What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 226 added, 197 removed, 255 unchanged (62% of the section changed)

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Business Update Related to COVID-19

As previously disclosed in a series of filings with the SEC and further described in detail in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the SEC on May 21, 2020, the our results have been negatively impacted by the effects of the COVID-19 pandemic.

Management has taken a number of steps to reduce costs, stem operating losses incurred in March and April and increase profits subsequently.

In March, with the onset of the COVID-19 pandemic, we began to furlough or terminate approximately 40% of its 5,500 full and part-time workforce.

Since early May, over 750 of the furloughed employees have returned to work on a full or part-time basis.

As previously disclosed in a series of filings with the SEC and further described in detail in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and June 30, 2020 filed with the SEC on May 21, 2020 and August 7, 2020, respectively, our results have been negatively impacted by the effects of the COVID-19 pandemic.

We have taken a number of steps to reduce costs, make up for operating losses incurred in March and April, and increase profits.

We continue to experience somewhat lower physical therapy patient volumes;

however revenues improved significantly in the three months ended September 30, 2020 (“2020 Third Quarter”) compared to the three months ended June 30, 2020 (“2020 Second Quarter”).

Our average physical therapy patient volumes per day per clinic were 26.2, 18.9, and 25.8, respectively, in the first three quarters of 2020.

Our industrial injury prevention business has been less affected by the pandemic and is currently running at slightly less than its pre-COVID-19 levels.

In March, with the onset of the COVID-19 pandemic, we began to furlough or terminate approximately 40% of our 5,500 full and part-time workforce.

Since early May, approximately 1,200 of the furloughed employees have returned to work on a full or part-time basis.

As of the filing of this quarterly report, we continue to experience lower physical therapy revenues;

however we have seen recent improvement.

The Company’s physical therapy daily patient volumes in April declined to as low as 45% of normal.

For the month of April recent average visits per day per clinic were 16.4, in May that increased to 18.6 and in June rose to an average of 21.8 visits per day per clinic.

Our industrial injury prevention business has been less effected by the pandemic and is currently running at approximately 90% of normal.

Management estimates that the physical therapy visits in the month of July 2020, reached 80% to 85% of pre-COVID-19 volume.

however we have seen recent improvements.

As stay at home orders and other restrictions have been lifted, we have seen our physical therapy volumes trending upwards.

Should stay at home orders or other restrictions be reenacted, we could see the patient volume and revenues decline again.

We have put preparedness plans in place at our facilities to maintain continuity of operations, while also taking steps to keep employees and patients safe.

In line with recommendations to reduce large gatherings and increase social distancing, we have, where practical, transitioned a large number of office-based employees to a remote work environment.

In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law.

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees.

We have received, or expects to receive a number of benefits under The CARES Act including, but not limited to:

The CARES Act allowed for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program (“MAAPP funds”) during the COVID-19 pandemic.

Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided.

We applied for and received approval to receive advanced payments from Centers for Medicare & Medicaid Services (“CMS”) in April 2020.

We will record these payments as a liability until all performance obligations have been met as the payments were made on behalf of patients before services were provided.

Currently, MAAPP funds received are required to be applied to future Medicare billings commencing in August 2021, with all such remaining amounts required to be repaid by January 2024.

Beginning January 2024, any unpaid balance will begin accruing interest.

We currently intend to repay funds prior to August 2021.

Included in cash and cash equivalents and accrued liabilities at September 30, 2020 is $12.9 million of MAAPP funds.

We elected to defer depositing the employer’s share of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free.

As of September 30, 2020, included in accrued liabilities is $4.9 million related to these deferred payments.

The CARES Act provided additional 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.

Through September 30, 2020, our consolidated subsidiaries received approximately $8.3 million of payments under the CARES Act (“Relief Funds”).

Under our accounting policy, these payments have been recorded as Other income – Relief Funds.

For the three and nine months ended September 30, 2020, we have recognized approximately $0.4 million and $8.3 million, respectively, as Other income – Relief Funds on the accompanying consolidated statements of income .

These funds are not required to be repaid upon attestation and compliance with certain terms and conditions, which could change materially based on evolving grant compliance provisions and guidance provided by the U.S.

Department of Health and Human Services.

Currently, we can attest to and comply with the terms and conditions.

We will continue to monitor the evolving guidelines and may record adjustments as additional information is released.

Selected Operating and Financial Data

At June 30, 2020, we operated 554 clinics (of which 8 are not currently seeing patients) 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 29 such third-party facilities under management as of June 30, 2020.

At September 30, 2020, we operated 550 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 38 such third-party facilities under management as of September 30, 2020.

Our reportable segments include the physical therapy operations segment and the industrial injury prevention services segment.

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The acquired business was then combined with Briotix Health increasing our ownership position in the partnership to approximately 76.0%.

On September 30, 2020, we acquired a 70% interest in an entity which holds six-management contracts that have been in place for a number of years.

Currently, these contracts have a five year term.

The purchase price for the 70% interest was approximately $4.2 million, with $3.7 million payable in cash and $0.5 million in notes payable.

One of the notes payable of $0.2 million is payable, with any accrued interest at 5% per annum, on September 30, 2021.

The remaining note of $0.3 million was paid in November 2020.

On February 27, 2020, we acquired interests in a four-clinic physical therapy practice.

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On September 30, 2019, we acquired a 67% interest in eleven-clinic physical therapy practice.

The purchase price for the 67% interest was $12.4 million of which $12.1 million was paid in cash and $0.3 million in a seller note that is payable in two principal installments totaling $150,000 each, plus accrued interest in September 2020 and September 2021.

The first installent plus accrued interest was paid in September 2020 and the second installment plus accrued interest is due in September 2021.

The note accrues interest at 5.0% per annum.

During the six months ended June 30, 2020, we sold 11 previously closed clinics.

During the nine months ended September 30, 2020, we sold 12 previously closed clinics.

The aggregate sales price was $1.1 million, of which $0.7 million was paid in cash and $0.4 million in a note receivable payable in two equal installments of principal and any accrued interest on June 15, 2021 and 2022.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

For the second quarter ended June 30, 2020 (“2020 Second Quarter”), our Operating Results (as defined below) was $10.9 million, or $0.85 per diluted share, inclusive of relief funds received from the Public Health and Social Services Emergency Fund as part of the CARES Act (“Relief Funds”), as compared to $10.3 million, or $0.81 per diluted share, in quarter ended June 30, 2019 (“2019 Second Quarter”).

For the 2020 Second Quarter, our Operating Results was $5.0 million, or $0.39 per diluted share, without the Relief Funds.

Operating Results, a non-GAAP measure, equals net income attributable to our shareholders per the consolidated statement of net income plus charges incurred for closure costs less gain on sale of partnership interest and clinics and Relief Funds, all net of tax.

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

For the third quarter ended September 30, 2020 (“ 2020 Third Quarter”), our Operating Results (as defined below), inclusive of Relief Funds was $11.1 million, or $0.86 per diluted share, as compared to $9.0 million, or $0.71 per diluted share, for the third quarter ended September 30, 2019 (“2019 Third Quarter”).

