| ITEM 1. |
LEGAL PROCEEDINGS.
|
We are a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of our business. We cannot predict the
ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. The Department of
Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future that may, either individually or in the aggregate, have a material adverse effect on our
business, financial position, results of operations, and liquidity.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal for some time while the government decides whether or not to intervene
on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. We
have been a defendant in these cases in the past and may be named as a defendant in similar cases from time to time in the future.
| ITEM 1A. |
RISK FACTORS.
|
Our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing, and our ability to
operate our business.
We have outstanding debt obligations that could adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time
to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating
performance, the condition of the capital markets, and other factors. We cannot provide assurances that additional financing will be available to us on favorable terms when required, or at all.
Our loan agreements contain certain restrictions and requirements that among other things:
| • |
require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;
|
| • |
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;
|
| • |
limit our future ability to refinance our indebtedness on terms acceptable to us or at all;
|
| • |
limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and
|
| • |
impose on us financial and operational restrictions.
|
Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in our Annual Report on Form 10-K
filed on March 1, 2022. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we
will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.
If we fail to satisfy our debt service obligations or the other restrictions and requirements in our loan agreements, we could be in default. Unless cured or waived, a default would
permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.
Our outstanding loans bear interest at variable rates. In response to the variable rates, we entered into entered into an interest rate swap agreement. See above for further
discussion of this swap agreement.
|
Exhibit
Number
|
Description
|
|
|
|
| 10.1+ |
Third Amended and Restated Credit Agreement dated as of June 17, 2022 among the Company, as the borrower, and Bank of America, N.A., as Administrative Agent,
Regions Capital Markets as Syndication Agent, BofA Securities Inc. and Regions Capital Markets as Joint Load Arrangers, BofA Securities Inc., as Sole Bookrunner and the lenders named therein. [incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 10-Q filed with the SEC on June 21, 2022.]
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|
|
|
Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
101.INS*
|
XBRL Instance Document
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
*
|
Filed herewith
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
|
|
U.S. PHYSICAL THERAPY, INC.
|
|
|
|
|
|
|
Date: August 8, 2022
|
By:
|
/s/ CAREY HENDRICKSON
|
|
|
|
Carey Hendrickson
|
|
|
|
Chief Financial Officer
|
|
|
|
(Principal financial and accounting officer)
|
|
|
|
|
49
EXHIBIT 31.1
CERTIFICATION
I, Christopher Reading, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of U.S. Physical Therapy, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
| d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
| a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
|
| b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
|
/s/ CHRISTOPHER READING
|
|
|
|
Christopher Reading
|
|
|
President and Chief Executive Officer
(Principal executive officer)
|
Date: August 8, 2022
EXHIBIT 31.2
CERTIFICATION
I, Carey Hendrickson, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of U.S. Physical Therapy, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
| d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
| a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
|
| b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
|
|
/s/ CAREY HENDRICKSON
|
|
|
Carey Hendrickson
|
|
|
Chief Financial Officer
|
|
|
(Principal financial and accounting officer)
|
Date: August 8, 2022
EXHIBIT 32
CERTIFICATION OF PERIODIC REPORT
In connection with the Quarterly Report of U.S. Physical Therapy, Inc. (the “Company”) on Form 10-Q for the three and six months ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Christopher J. Reading, President and Chief Executive Officer of the Company, and Carey Hendrickson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 8, 2022
|
/s/ CHRISTOPHER J. READING
|
|
|
Christopher J. Reading
|
|
|
Chief Executive Officer
|
|
|
|
|
|
/s/ CAREY HENDRICKSON
|
|
|
Carey Hendrickson
|
|
|
Chief Financial Officer
|
|
This certification is made solely pursuant to the requirement of Section 1350 of 18 U.S.C. and is not for any other purpose. A signed original of this written statement required by Section 906 has been provided to U. S.
Physical Therapy, Inc. and will be retained by U. S. Physical Therapy, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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