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U S PHYSICAL THERAPY INC /NV – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission (the "SEC") onMarch 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
Therapy, Inc.
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. AtJune 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 ofJune 30, 2022 .
During the 2021 year and for the six months ended
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
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 ofJune 30, 2022 we employed approximately 5,809 people nationwide, of which approximately 3,158 were full-time employees. 31
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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 endedJune 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 endedJune 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 endedJune 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 endedJune 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. 32
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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
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
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
Earnings per share (basic and diluted) $
1.55
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
Basic and diluted Operating Results per share (a non-GAAP
measure)
$
1.54
Shares used in computation - basic and diluted 12,968 12,886
33
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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
increase of 10.8% as compared to
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 onJune 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 forMature 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. 34
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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 inNovember 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 toMature 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 ourNovember 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 toMature 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
injury prevention services revenue, as compared to
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 forMature 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. 35
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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% onJune 30, 2022 , as compared to 5.64% onDecember 31, 2021 . Our days' sales outstanding was 33 days onJune 30, 2022 and 32 days onDecember 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$34.3 million for the 2021 Second Quarter. The gross profit percentage was 21.9% of total revenue for the 2022 Second Quarter as compared to 27.0% for the 2021 Second Quarter. The gross profit percentage for our physical therapy operations was 22.0% for the 2022 Second Quarter as compared to 27.4% for the 2021 Second Quarter. The gross profit percentage on management contracts was 23.7% for the 2022 Second Quarter as compared to 19.6% for the 2021 Second Quarter. The gross profit percentage for the industrial injury prevention services business was 21.2% for the 2022 Second Quarter as compared to 25.3% for the 2021 Second Quarter. The IIPS margin in 2022 has been impacted by the lower margin profile of the Company'sNovember 2021 IIPS acquisition The table below details the gross profit (in thousands): Three Months Ended June 30, 2022 June 30, 2021 Physical therapy operations$ 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 onNovember 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$3.5 million value atJune 30, 2022 , as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate. 36
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Provision for Income Taxes
The provision for income tax was
percentage of income before taxes less net income attributable to
non-controlling interest (effective tax rate) was 27.5% for the 2022 Second
Quarter and 26.9% for the 2021 Second Quarter. See table below ($ 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
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 )
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
37
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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
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 toMature 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 forMature 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 inNovember 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. 38
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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 toMature 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 toMature 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
prevention services revenue, as compared to
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 forMature 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% atJune 30, 2022 , as compared to 5.64% atDecember 31, 2021 . Our days' sales outstanding was 33 days atJune 30, 2022 and 32 days atDecember 31, 2021 . 39
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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$60.2 million for the 2021 Six Months. The gross profit percentage was 21.1% of total revenue for the 2022 Six Months as compared to 25.2% for the 2021 Six Months. The gross profit percentage for our physical therapy operations was 21.0% for the 2022 Six Months as compared to 25.3% for the 2021 Six Months. The gross profit percentage on management contracts was 20.6% for the 2022 Six Months as compared to 16.0% for the 2021 Six Months. The gross profit percentage for industrial injury prevention services was 21.5% for the 2022 Six Months as compared to 26.3% for the 2021 Six Months. The IIPS margin in 2022 has been impacted by the lower margin profile of ourNovember 2021 IIPS acquisition. The table below details the gross profit (in thousands): Six Months Ended June 30, 2022 June 30, 2021 Physical therapy operations$ 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 onNovember 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 atJune 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. 40
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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
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 )
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 inMay 2022 , which has a$150 million notional value, a maturity date ofJune 30, 2027 and was effective onJune 30, 2022 . Beginning inJuly 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 atJune 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 endedJune 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. AtJune 30, 2022 andDecember 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 leastJune 30, 2023 . Cash and cash equivalents increased by$20.4 million fromDecember 31, 2021 toJune 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
Agreement (the "Credit Agreement") among
administrative agent ("Administrative Agent") and the lenders from time-to-time
party thereto.
The Credit Agreement, which matures onJune 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:
("Revolving Facility"), which includes a
of standby letters of credit and a
(each, a "Swingline Loan").
41
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2) Term Facility:
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
Revolving Facility remains available resulting in
availability. As of
covenants thereunder.
OnMarch 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 onMarch 31, 2024 . OnDecember 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 onDecember 31, 2023 . 42
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OnNovember 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 onNovember 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 onJune 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. OnSeptember 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 onSeptember 30, 2023 . OnJune 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 inJuly 2022 . The note accrues interest at 3.25% per annum and the principal and interest are payable onJune 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. OnMarch 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
OnMarch 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 thePublic Health and Social Services Emergency Fund , also referred to as theProvider 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 fromCenters for Medicare & Medicaid Services ("CMS") inApril 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. 43
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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 ofJune 30, 2022 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interest that occurred in 2018 throughJune 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. AtJune 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 ofJune 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. FromSeptember 2001 throughDecember 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. InMarch 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 theMarch 2009 Authorization. There is no expiration date for the share repurchase program. As ofJune 30, 2022 , there are currently an additional estimated 137,363 shares (based on the closing price of$109.20 onJune 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 endedJune 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;
44
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• 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 endedDecember 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 onMarch 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.
45
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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 theSecurities 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.
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