For the third quarter ended September 30, 2020, USPH’s Operating Results, without the Relief Funds, was $10.9 million, or $0.85 per diluted share.

The earnings per share from Operating Results also excludes the impact of the revaluation of redeemable non-controlling interest.

For the 2020 Second Quarter, our net income attributable to its shareholders, in accordance with GAAP, was $10.3 million as compared to $14.6 million for the comparable period of 2019.

Inclusive of the credit or charge for the revaluation of non-controlling interest, net of tax, used to compute diluted earnings per share, in accordance with GAAP, in the 2020 Second Quarter, the amount is $12.7 million, or $0.99 per share, as compared to $10.8 million, or $0.85 per share in the 2019 Second Quarter.

For the third quarter ended September 30, 2020, our net income attributable to its shareholders, in accordance with GAAP, was $10.9 million as compared to $9.0 million for the comparable period of 2019.

Inclusive of the credit or charge for the revaluation of non-controlling interest, net of tax, used to compute diluted earnings per share in accordance with GAAP in the 2020 Third Quarter, the amount is $7.8 million, or $0.61 per share, as compared to $8.4 million, or $0.66 per share in the third quarter last year.

In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but charged or credited directly to retained earnings;

however, the charge or credit for this change is included in the earnings per basic and diluted share calculation.

however, the charge or credit for this change is included in the earnings per basic and diluted share calculations.

The following table provides details of the diluted earnings per share computation and reconciles net income attributable to our shareholders calculated in accordance with GAAP to Operating Results.

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Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.

Three Months Ended June 30,

Three Months Ended September 30,

Computation of earnings per share - USPH shareholders:

7 unchanged sentences

Gain on sale of partnership interest and clinics

Receipts from the CARES Act Provider Relief Fund ("Relief Fund")

Allocation to non-controlling interest

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Tax effect at statutory rate (federal and state) of 26.25%

Operating Results (without receipts from Relief Fund)

Receipts from Relief Fund

Operating Results (without Relief Funds)

Allocation to non-controlling interest

Tax effect at statutory rate (federal and state) of 26.25%

Operating Results (including receipts from Relief Fund)

Basic and diluted Operating Results (without receipts from Relief Fund) per share

Basic and diluted Operating Results (including receipts from Relief Fund) per share

Operating Results (including Relief Funds)

Basic and diluted Operating Results (without Relief Funds) per share

Basic and diluted Operating Results (including Relief Funds) per share

Shares used in computation - basic and diluted

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Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

(in thousands)

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Physical therapy operations - closure costs

Reported net revenues in the 2020 Second Quarter was $83.9 million as compared to $126.4 million in the 2019 Second Quarter.

Adjusted for the clinics sold in 2019 and 2020, net patient revenues were $83.7 million ($83.9 million less $0.2 million related to sold clinics) in the 2020 Second Quarter compared to $118.8 million ($126.4 million less $7.6 million related to sold clinics) in the 2019 Second Quarter.

The remaining reduction in revenue of $35.1 million is due to the adverse effects of the COVID-19 pandemic.

Please see table below.

Reported net revenues in the 2020 Third Quarter were $108.9 million as compared to $117.3 million in the 2019 Third Quarter.

See detailed discussion below for each category of reported revenue.

Net patient revenues from physical therapy operations was approximately $96.4 million in the 2020 Third Quarter and $104.4 million in the 2019 Third Quarter.

Included in net patient revenues for the 2019 Third Quarter was $3.2 million related in clinics sold or closed in the nine months ended September 30, 2020 and 2019 compared in $0.1 million related to these clinics in the 2020 Third Quarter.

During the 2020 nine month period, we sold our interest in 12 closed clinics.

For comparison purposes, adjusted for revenue from the clinics sold or closed, net patient revenues from physical therapy operations was approximately $96.3 million in the 2020 Third Quarter and $101.2 million in the 2019 Third Quarter.

Net patient revenues for the 2020 Third Quarter included $3.8 million related to clinics opened or acquired after September 30, 2019 (“New Clinics”).

Net patient revenues related to clinics opened or acquired prior to October 1, 2019 decreased by $8.7 million (“Mature Clinics”).

See below for a tabular presentation of the above discussion:

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

(in thousands)

Reported net revenues

2019 sold clinics

2020 sold clinics

Net patient revenues from physical therapy operations were approximately $72.3 million in the 2020 Second Quarter and $113.4 million in the 2019 Second Quarter.

Included in net patient revenues for the 2020 Second Quarter was $5.0 million related to clinics opened or acquired after June 30, 2019 (“New Clinics”).

Included in net patient revenues for the 2019 Second Quarter was $7.8 million related to clinics sold in the six months ended June 30, 2019 and 2020.

During the 2019 Second Quarter, the Company sold its interest in a partnership that included 30 clinics and during the 2020 Second Quarter, the Company sold its interest in eleven closed clinics.

The average net patient revenue per visit was $106.97 for the 2020 Second Quarter and $107.16 for the 2019 Second Quarter.

Total patient visits were 675,700 in the 2020 Second Quarter and 1,058,000 for the 2019 Second Quarter.

Adjusted for the clinics sold in 2020 and 2019, total patient visits were 674,600 in the 2020 Second Quarter and 992,200 for the 2019 Second Quarter.

The reduction in adjusted total patient visits is due to the adverse effects of the COVID-19 pandemic.

Net patient revenues related to 2019 and 2020 sold and closed clinics

Net patient revenue related to Mature Clinics

Net patient revenue related to New Clinics

Reported net patient revenues

The average net patient revenue per visit was $105.91 for the 2020 Third Quarter and $104.80 for the 2019 Third Quarter.

Total patient visits were 910,200 in the 2020 Third Quarter and 996,100 for the 2019 Third Quarter.

The reduction in adjusted total patient visits is due primarily to the adverse effects of the COVID-19 pandemic.

Net patient revenues are based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation.

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Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.

Also included in physical therapy operations was revenue from physical therapy management contracts which was $1.6 million for the 2020 Second Quarter and $2.2 million in 2019 Second Quarter.

Other miscellaneous revenue from physical therapy operations was $0.3 million in the 2020 Second Quarter and $0.5 million in the 2019 Second Quarter.

Also included in physical therapy operations was revenue from physical therapy management contracts which was $2.0 million for the 2020 Third Quarter and $2.1 million in the 2019 Third Quarter.

Other miscellaneous revenue from physical therapy operations was $0.5 million in the 2020 Third Quarter and $0.7 million in the 2019 Third Quarter.

Other miscellaneous revenue include physical therapy services, including athletic trainers, provided on-site such as for schools.

Revenue from the industrial injury prevention services business decreased 6.1% to $9.7 million in the 2020 Second Quarter compared to $10.3 million in the 2019 Second Quarter.

The reduction is primarily attributable to the adverse effects of the COVID-19 pandemic.

Currently, the industrial injury prevention services business is running at slightly over 90% of normal.

Revenue from the industrial injury prevention business was $10.0 million in the 2020 Third Quarter compared to $9.9 million in the 2019 Third Quarter.

On April 11, 2019, we acquired a third company that is a provider of industrial injury prevention services.

Operating Costs

Total operating costs, excluding closure costs, were $64.5 million in the 2020 Second Quarter, or 76.9% of net revenues, as compared to $94.9 million in the 2019 Second Quarter, or 75.1% of net revenues.

Total operating costs for the physical therapy operations, excluding closure costs, were $58.0 million in the 2020 Second Quarter, or 78.2% of physical therapy operations revenues, as compared to $87.7 million in the 2019 Second Quarter, or 75.5% of physical therapy operations revenues.

Included in operating costs for the physical therapy operations for the 2020 Second Quarter was $3.8 million related to New Clinics, of which $2.6 million related the clinics acquired in September 2019 and February 2020.

Adjusted for the operating costs for clinics related to the partnership interest sold in 2019 and 2020 of $6.6 million in 2019 Second Quarter and $0.5 million in 2020 Second Quarter, operating costs for clinic opened or acquired prior to July 1, 2019 (“Mature Clinics”) decreased by $26.5 million in the 2020 Second Quarter compared to the 2019 Second Quarter.

Total operating costs, excluding closure costs, were $78.5 million in the 2020 Third Quarter, or 72.1% of net revenues, as compared to $89.9 million in the 2019 Third Quarter, or 76.7% of net revenues.

Total operating costs for the physical therapy operations, excluding closure costs, were $71.3 million in the 2020 Third Quarter, or 65.5% of physical therapy operations revenues, as compared to $81.9 million in the 2019 Third Quarter, or 69.8% of physical therapy operations revenues.

Included in operating costs for the physical therapy operations for the 2020 Third Quarter was $3.0 million related to New Clinics, of which $1.2 million related the clinics acquired in September 2019 and February 2020.

Adjusted for the operating costs for clinics related to the partnership interest sold in 2019 and 2020 of $3.1 million in the 2019 Third Quarter and $0.1 million in the 2020 Third Quarter, operating costs for Mature Clinics decreased by $7.2 million in the 2020 Third Quarter compared to the 2019 Third Quarter.

Operating costs, included in physical therapy operations, related to management contracts decreased by $0.3 million.

Closure costs of $0.1 million include estimates of remaining lease obligations and other costs offset by settlement of certain lease commitments recorded in the first quarter of 2019 due to closed clinics.

Total operating costs for the industrial injury prevention services business, were $6.5 million in the 2020 Second Quarter, or 67.1% of industrial injury prevention services revenues, as compared to $7.3 million in the 2019 Second Quarter, or 70.8% of net industrial injury prevention revenues.

Total operating costs for the industrial injury prevention services business were $7.1 million in the 2020 Third Quarter, or 65.6% of industrial injury prevention services revenues, as compared to $7.9 million in the 2019 Third Quarter, or 67.6% of net industrial injury prevention revenues.

Each component of operating costs is discussed below:

Operating Costs—Salaries and Related Costs

Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, were 51.8% of net revenues in the 2020 Second Quarter versus 55.9% in the 2019 Second Quarter primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic.

Please see discussion in Business Update Related to COVID-19 for further information.

Salaries and related costs for the physical therapy operations were $37.9 million in the 2020 Second Quarter, or 51.1% of physical therapy operations revenues, as compared to $64.6 million in the 2019 Second Quarter, or 55.6% of physical therapy operations revenues.

Included in salaries and related costs for the physical therapy operations for the 2020 Second Quarter was $2.2 million related to New Clinics.

Adjusted for the salaries and related costs for clinics related to the partnership interest sold in 2019 and 2020 of $4.9 million in the 2019 Second Quarter and $0.1 million in the 2020 Second Quarter, salaries and related costs for Mature Clinics decreased by $23.5 million in the Second Quarter 2020 compared to the Second Quarter 2019 .

Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, were 52.8% of net revenues in the 2020 Third Quarter versus 56.9% in the 2019 Third Quarter primarily due to a reduction in staffing due to management response to the COVID-19 pandemic.

Salaries and related costs for the physical therapy operations were $51.6 million in the 2020 Third Quarter, or 53.3% of physical therapy operations revenues, as compared to $60.4 million in the 2019 Third Quarter, or 57.5% of physical therapy operations revenues.

Included in salaries and related costs for the physical therapy operations for the 2020 Third Quarter was $1.9 million related to New Clinics.

Adjusted for the salaries and related costs for clinics closed or sold in 2020 and 2019 of $0.1 million and $2.2 million, respectively, in the 2020 and 2019 Third Quarters, repectively, salaries and related costs for Mature Clinics decreased by $8.4 million in the Third Quarter 2020 compared to the Third Quarter 2019.

Salaries and related costs, included in physical therapy operations, related to management contracts decreased by $0.2 million.

Salaries and related costs for the industrial injury prevention services business, were $5.5 million in the 2020 Second Quarter, or 56.9% of industrial injury prevention services revenues, as compared to $6.0 million in the 2019 Second Quarter, or 58.7% of net industrial injury prevention services revenues.

Salaries and related costs for the industrial injury prevention services business, were $5.9 million in the 2020 Third Quarter, or 59.0% of industrial injury prevention services revenues, as compared to $6.3 million in the 2019 Third Quarter, or 63.8% of net industrial injury prevention services revenues.

Operating Costs—Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, were 24.2% of net revenues in the 2020 Second Quarter versus 18.2% in the 2019 Second Quarter.

Rent, supplies, contract labor and other costs for the physical therapy operations were $19.3 million in the 2020 Second Quarter, or 26.0% of physical therapy operations revenues, as compared to $21.8 million in the 2019 Second Quarter, or 18.8% of physical therapy operations revenues.

Included in rent, supplies, contract labor and other costs for the physical therapy operations for the 2020 Second Quarter was $1.5 million related to New Clinics.

Adjusted for the rent, supplies, contract labor and other costs for clinics related to the partnership interest sold in 2019 and 2020 of $1.6 million in the 2019 Second Quarter and $0.4 million in the 2020 second quarter, rent, supplies, contract labor and other costs for Mature Clinics decreased by $2.6 million in the Second Quarter 2020 compared to the Second Quarter 2019 .

Rent, supplies, contract labor and other costs, included in physical therapy operations, related to management contracts decreased slightly.

Rent, supplies, contract labor and other costs for the industrial injury prevention services business, were $1.0 million in the 2020 Second Quarter, or 10.2% of industrial injury prevention services revenues, as compared to $1.2 million in the 2019 Second Quarter, or 12.1% of net industrial injury prevention services revenues.

Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, were 18.1% of net revenues in the 2020 Third Quarter versus 18.9% in the 2019 Third Quarter.

Rent, supplies, contract labor and other costs for the physical therapy operations were $18.6 million in the 2020 Third Quarter, or 19.2% of physical therapy operations revenues, as compared to $20.3 million in the 2019 Third Quarter, or 19.3% of physical therapy operations revenues.

Included in rent, supplies, contract labor and other costs for the physical therapy operations for the 2020 Third Quarter was $1.2 million related to New Clinics.

Adjusted for the rent, supplies, contract labor and other costs for clinics related to the partnership interest closed or sold in 2020 and 2019 of $0.0 million in the 2020 Third Quarter and $1.1 million in the 2019 Third Quarter, rent, supplies, contract labor and other for Mature Clinics decreased by $1.6 million in the Third Quarter 2020 compared to the Third Quarter 2019.

Rent, supplies, contract labor and other costs, included in physical therapy operations, related to management contracts decreased $0.2 million.

Rent, supplies, contract labor and other costs for the industrial injury prevention services business, were $1.1 million in the 2020 Third Quarter, or 11.1% of industrial injury prevention services revenues, as compared to $1.8 million in the 2019 Third Quarter, or 18.6% of net industrial injury prevention services revenues.

Operating Costs—Provision for Doubtful Accounts

The provision for doubtful accounts as a percentage of net revenue was 0.9% in the 2020 Second Quarter and 1.0% for the comparable period in 2019.

Our provision for doubtful accounts for patient accounts receivable as a percentage of total patient accounts receivable was 6.4% at June 30, 2020, as compared to 5.6% at December 31, 2019.

Our days’ sales outstanding were 36 days at June 30, 2020 and 33 days at December 31, 2019.

Gross profit, including physical therapy operations, without closure costs, and the industrial injury prevention service business, was $19.4 million, or 23.1% of net revenue, as compared to $31.4 million, or 24.9% of net revenues, in the 2019 Second Quarter.

Gross profit for the physical therapy operations was $16.2 million in the 2020 Second Quarter, or 21.8% of physical therapy operations revenues, as compared to $28.4 million in the 2019 Second Quarter, or 24.5% of physical therapy operations revenues.

Gross profit for the physical therapy operations, excluding management contracts, was $15.8 million in the 2020 Second Quarter, or 21.7% of net patient revenues, as compared to $28.1 million in the 2019 Second Quarter, or 24.7% of net patient revenues.

Gross profit for management contracts was $0.4 million in the 2020 Second Quarter, or 26.9% of management contract revenues, as compared to $0.3 million in the 2019 Second Quarter, or 15.4% of net patient revenues.

The gross profit for the industrial injury prevention service business was $3.2 million, or 32.9%, in the 2020 Second Quarter as compared to $3.0 million, or 29.2%, in the 2019 Second Quarter.

The provision for doubtful accounts as a percentage of net revenue was 1.2% in the 2020 Third Quarter and 0.8% for the comparable period in 2019.

Our provision for doubtful accounts for patient accounts receivable as a percentage of total patient accounts receivable was 5.1% at September 30, 2020, as compared to 5.6% at December 31, 2019.

Our days’ sales outstanding were 29 days at September 30, 2020 and 33 days at December 31, 2019.

Gross profit, including physical therapy operations, without closure costs, and the industrial injury prevention services business, was $30.4 million, or 27.9% of net revenue, as compared to $27.4 million, or 23.3% of net revenues, in the 2019 Third Quarter.

Gross profit for the physical therapy operations was $27.6 million in the 2020 Third Quarter, or 27.9% of physical therapy operations revenues, as compared to $25.4 million in the 2019 Third Quarter, or 23.7% of physical therapy operations revenues.

Gross profit for the physical therapy operations, excluding management contracts, was $27.2 million in the 2020 Third Quarter, or 28.0% of net patient revenues, as compared to $25.2 million in the 2019 Third Quarter, or 23.9% of net patient revenues.

Gross profit for management contracts was $0.4 million in the 2020 Third Quarter, or 19.8% of management contract revenues, as compared to $0.2 million in the 2019 Third Quarter, or 11.2% of net patient revenues.

The gross profit for the industrial injury prevention services business was $2.9 million, or 28.6%, in the 2020 Third Quarter as compared to $2.0 million, or 19.9%, in the 2019 Third Quarter.

Corporate Office Costs

Corporate office costs, consisting primarily of salaries, incentive compensation, and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, accounting, professional, and recruiting fees, were $9.0 million for the 2020 Second Quarter and $11.5 million for the 2019 Second Quarter primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic.

Please see discussion in Business Update Related to COVID-19 for further information.

As a percentage of net revenues, corporate office costs were 10.8% for the 2020 Second Quarter and 9.1% for the 2019 Second Quarter.

Corporate office costs, consisting primarily of salaries, incentive compensation, and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, accounting, professional, and recruiting fees, were $10.4 million for the 2020 Third Quarter and $10.6 million for the 2019 Third Quarter.

As a percentage of net revenues, corporate office costs were 9.6% for the 2020 Third Quarter and 9.0% for the 2019 Third Quarter.

Operating Income

Operating income for the 2020 Second Quarter was $10.3 million as compared to $19.9 million for the 2019 Second Quarter.

Operating income as a percentage of net revenue decreased from 15.7% in the 2019 period to 12.2% in 2020.

For the 2020 Second Quarter, operating income increased $6.2 million or 3.6% compared to the first quarter of 2020.

See discussion above related to the effects of COVID-19 on our business and results of operation.

Included in other income in the 2020 Second Quarter was $7.9 million of Relief Funds.

The Relief Funds do not have to be repaid and were used for operations and offset of losses due to the COVID-19 pandemic.

Gain on Sale of Partnership Interest and Clinics

Included in other income was a gain of $1.1 million in the 2020 Second Quarter resulting from the sale of 11 previously closed clinics.

A gain of $5.8 million was recognized in the 2019 Second Quarter resulting from the sale of a partnership interest which included 30 clinics.

Operating income for the 2020 Third Quarter was $19.9 million as compared to $16.8 million for the 2019 Third Quarter.

Operating income as a percentage of net revenue increased from 14.3% in the 2019 period to 18.3% in 2020.

For the 2020 Third Quarter, operating income increased $9.6 million or 94.3% compared to the second quarter of 2020.

See discussion above related to effects of COVID-19.

For the 2020 Third Quarter, we have recognized approximately $0.4 million as Other income – Relief Funds on the accompanying consolidated statement of operations .

See discussion above related to Relief Funds.

Interest Expense

Interest expense was $653,000 in the 2020 Second Quarter and $607,000 in the 2019 Second Quarter due to higher average borrowings under the Company’s Amended Credit Agreement.

At June 30, 2020, $33.0 million was outstanding under our Amended Credit Agreement (as defined below).

Interest expense was $351,000 in the 2020 Third Quarter and $557,000 in the 2019 Third Quarter due to lower average borrowings under our Amended Credit Agreement.

At September 30, 2020, $7.0 million was outstanding under our Amended Credit Agreement (as defined below).

See “—Liquidity and Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.

Provision for Income Taxes

The provision for income tax was $3.9 million for the 2020 Second Quarter and $5.3 million for the 2019 Second Quarter.

The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest was 27.5% for the 2020 Second Quarter and 26.7% for the 2019 Second Quarter.

The provision for income tax was $4.3 million for the 2020 Third Quarter and $3.2 million for the 2019 Third Quarter.

The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest was 28.2% for the 2020 Third Quarter and 26.1% for the 2019 Third Quarter.

See table below detailing calculation of the provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Income before taxes

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Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests (permanent equity) was $1.5 million in the 2020 Second Quarter and $1.8 million in the 2019 Second Quarter.

Net income attributable to redeemable non-controlling interests (temporary equity) was $3.0 million in the 2020 Second Quarter and $3.4 million in the 2019 Second Quarter.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

For the six months ended June 30, 2020 (“2020 Six Months”), our Operating Results (as defined below), was $14.8 million, or $1.15 per diluted share, inclusive of Relief Funds, as compared to $18.8 million, or $1.47 per diluted share in the six months ended June 30, 2019 (“2019 Six Months”).

For the 2020 Six Months, our Operating Results, was $8.9 million, or $0.70 per diluted share, without the Relief Funds.

Please see page 32 for the definition of Operating Results.

For the 2020 Six Months, our net income attributable to its shareholders, in accordance with GAAP, was $11.2 million as compared to $23.0 million for the 2019 Six Months.

Inclusive of the credit or charge for the revaluation of non-controlling interest, net of tax, used to compute diluted earnings per share, in accordance with GAAP, in the 2020 Six Months, the amount is $15.3 million, or $1.19 per share, as compared to $15.8 million, or $1.24 per share, in the 2019 Six Months.

Net income attributable to non-controlling interests (permanent equity) was $1.8 million in the 2020 Third Quarter and $1.6 million in the 2019 Third Quarter.

Net income attributable to redeemable non-controlling interests (temporary equity) was $3.0 million in the 2020 Third Quarter and $2.4 million in the 2019 Third Quarter.

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

For the nine months ended September 30, 2020 (“2020 Nine Months”), our Operating Results, including Relief Funds, was $24.6 million, or $1.92 per diluted share, as compared to $27.8 million, or $2.18 per diluted share for the nine months ended September 30, 2019 (“2019 Nine Months”).

For the nine months ended September 30, 2020, our Operating Results, without Relief Funds, was $19.7 million, or $1.54 per diluted share.

For the nine months ended September 30, 2020, our net income attributable to our shareholders, in accordance with GAAP, was $22.2 million as compared to $32.1 million for the comparable period of 2019.

Inclusive of the credit or charge for the revaluation of non-controlling interest, net of tax, used to compute diluted earnings per share, in accordance with GAAP, in the nine months ended September 30, 2020, the amount is $23.0 million, or $1.80 per share, as compared to $24.2 million, or $1.90 per share in 2019.

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Management believes providing Operating Results to investors is useful information for comparing our period-to-period results.

The earnings per share from Operating Results also excludes the impact of the revaluation of redeemable non-controlling interest.

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Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.

Six Months Ended June 30,

Nine Months Ended September 30,

Computation of earnings per share - USPH shareholders:

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Gain on sale of partnership interest and clinics

Receipts from the CARES Act Provider Relief Fund ("Relief Fund")

Allocation to non-controlling interest

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Tax effect at statutory rate (federal and state) of 26.25%

Operating Results (without receipts from Relief Fund)

Receipts from Relief Fund

Operating Results (without Relief Funds)

Allocation to non-controlling interest

Tax effect at statutory rate (federal and state) of 26.25%

Operating Results (including receipts from Relief Fund)

Basic and diluted Operating Results (without receipts from Relief Fund) per share

Basic and diluted Operating Results (including receipts from Relief Fund) per share

Operating Results (including Relief Funds)

Basic and diluted Operating Results (without Relief Funds) per share

Basic and diluted Operating Results (including Relief Funds) per share

Shares used in computation - basic and diluted

The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements:

Six Months Ended

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

(in thousands)

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Total Company

Reported net revenues in the 2020 Six Months was $196.6 million as compared to $242.6 million in the 2019 Six Months.

Adjusted for the clinics sold in 2019 and 2020, net patient revenues were $195.6 million ($196.6 million less $1.0 million related to sold clinics) in the 2020 Six Months compared to $228.4 million ($242.6 million less $14.2 million related to sold clinics) in the 2019 Six Months.

The remaining reduction in revenue of $32.8 million is due to the adverse effects of the COVID-19 pandemic.

Please see table below.

Six Months Ended

June 30, 2020

June 30, 2019

Reported net revenues in the 2020 Nine Months was $305.5 million as compared to $359.9 million in the 2019 Nine Months.

See detailed discussion below for each category of reported revenue.

Net patient revenues from physical therapy operations was approximately $268.8 million in the 2020 Nine Months and $324.4 million in the 2019 Nine Months.

Included in net patient revenues above are revenues related to clinics sold or closed in the nine months ended September 30, 2020 and 2019 of $3.2 million and $22.5 million, respectively.

During the 2020 nine month period, the Company sold its interest in 12 closed clinics and closed 31 clinics.

During the nine months ended September 30, 2019, the Company sold its interest in a partnership which include 30 clinics and closed 11 clinics.

For comparison purposes, adjusted for revenue from the clinics sold or closed, net patient revenues from physical therapy operations was approximately $265.6 million in the 2020 Nine Months and $301.9 million in the 2019 Nine Months.

Net patient revenues for the 2020 Nine Months included $8.4 million related to New Clinics.

Net patient revenues related to Mature Clinics decreased by $44.7 million in the 2020 Nine Months compared to the 2019 comparable period.

The reduction is largely attributable to the adverse effects of the COVID-19 pandemic.

See below for a tabular presentation of the above discussion:

Nine Months Ended

September 30, 2020

September 30, 2019

(in thousands)

Reported net revenues

2019 sold clinics

2020 sold clinics

Net patient revenues from physical therapy operations were approximately $172.4 million in the 2020 Six Months and $220.0 million in the 2019 Six Months.

Included in net patient revenues for the 2020 Six Months was $9.1 million related to New Clinics.

Included in net patient revenues for the 2020 Six Months was $1.0 million related to the clinics sold in 2020.

For the 2019 Six Months, net patient revenue included $7.8 million related to the clinics sold in the six months ended June 30, 2019 and 2020.

During the 2019 Six Months, the Company sold its interest in a partnership that included 30 clinics and during the 2020 six month period, the Company sold its interest in 11 closed clinics.

The average net patient revenue per visit was $104.70 for the 2020 Six Months and $106.83 for the 2019 Six Months.

Total patient visits were 1,646,700 in the 2020 Six Months and 2,059,000 for the 2019 Six Months.

Adjusted for the clinics sold in 2020 and 2019, total patient visits were 1,637,800 in the 2020 Six Months and 1,934,500 for the 2019 Six Months.

The reduction in adjusted total patient visits is due to the adverse effects of the COVID-19 pandemic.

Net patient revenues related to 2019 and 2020 sold and closed clinics

Net patient revenue related to Mature Clinics

Net patient revenue related to New Clinics

Reported net patient revenues

Including all clinics operational during the periods, the average net patient revenue per visit was $105.13 for the 2020 Nine Months and $106.17 for the 2019 Nine Months.

Total patient visits were 2,556,900 in the first nine months of 2020 and 3,055,400 in the first nine months of 2019.

Net patient revenues are based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation.

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Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.

Also included in physical therapy operations was revenue from physical therapy management contracts which was $3.7 million for the 2020 Six Months and $4.4 million in 2019 Six Months.

Other miscellaneous revenue from physical therapy operations was $0.9 million in the 2020 Six Months and $1.0 million in the 2019 Six Months.

Also included in physical therapy operations was revenue from physical therapy management contracts which was $5.7 million for the 2020 Nine Months and $6.5 million in 2019 Nine Months.

Other miscellaneous revenue from physical therapy operations was $1.4 million in the 2020 Nine Months and $1.8 million in the 2019 Nine Months.

Other miscellaneous revenue include physical therapy services, including athletic trainers, provided on-site such as for schools.

Revenue from the industrial injury prevention services business increased 13.6% to $19.5 million in the 2020 Six Months compared to $17.2 million in the 2019 Six Months.

Revenue from the industrial injury prevention services business increased 8.9% to $29.5 million in the 2020 Nine Months compared to $27.1 million in the 2019 Nine Months.

The increase is primarily attributable to the acquisition in April 2019 offset by the adverse effects of the COVID-19 pandemic.

Currently, the industrial injury prevention services business is running at slightly over 90% of normal.

Operating Costs

Total operating costs, excluding closure costs, were $157.8 million in the 2020 Six Months, or 80.3% of net revenues, as compared to $184.5 million in the 2019 Six Months, or 76.0% of net revenues.

Total operating costs for the physical therapy operations, excluding closure costs, were $143.1 million in the 2020 Six Months, or 80.8% of physical therapy operations revenues, as compared to $171.8 million in the 2019 Six Months, or 76.2% of physical therapy operations revenues.

Included in operating costs for the physical therapy operations for the 2020 Six Months was $7.3 million related to New Clinics, of which $4.7 million related the clinics acquired in September 2019 and February 2020.

Adjusted for the operating costs for clinics related to the partnership interests sold in 2019 and 2020 of $6.6 million in the 2019 Six Months and $0.5 million in the 2020 Six Months, operating costs for clinic opened or acquired prior to July 1, 2019 (“Mature Clinics”) decreased by $26.5 million in the Second Quarter 2020 compared to the Second Quarter 2019.

Operating costs, included in physical therapy operations, related to management contracts decreased by $0.7 million.

Closure costs of $0.1 million include estimates of remaining lease obligations and other costs offset by settlement of certain lease commitments recorded in the 2019 First Quarter due to closed clinics.

Operating costs for the industrial injury prevention services business, were $14.7 million in the 2020 Six Months, or 74.7% of industrial injury prevention services revenues, as compared to $12.7 million in the 2019 Six Months, or 52.1% of net industrial injury prevention revenues.

Total operating costs, excluding closure costs, were $236.2 million in the 2020 Nine Months, or 77.3% of net revenues, as compared to $274.3 million in the 2019 Nine Months, or 76.2% of net revenues.

Total operating costs for the physical therapy operations, excluding closure costs, were $214.4 million in the 2020 Nine Months, or 77.7% of physical therapy operations revenues, as compared to $253.7 million in the 2019 Nine Months, or 76.3% of physical therapy operations revenues.

Included in operating costs for the physical therapy operations for the 2020 Nine Months was $6.9 million related to New Clinics, of which $2.7 million related the clinics acquired in February 2020.

Adjusted for the operating costs for clinics closed or sold in 2020 and 2019 of $4.4 million and $17.3 million, respectively, in the 2020 and 2019 Nine Months, respectively, operating costs for clinic opened or acquired prior to Mature Clinics decreased by $27.9 million in the 2020 Nine Months compared to the 2019 Nine Months.

Operating costs, included in physical therapy operations, related to management contracts decreased by $1.0 million in 2020 Nine Months compared to the 2019 Nine Months.

Closure costs in the current nine month period of $3.9 million include estimates of remaining lease obligations, derecognition of goodwill and other costs related to closed and sold clinics.

Operating costs for the industrial injury prevention services business, were $21.8 million in the 2020 Nine Months, or 73.9% of industrial injury prevention services revenues, as compared to $20.6 million in the 2019 Nine Months, or 76.0% of net industrial injury prevention revenues.

Each component of operating costs is discussed below:

Operating Costs—Salaries and Related Costs

Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, were 57.2% of net revenues in the 2020 Six Months versus 56.4% in the 2019 Six Months primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic.

Please see discussion in Business Update Related to COVID-19 for further information .

Salaries and related costs for the physical therapy operations were $100.0 million in the 2020 Six Months, or 56.5% of physical therapy operations revenues, as compared to $126.5 million in the 2019 Six Months, or 56.1% of physical therapy operations revenues.

Included in salaries and related costs for the physical therapy operations for the 2020 Six Months was $4.5 million related to New Clinics.

Adjusted for the salaries and related costs for clinics related to the partnership interest sold in 2019 and 2020 of $9.6 million in the 2019 Six Months and $0.6 million in the 2020 Six Months, salaries and related costs for Mature Clinics decreased by $21.4 million in the Second Quarter 2020 compared to the Second Quarter 2019.

Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, were 55.6% of net revenues in the 2020 Nine Months versus 56.6% in the 2019 Nine Months primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic.

Salaries and related costs for the physical therapy operations were $151.6 million in the 2020 Nine Months, or 56.1% of physical therapy operations revenues, as compared to $186.9 million in the 2019 Nine Months, or 57.3% of physical therapy operations revenues.

Included in salaries and related costs for the physical therapy operations for the 2020 Nine Months was $4.0 million related to New Clinics.

Adjusted for the salaries and related costs for clinics closed or sold in 2020 and 2019 of $2.5 million and $13.4 million, respectively, in the 2020 and 2019 Nine Months, respectively, salaries and related costs for Mature Clinics decreased by $27.6 million in the 2020 Nine Months compared to the 2019 Nine Months.

Salaries and related costs, included in physical therapy operations, related to management contracts decreased by $0.8 million.

Salaries and related costs for the industrial injury prevention services business, were $12.4 million in the 2020 Six Months, or 63.6% of industrial injury prevention services revenues, as compared to $10.4 million in the 2019 Six Months, or 60.4% of net industrial injury prevention services revenues.

Salaries and related costs for the industrial injury prevention services business, were $18.4 million in the 2020 Nine Months, or 62.1% of industrial injury prevention services revenues, as compared to $16.7 million in the 2019 Nine Months, or 61.7% of net industrial injury prevention services revenues.

Operating Costs—Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, were 22.0% of net revenues in the 2020 Six Months versus 18.6% in the 2019 Six Months.

Rent, supplies, contract labor and other costs for the physical therapy operations were $40.9 million in the 2020 Six Months, or 23.1% of physical therapy operations revenues, as compared to $45.1 million in the 2019 Six Months, or 20.0% of physical therapy operations revenues.

Included in rent, supplies, contract labor and other costs for the physical therapy operations for the 2020 Six Months was $2.4 million related to New Clinics.

Adjusted for the rent, supplies, contract labor and other costs for clinics related to the partnership interest sold in 2019 and 2020 of $3.1 million in the 2019 Six Months and $0.2 million in the 2020 Six Months, rent, supplies, contract labor and other costs for Mature Clinics decreased by $1.4 million in the Second Quarter 2020 compared to the Second Quarter 2019.

Rent, supplies, contract labor and other costs, included in physical therapy operations, related to management contracts increased slightly.

Rent, supplies, contract labor and other costs for the industrial injury prevention services business, were $2.3 million in both the 2020 and 2019 Six Months.

As a percentage of industrial injury prevention services revenues, rent, supplies, contract labor and other costs were 11.6% and 13.1% of net industrial injury prevention services revenues for the 2020 and 2019 Six Months, respectively.

Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, were 20.6% of net revenues in the 2020 Nine Months versus 18.7% in the 2019 Nine Months.

Rent, supplies, contract labor and other costs for the physical therapy operations were $59.5 million in the 2020 Nine Months, or 22.0% of physical therapy operations revenues, as compared to $63.1 million in the 2019 Nine Months, or 19.3% of physical therapy operations revenues.

Included in rent, supplies, contract labor and other costs for the physical therapy operations for the 2020 Nine Months was $2.8 million related to New Clinics.

Adjusted for the rent, supplies, contract labor and other costs for clinics closed or sold in 2020 and 2019 of $1.9 million and $8.1 million, respectively, in the 2020 and 2019 Nine Months, respectively, rent, supplies, contract labor and other costs for Mature Clinics decreased by $0.1 million in the 2020 Nine Months compared to the 2019 Nine Months.

Rent, supplies, contract labor and other costs, included in physical therapy operations, related to management contracts decreased by $0.1 million.

Rent, supplies, contract labor and other costs for the industrial injury prevention services business, were $3.3 million in the 2020 Nine Months and $4.1 million in 2019 Nine Months.

As a percentage of industrial injury prevention services revenues, rent, supplies, contract labor and other costs were 11.4% and 15.2% of net industrial injury prevention services revenues for the 2020 and 2019 Nine Months, respectively.

Operating Costs—Provision for Doubtful Accounts

The provision for doubtful accounts as a percentage of net revenue was 1.1% in the 2020 Six Months and 1.0% for the 2019 Six Months.

Our provision for doubtful accounts for patient accounts receivable as a percentage of total patient accounts receivable was 6.4% at June 30, 2020, as compared to 5.6% at December 31, 2019.

Our days’ sales outstanding were 36 days at June 30, 2020 and 33 days at December 31, 2019.

Gross profit, including physical therapy operations, without closure costs, and the industrial injury prevention services business, was $38.8 million, or 19.7% of net revenue, as compared to $58.2 million, or 24.0% of net revenues, in the 2019 Six Months.

Gross profit for the physical therapy operations was $34.0 million in the 2020 Six Months, or 19.2% of physical therapy operations revenues, as compared to $53.6 million in the 2019 Six Months, or 23.8% of physical therapy operations revenues.

Gross profit for the physical therapy operations, excluding management contracts, was $33.2 million in the 2020 Six Months, or 19.2% of net patient revenues, as compared to $52.9 million in the 2019 Six Months, or 23.9% of net patient revenues.

Gross profit for management contracts was $0.8 million in the 2020 Six Months, or 20.5% of management contract revenues, as compared to $0.7 million in the 2019 Six Months, or 16.9% of net patient revenues.

The gross profit for the industrial injury prevention services business was $4.8 million, or 24.8%, in the 2020 Six Months as compared to $4.5 million, or 26.4%, in the 2019 Six Months.

The provision for doubtful accounts as a percentage of net revenue was 1.1% in the 2020 Nine Months and 0.9% for the 2019 Nine Months.

Our provision for doubtful accounts for patient accounts receivable as a percentage of total patient accounts receivable was 5.1% at September 30, 2020, as compared to 5.6% at December 31, 2019.

Our days’ sales outstanding were 29 days at September 30, 2020 and 33 days at December 31, 2019.

Gross profit for the 2020 Nine Months, excluding closure costs, was $69.3 million, as compared to $85.5 million in the 2019 Nine Months.

The gross profit percentage, excluding closure costs, was 22.7% of net revenue in the 2020 Nine Months as compared to 23.8% in the 2019 Nine Months.

The gross profit percentage for our physical therapy clinics, excluding closure costs, was 22.3% in the 2020 Nine Months as compared to 23.9% in the 2019 Nine Months.

The gross profit percentage on physical therapy management contracts was 20.2% in the 2020 Nine Months as compared to 15.0% in the 2019 Nine Months.

The gross profit for the industrial injury prevention business was $7.7 million, or 26.1%, in the 2020 Nine Months as compared to $6.5 million, or 24.0%, in the 2019 Nine Months.

Corporate Office Costs

Corporate office costs, consisting primarily of salaries, incentive compensation, and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, accounting, professional, and recruiting fees, were $20.7 million for the 2020 Six Months and $22.8 million for the 2019 Six Months primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic.

As a percentage of net revenues, corporate office costs were 10.5% for the 2020 Six Months and 9.4% for the 2019 Six Months.

Corporate office costs, consisting primarily of salaries, incentive compensation, and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, accounting, professional, and recruiting fees, were $31.1 million for the 2020 Nine Months and $33.4 million for the 2019 Nine Months primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic.

As a percentage of net revenues, corporate office costs were 10.2% for the 2020 Nine Months and 9.3% for the 2019 Nine Months.

Operating Income

Operating income for the 2020 Six Months was $14.3 million as compared to $35.3 million for the 2019 Six Months.

Operating income as a percentage of net revenue decreased from 14.6% in the 2019 Six Months to 7.3% in 2020.

Operating income for the 2020 Nine Months was $34.2 million as compared to $52.1 million for the 2019 Nine Months.

Operating income as a percentage of net revenue decreased from 14.5% in the 2019 period to 11.2% in 2020 comparable period.

See discussion above related to the effects of COVID-19 on our business and results of operations.

Included in other income in the 2020 Six Months was $7.9 million of Relief Funds.

The Relief Funds do not have to be repaid and were used for operations and offset of losses due to the COVID-19 pandemic.

For the 2020 First Nine Months, our consolidated subsidiaries received approximately $8.3 million of Relief Funds.

See discussion above related to Relief Funds.

Gain on Sale of Partnership Interest and Clinics

Included in other income was a gain of $1.1 million in the 2020 Six Months resulting from the sale of 11 previously closed clinics and, as previously disclosed, a gain of $5.8 million in the 2019 Six Months resulting from the sale of a partnership interest which included 30 clinics.

Included in other income was the gain of $1.1 million in the 2020 Nine Months resulting from the sale of 12 previously closed clinics and, in the 2019 Nine Months, a gain of $5.8 million resulting from the sale of a partnership interest with 30 clinics.

Interest Expense

Interest expense was $1.1 million in the 2020 Six Months and $1.0 in the 2019 Six Months due to higher average borrowings under the Company’s Amended Credit Agreement.

At June 30, 2020, $33.0 million was outstanding under our Amended Credit Agreement (as defined below).

Interest expense was $1.4 million in the 2020 Nine Months and $1.5 in the 2019 Nine Months due to higher average borrowings under our Amended Credit Agreement.

At September 30, 2020, $7.0 million was outstanding under our Amended Credit Agreement (as defined below).

See “—Liquidity and Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.

Provision for Income Taxes

The provision for income tax was $4.2 million for the 2020 Six Months and $8.0 million for the 2019 Six Months.

The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest was 27.1% for the 2020 Six Months and 25.8% for the 2019 Six Months.

The provision for income tax was $8.5 million for the 2020 Nine Months and $11.2 million for the 2019 Nine Months.

The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest was 27.6% for the 2020 Nine Months and 25.9% for the 2019 Nine Months.

See table below detailing calculation of the provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):

Six Months Ended

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

Income before taxes

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Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests (permanent equity) was $2.0 million in the 2020 Six Months and $3.3 million in the 2019 Six Months.

Net income attributable to redeemable non-controlling interests (temporary equity) was $4.8 million in the 2020 Six Months and $5.8 million in the 2019 Six Months.

Net income attributable to non-controlling interests (permanent equity) was $3.9 million in the 2020 Nine Months and $5.0 million in the 2019 Nine Months.

Net income attributable to redeemable non-controlling interests (temporary equity) was $7.8 million in the 2020 Nine Months and $8.1 million in the 2019 Nine Months.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our business has sufficient cash to allow us to meet our short-term cash requirements.

At June 30, 2020 and December 31, 2019, we had $43.5 million and $23.5 million, respectively, in cash.

We believe that our cash is sufficient to fund the working capital needs of our operating subsidiaries through at least June 30, 2021.

Included in our cash at June 30, 2020 are the receipts from the Medicare Accelerated and Advance Payment Program (“MAAPP”) of $12.4 million.

Based on current regulations, MAAPP funds received will be applied to future Medicare billings commencing in August 2020, with all such remaining amounts required to be repaid by us by November 2020.

Beginning November 2020, any unpaid balance will begin accruing interest.

Cash and cash equivalents increased by $20.0 million from December 31, 2019 to June 30, 2020.

During the 2020 Six Months, $48.4 million was provided by operations and $12.9 million from MAAPP, as described above.

At September 30, 2020 and December 31, 2019, we had $30.1 million and $23.5 million, respectively, in cash.

We believe that our cash is sufficient to fund the working capital needs of our operating subsidiaries through at least September 30, 2021.

Included in our cash at September 30, 2020 are the receipts from MAAPP of $12.9 million.

Currently, MAAPP funds received are required to be applied to future Medicare billings commencing in August 2021, with all such remaining amounts required to be repaid by January 2024.

Beginning January 2024, any unpaid balance will begin accruing interest.

We currently intend to repay funds prior to August 2021.

Cash and cash equivalents increased by $6.6 million from December 31, 2019 to September 30, 2020.

During the 2020 Nine Months, $74.6 million was provided by operations and $12.9 million from MAAPP, as described above.

The major uses of cash for investing and financing activities included:

net reduction in credit line ($39.0 million), distributions to non-controlling interests inclusive of those classified as redeemable non-controlling interests ($14.2 million), purchase of business ($15.3 million), purchase of fixed assets ($5.5 million), cash dividends paid to our shareholders ($4.1 million) and a purchase of redeemable non-controlling interests ($3.1 million).

During the 2020 Second Quarter, we were able to negotiate rent abatements and deferrals totaling $1.6 million.

Effective December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility.

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The November 2017 amendment, among other items, adjusted the pricing grid as described above, increased the aggregate amount we may pay in cash dividends to $20.0 million to our shareholders and extended the maturity date to November 30, 2021.

As of June 30, 2020, we were in compliance with all of the covenants contained in the credit agreement.

Given the uncertainty inherent in operating results due to the COVID-19 pandemic, the Company continues to closely monitor covenant compliance.

The Company will engage as required in discussions with its lender regarding an amendment to the facility so as to maintain compliance with all covenants.

As of September 30, 2020, we were in compliance with all of the covenants contained in the credit agreement.

Given the uncertainty inherent in operating results due to the COVID-19 pandemic, we continue to closely monitor covenant compliance.

We will engage as required in discussions with our lender regarding an amendment to the facility so as to maintain compliance with all covenants.

We are currently in negotiations with our lender to renew the Amended Credit Agreement.

On September 30, 2020, we acquired a 70% interest in an entity which holds six-management contracts that have been in place for a number of years.

Currently, these contracts have a five year term.

The purchase price for the 70% interest was approximately $4.2 million, with $3.7 million payable in cash and $0.5 million in notes payable.

One of the notes payable of $0.2 million is payable, with any accrued interest at 5% per annum, on September 30, 2021.

The remaining note of $0.3 million was paid in November 2020.

On February 27, 2020, we acquired interests in a four-clinic physical therapy practice.

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On September 30, 2019, we acquired a 67% interest in eleven-clinic physical therapy practice.

The purchase price for the 67% interest was $12.4 million, of which $12.1 million was in cash and $0.3 million in a seller note that is payable in two principal installments totaling $150,000 each, plus accrued interest in September 2020 and September 2021.

The purchase price for the 67% interest was $12.4 million, of which $12.1 million was in cash and $0.3 million in a seller note that is payable in two principal installments totaling $150,000 each.

The first installment plus accrued interest was paid in September 2020 and the second installment plus accrued interest remains to be paid in September 2021.

The note accrues interest at 5.0% per annum.

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We generally enter into various notes payable as a means of financing our acquisitions.

Our outstanding notes payable as of June 30, 2020 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interests that occurred in 2018 through June 2020.

Our outstanding notes payable as of September 30, 2020 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interests that occurred in 2018 through September 2020.

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, 2020, the balance on these notes payable was $5.3 million.

At September 30, 2020, the balance on these notes payable was $5.5 million.

In addition, we assumed leases with remaining terms of 1 month to 6 years for the operating facilities.

In conjunction with the above mentioned acquisitions, in the event that a limited minority partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition date, we have agreed to certain contractual provisions which enable such minority partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.

As of June 30, 2020, we have accrued $6.9 million related to credit balances due to patients and payors.

As of September 30, 2020, we have accrued $6.8 million related to credit balances due to patients and payors.

This amount is expected to be paid in the next twelve months.

4 unchanged sentences

There is no expiration date for the share repurchase program.

As of June 30, 2020, there are currently an additional estimated 185,139 shares (based on the closing price of $81.02 on June 30, 2020) 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, 2020.

As of September 30, 2020, there are currently an additional estimated 172,651 shares (based on the closing price of $86.88 on September 30, 2020) 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 nine months ended September 30, 2020.

FACTORS AFFECTING FUTURE RESULTS

36 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis