U S PHYSICAL THERAPY INC /NV 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of U.S. Physical Therapy, Inc. and its subsidiaries (herein referred to as “we,” “us,” “our” and the “Company”) should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023 (“2022 Annual Report”); and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2022 Annual Report. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed below. Forward-Looking Statements We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to the following. • changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status; • the impact of future public health crises and epidemics/pandemics, such as was the case with the novel strain of COVID-19 and its variants; • 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; • one of our acquisition agreements contains a Put Right related to a future purchase of a majority interest in a separate company; • the impact of future vaccinations and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations; • our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing and our ability to operate our business; • changes as the result of government enacted national healthcare reform; • business and regulatory conditions including federal and state regulations; • governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs; • revenue and earnings expectations; • some of our acquisition agreements contain contingent consideration, the value of which may impact future financial results; • legal actions, which could subject us to increased operating costs and uninsured liabilities; • general economic conditions, including but not limited to inflationary and recessionary periods; • actual or perceived events involving banking volatility or limited liability, defaults or other adverse developments that affect the U.S. or international financial systems, may result in market wide liquidity problems which could have a material and adverse impact on our available cash and results of operations; 29 Table of Contents • our business depends on hiring, training, and retaining qualified employees • availability and cost of qualified physical therapists; • competitive environment in the industrial injury prevention services business, which could result in the termination or non-renewal of contractual service arrangements and other adverse financial consequences for that service line; • acquisitions, and the successful integration of the operations of the acquired businesses; • impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests); • maintaining our information technology systems with adequate safeguards to protect against cyber-attacks; • 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, IIP, and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected; • maintaining adequate internal controls; • maintaining necessary insurance coverage; • availability, terms, and use of capital; and • weather and other seasonal factors. Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate. EXECUTIVE SUMMARY Our Business We operate outpatient physical therapy clinics and an industrial injury prevention services (“IIP”) business. Our reportable segments include the physical therapy operations segment and the IIP services segment. Our physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the IIP segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments. During the nine months ended September 30, 2023 (“2023 Nine Months”) and for the year ended December 31, 2022, we completed the acquisitions of the following physical therapy practices. 30 Table of Contents Acquisition Date % Interest Acquired Number of Clinics September 2023 Acquisition 1 September 29, 2023 70% 4 September 2023 Acquisition 2 September 29, 2023 70% 1 July 2023 Acquisition July 31, 2023 70% 7 May 2023 Acquisition May 31, 2023 45% 4 February 2023 Acquisition February 28, 2023 80% 1 November 2022 Acquisition November 30, 2022 80% 13 October 2022 Acquisition October 31, 2022 60% 14 September 2022 Acquisition September 30, 2022 80% 2 August 2022 Acquisition August 31, 2022 70% 6 March 2022 Acquisition March 31, 2022 70% 6 On September 30, 2023, we operated 672 clinics in 42 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 42 third-party facilities under management as of September 30, 2023. The following table provides a roll forward of our clinic count for the periods presented. Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Number of clinics, beginning of period 656 608 640 591 Additions (1) 19 8 40 33 Closed or sold (3 ) (2 ) (8 ) (10 ) Number of clinics, end of period 672 614 672 614 (1) Includes clinics added through acquisitions. In May 2023, we completed a secondary public offering of common stock, in which we sold 1,916,667 shares. The shares were sold at a public offering price of $90.00 per share. Upon completion of the offering, we received net proceeds of approximately $163.6 million, after deducting an underwriting discount of $8.6 million and recognizing related fees and expenses of $0.2 million. A portion of the net proceeds was used to repay the $35.0 million then outstanding under our credit facility while the remainder is expected to be used primarily to fund acquisitions. Regulatory Changes The following is a discussion of some of the significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our 2022 Annual Report. Medicare Reimbursement The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). In 2021 the MPFS established by Centers for Medicare and Medicaid Services (“CMS”) resulted in an approximate 3.5% decrease in the reimbursement for the codes applicable to physical/occupational therapy services provided by our clinics, as compared to 2020. Since January 1, 2022, outpatient therapy services furnished in whole or part by a therapist assistant are paid at an amount equal to 85% of the payment amount otherwise applicable for the service. For 2022, the MPFS Final Rule was to be an approximately 3.75% reduction to Medicare payments for physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by Congress in 2021 under the Consolidated Appropriations Act, 2021. However, this reduction was addressed in the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 Act”) signed into law on December 10, 2021. Based on various provisions in the 2021 Act, the Medicare rate reduction for 2022 was approximately 0.75%. The 2021 Act did not address the 15% reduction in Medicare payments for services performed by a physical or occupational therapist assistant, which began on January 1, 2022. 31 Table of Contents In the 2023 MPFS Proposed Rule, CMS proposed a 4.5% reduction in the Physician Fee Schedule conversion factor. However, this reduction was later addressed in the Consolidated Appropriations Act, 2023 (“2023 Act”). The provisions of the 2023 Act increased the conversion factor by 2.5% for 2023 and by 1.25% for 2024, resulting in an overall reduction of approximately 2% in the 2023 Physician Fee Schedule conversion factor for 2023. In the 2024 MPFS Final Rule, CMS decreased the Physician Fee Schedule conversion factor by 3.39%, which is estimated to result in an approximately 3.5% reduction in reimbursement for the codes applicable to physical/occupational therapy services provided by our clinics, as compared to 2023, unless these reductions are otherwise mitigated by action of Congress. The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. The Bipartisan Budget Act of 2018 extended the 2% reductions to Medicare payments through fiscal year 2027. The CARES Act suspended the 2% payment reduction to Medicare payments for dates of service from May 1, 2020, through December 31, 2020, and the Consolidated Appropriations Act, 2021 further suspended the 2% payment reduction through March 2021. In April 2021, additional legislation was enacted that waived the 2% payment reduction for the remainder of calendar 2021. The 2021 Act included a three-month extension of the 2% sequester relief applied to all Medicare payments through March 2022, followed by three months of 1% sequester relief through June 30, 2022. Sequester relief ended on June 30, 2022. Beginning in 2021, payments to individual therapists (Physical/Occupational Therapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit Based Incentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Therapists eligible to participate in MIPS include only those therapists who are enrolled with Medicare as private practice providers and does not include therapists in facility-based providers, such as our clinics enrolled as certified rehabilitation agencies. Less than 3% of our therapist providers currently participate in MIPS. Under the MIPS requirements, a provider’s performance is assessed according to established performance standards each year and then is used to determine an adjustment factor that is applied to the professional’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 determined the payment adjustment in 2021. For those therapist providers who actually participated in MIPS during 2019 and 2020, the resulting average payment adjustment in 2021 and 2022 was an increase of 1%. The 2023 adjustment for those therapist providers who participated in MIPS during 2021 is expected to remain at an average increase of 1%. Under the Middle-Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) directed CMS to modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the $3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate. The Bipartisan Budget Act of 2018 extended the targeted medical review indefinitely but reduces the threshold to $3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year. CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50%. 32 Table of Contents Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, we may not continue to receive reimbursement rates from Medicare that sufficiently compensate it for our services or, in some instances, cover our operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect our business, financial condition and results of operations. Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. We believe that we are in compliance, in all material respects, with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on our financial statements as of September 30, 2023. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. For the nine months ended September 30, 2023, and 2022, respectively, net patient revenues from Medicare were approximately $128.5 million and $115.1 million, respectively. RESULTS OF OPERATIONS The defined terms, with their respective descriptions, used in the following discussions are listed below. • Mature clinics are clinics opened or acquired prior to January 1, 2022, and are still operating as of September 30, 2023. • Net rate per patient visit is net patient revenue related to our physical therapy operations divided by total number of patient visits (defined below) during the periods presented. • Patient visits is the number of unique patient visits during the periods presented. • Average visits per day per clinic is patient visits divided by the number of days in which normal business operations were conducted during the periods presented and further divided by the average number of clinics in operation during the periods presented. • 2023 Third Quarter refers to the period three months ended September 30, 2023. • 2022 Third Quarter refers to the period three months ended September 30, 2022. • 2023 Nine Months refers to the period nine months ended September 30, 2023. • 2022 Nine Months refers to the period nine months ended September 30, 2022. Net income attributable to our shareholders, a Generally Accepted Accounting Principles (“GAAP”) measure, was $9.3 million for the 2023 Third Quarter compared to $9.6 million for the 2022 Third Quarter. In accordance with GAAP, the revaluation of non-controlling interest, net of taxes, is not included in net income but is charged directly to retained earnings; however, this change is included in the computation of earnings per share. Basic and diluted earnings per share attributable to our shareholders were $0.51 for the 2023 Third Quarter as compared to $0.72 for the 2022 Third Quarter. Net income attributable to our shareholders was $27.6 million for the 2023 Nine Months compared to $29.6 million for the 2022 Nine Months. Basic and diluted earnings per share attributable to our shareholders were $1.72 for the 2023 Nine Months as compared to $2.27 for the 2022 Nine Months. The following table provides a calculation of earnings per share. Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 (In thousands, except per share data) Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 9,254 $ 9,557 $ 27,583 $ 29,551 Charges to retained earnings: Revaluation of redeemable non-controlling interest (2,242 ) (196 ) (4,988 ) (193 ) Tax effect at statutory rate (federal and state) 573 50 1,274 49 $ 7,585 $ 9,411 $ 23,869 $ 29,407 Earnings per share (basic and diluted) $ 0.51 $ 0.72 $ 1.72 $ 2.27 Shares used in computation: Basic and diluted earnings per share - weighted-average shares 14,987 13,001 13,918 12,979 33 Table of Contents Non-GAAP Measures Adjusted EBITDA, a non-GAAP measure, is defined as net income attributable to USPH shareholders before interest income, interest expense, taxes, depreciation, amortization, change in fair value of contingent earn-out consideration, Relief Funds (see “ 2023 Nine Months Compared to 2022 Nine Months – Other Income and Expense ” section below for definition), changes in revaluation of put-right liability, equity-based awards compensation expense, and related portions for non-controlling interests. Operating Results, a non-GAAP measure, equals net income attributable to our shareholders less changes in revaluation of put-right liability, Relief Funds, changes in fair value of contingent earn-out consideration, and any allocations to non-controlling interests, all net of taxes. Operating Results per share also exclude the impact of the revaluation of redeemable non-controlling interest and the associated tax impact. We use Adjusted EBITDA and Operating Results, which eliminate certain items described above that can be subject to volatility and unusual costs, as the principal measures to evaluate and monitor financial performance period over period. We believe that Adjusted EBITDA and Operating Results are useful measures for investors to use in comparing our period-to-period results as well as for comparing with other similar businesses since most do not have redeemable instruments and therefore have different equity structures. Adjusted EBITDA and Operating Results are not measures of financial performance under GAAP. Adjusted EBITDA and Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements. The following tables reconcile net income attributable to our shareholders calculated in accordance with GAAP to Adjusted EBITDA and Operating Results as well as the detail of the basic and diluted earnings per share computation. 34 Table of Contents OPERATING RESULTS AND ADJUSTED EBITDA (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022* (In thousands, except per share data) Adjusted EBITDA Net income attributable to USPH shareholders $ 9,254 $ 9,557 $ 27,583 $ 29,551 Adjustments: Provision for income taxes 3,557 3,215 10,757 10,953 Depreciation and amortization 3,966 3,652 11,582 10,950 Interest expense, debt and other 2,101 2,013 7,293 3,540 Equity-based awards compensation expense 1,859 1,802 5,451 5,462 Change in revaluation of put-right liability 145 (785 ) 344 (771 ) Change in fair value of contingent earn-out consideration (187 ) (2,000 ) (197 ) (2,000 ) Interest income (1,673 ) - (2,191 ) - Other (income) expense (78 ) (65 ) (305 ) (790 ) Relief Funds - - (467 ) - Allocation to non-controlling interests (358 ) (402 ) (1,119 ) (1,098 ) Adjusted EBITDA (a non-GAAP measure) $ 18,586 $ 16,987 58,731 55,797 Operating Results Net income attributable to USPH shareholders $ 9,254 $ 9,557 $ 27,583 $ 29,551 Adjustments: Change in fair value of contingent earn-out consideration (187 ) (2,000 ) (197 ) (2,000 ) Change in revaluation of put-right liability 145 (785 ) 344 (771 ) Relief Funds - - (467 ) - Allocation to non-controlling interest - 33 Tax effect at statutory rate (federal and state) 11 711 73 708 Operating Results (a non-GAAP measure) $ 9,223 $ 7,483 $ 27,369 $ 27,488 Operating Results per share (a non-GAAP measure) $ 0.62 $ 0.58 $ 1.97 $ 2.12 Earnings per share Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 9,254 $ 9,557 $ 27,583 $ 29,551 Charges to retained earnings: Revaluation of redeemable non-controlling interest (2,242 ) (196 ) (4,988 ) (193 ) Tax effect at statutory rate (federal and state) 573 50 1,274 49 $ 7,585 $ 9,411 $ 23,869 $ 29,407 Earnings per share (basic and diluted) $ 0.51 $ 0.72 $ 1.72 $ 2.27 Shares used in computation - basic and diluted 14,987 13,001 13,918 12,979 * Revised to conform to current year presentation. For the 2023 Third Quarter, Adjusted EBITDA, increased $1.6 million to $18.6 million from $17.0 million in the 2022 Third Quarter while Operating Results, increased $1.7 million to $9.2 million, or $0.62 per share, in the 2023 Third Quarter from $7.5 million, or $0.58 per share, in the 2022 Third Quarter. The increase in both Adjusted EBITDA and Operating Results was primarily associated with clinic additions since the comparable prior year period. For the 2023 Nine Months, Adjusted EBITDA, a non-GAAP measure, was $58.7 million, an increase of $2.9 million, from $55.8 million for the 2022 Nine Months. The increase in Adjusted EBITDA was primarily associated with clinic additions since the comparable prior year period partially offset by higher corporate office costs. Operating Results, also a non-GAAP measure, was $27.4 million, or $1.97 per share, in the 2023 Nine Months as compared to $27.5 million, or $2.12 per share, in the 2022 Nine Months. 35 Table of Contents 2023 Third Quarter Compared to 2022 Third Quarter Results Our reportable segments include the physical therapy operations segment and the IIP segment. Also included in the physical therapy operations segment are revenues from management contract services and other services which include services we provide on-site, such as athletic trainers for schools. The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements: Three Months Ended September 30, 2023 2022 (In thousands) Net revenue: Physical therapy operations $ 130,521 $ 119,447 Industrial injury prevention services 19,486 20,155 Total Company $ 150,007 $ 139,602 Gross profit: Physical therapy operations $ 23,505 $ 22,379 Industrial injury prevention services 4,424 4,405 Total Company $ 27,929 $ 26,784 Total Assets: Physical therapy operations $ 534,848 $ 432,683 Industrial injury prevention services 475,338 367,025 Total Company $ 1,010,186 $ 799,708 Net Revenue Total net revenue for 2023 Third Quarter was $150.0 million, an increase of 7.5%, compared to $139.6 million for the 2022 Third Quarter. The following table provides a breakdown of total net revenue. Three Months Ended September 30, Variance 2023 2022 $ % (In thousands, except percentages) Revenue related to: Mature Clinics (1) $ 111,943 $ 111,598 $ 345 0.3 % 2023 clinic additions 3,598 - 3,598 * (2) 2022 clinic additions 11,674 3,899 7,775 * (2) Clinics sold or closed (3) 28 1,213 (1,185 ) * (2) Net patient revenue from physical therapy operations 127,243 116,710 10,533 9.0 % Other revenue 889 753 136 18.1 % Physical therapy operations 128,132 117,463 10,669 9.1 % Industrial injury prevention services 19,486 20,155 (669 ) (3.3 )% Management contracts 2,389 1,984 405 20.4 % $ 150,007 $ 139,602 $ 10,405 7.5 % (1) See above for defined terms. (2) Not meaningful. (3) Revenue from closed clinics includes revenue from the eight and 16 clinics closed or sold during the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively. 36 Table of Contents Revenue from physical therapy operations increased $10.7 million, or 9.1%, to $128.1 million for the 2023 Third Quarter from $117.5 million for the 2022 Third Quarter. The increase was primarily due to an increase in the number of patient visits per day to 29.7 in the 2023 Third Quarter, a record-high average patient visits for a third quarter in our history, as compared to 28.8 for the 2022 Third Quarter, and an increase in volume from the 58 net new clinics added since the comparable prior year period, partially offset by a decrease in net rate per patient visit. The number of patient visits increased 10.8% to 1,242,954 for the 2023 Third Quarter from 1,122,070 in the 2022 Third Quarter, with visits at mature clinics up 1.3% over the same periods. Net rate per patient visit was $102.37 in the 2023 Third Quarter as compared to $104.01 in the 2022 Third Quarter. The decrease in net rate was due to the combined Medicare rate reductions in 2022 and 2023. All other payor categories, including commercial and workers compensation, increased as compared to the prior year. Net rate per patient visit increased sequentially in the 2023 Third Quarter from the net rate of $102.03 in the three months ended June 30, 2023. IIP revenue decreased $0.7 million, or 3.3%, to $19.5 million for the 2023 Third Quarter as compared to $20.2 million for the 2022 Third Quarter. Operating Costs Operating costs were $122.1 million for the 2023 Third Quarter, or 81.4% of net revenue, compared to $112.8 million, or 80.8% of net revenue, for the 2022 Third Quarter. The following table provides a breakdown of operating costs. Three Months Ended September 30, Variance 2023 2022 $ % Operating costs related to: (In thousands, except percentages) Mature Clinics (1) $ 91,822 $ 90,811 $ 1,011 1.1 % 2023 Clinic additions 3,395 - 3,395 * (2) 2022 Clinic additions 9,665 3,482 6,183 * (2) Clinics sold or closed (3) 137 1,238 (1,101 ) * (2) Physical therapy operations 105,019 95,531 9,488 9.9 % Industrial injury prevention services 15,062 15,750 (688 ) (4.4 )% Management contracts 1,997 1,537 460 29.9 % $ 122,078 $ 112,818 $ 9,260 8.2 % (1) See above for defined terms. (2) Not meaningful. (3) Operating costs from closed clinics include costs from the eight and 16 clinics closed or sold during the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively. Operating costs from physical therapy operations increased $9.5 million, or 9.9%, to $105.0 million in the 2023 Third Quarter from $95.5 million in the 2022 Third Quarter primarily driven by costs associated with the 58 net new clinics since the comparable prior year period as well as increased patient visits at mature clinics. On a cost per patient visit basis, total physical therapy operating costs were $84.49 in the 2023 Third Quarter, a decrease of 0.8% from $85.14 in the 2022 Third Quarter. Operating costs from the IIP segment were down $0.7 million, or 4.4%, versus the comparable prior year period. 37 Table of Contents Salaries and Related Costs Salaries and related costs were $89.8 million or 59.9% of net revenue for the 2023 Third Quarter versus $81.8 million or 58.6% for the 2022 Third Quarter. Salaries and related costs for physical therapy operations were $75.3 million as compared to $68.4 million in the 2022 Third Quarter and 58.8% of physical therapy operations revenue in the 2023 Third Quarter and 58.3% in the 2022 Third Quarter. On a cost per patient visit basis, physical therapy salaries and related costs per visit were $60.35 in the 2023 Third Quarter, a decrease of 1.0% from $60.99 in the 2022 Third Quarter. Salaries and related costs for the IIP business were $12.9 million in the 2023 Third Quarter, or 66.1% of IIP revenue, as compared to $12.1 million in the 2022 Third Quarter, or 59.9% of IIP revenue. Rent, Supplies, Contract Labor and Other Rent, supplies, contract labor and other costs as a percentage of total revenue were $30.7 million or 20.5% for the 2023 Third Quarter versus $29.7 million or 21.3% for the 2022 Third Quarter. Rent, supplies, contract labor and other costs for physical therapy operations were $28.2 million in the 2023 Third Quarter, or 22.0% of physical therapy operations revenue, as compared to $25.7 million in the 2022 Third Quarter, or 21.9% of physical therapy operations revenue. Rent, supplies, contract labor and other costs for the IIP services business were $2.2 million in the 2023 Third Quarter, or 11.2% of IIP revenue, as compared to $3.7 million in the 2022 Third Quarter, or 18.6% of net IIP revenue. Provision for Credit Losses The provision for credit losses as a percentage of net revenue were 1.0% in both the 2023 Third Quarter and the 2022 Third Quarter. Our allowance for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 4.7% on September 30, 2023, as compared to 5.4% on December 31, 2022. Our days’ sales outstanding were 31 days on both September 30, 2023, and December 31, 2022. Gross Profit Gross profit for the 2023 Third Quarter increased $1.1 million, or 4.3%, to $27.9 million from $26.8 million for the 2022 Third Quarter. Gross profit margin decreased to 18.6% in the 2023 Third Quarter from 19.2% in the 2022 Third Quarter. The following table provides a detailed breakdown of gross profit and related gross profit margins. Three Months Ended September 30, 2023 2022 Variance $ Margin % $ Margin % $ % (In thousands, except percentages) Physical therapy operations $ 23,113 18.0 % $ 21,932 18.7 % $ 1,181 5.4 % Industrial injury prevention services 4,424 22.7 % 4,405 21.9 % 19 0.4 % Management contracts 392 16.4 % 447 22.5 % (55 ) (12.3 )% Gross profit $ 27,929 18.6 % $ 26,784 19.2 % $ 1,145 4.3 % Corporate Office Costs Corporate office costs were $12.0 million, or 8.0% of net revenue, for the 2023 Third Quarter compared to $11.9 million, or 8.5% of net revenue, for the 2022 Third Quarter. Operating Income Operating income for the 2023 Third Quarter was $15.9 million, or 10.6% of net revenue, and $14.9 million, or 10.7% of net revenue, for the 2022 Third Quarter. 38 Table of Contents Other Income and Expense Total other (expense) income, net, was ($0.1) million in the 2023 Third Quarter compared to $1.1 million in the 2022 Third Quarter. • Interest expense, net of $0.9 million savings from the interest rate swap arrangement discussed in the “Liquidity and Capital Resources – Interest Rate Swap” section below, was $2.1 million for the 2023 Third Quarter compared to $2.0 million in the 2022 Third Quarter. The interest rate on the Company’s credit facilities, net of the savings from the interest rate swap, was 4.9% for the 2023 Third Quarter, with an all-in effective interest rate, including all associated costs, of 5.6%. • Interest income from investing excess cash (proceeds from the secondary offering sale of our stock completed in May 2023) in a high-yield savings account was $1.7 million during the 2023 Third Quarter. • We revalued contingent earn-out consideration related to acquisitions and recognized $0.2 million as income (a reduction in the related liability) in the 2023 Third Quarter compared to $2.0 million in the 2022 Third Quarter. • The revaluation of a put-right liability resulted in $0.1 million of expense (an increase in the related liability) for the 2023 Third Quarter compared to $0.8 million of income for the 2022 Third Quarter. The put-right, which expires in November 2026, relates to the potential future purchase of a company that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. Provision for Income Taxes The provision for income taxes was $3.6 million in the 2023 Third Quarter compared to $3.2 million during the 2022 Third Quarter. The provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.8% for the 2023 Third Quarter and 25.2% for the 2022 Third Quarter. A computation of our effective income tax rate is as follows. Three Months Ended September 30, 2023 2022 (In thousands, except percentages) Income before taxes $ 15,779 $ 16,036 Less: Net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity (1,976 ) (2,037 ) Non-controlling interest - permanent equity (992 ) (1,227 ) $ (2,968 ) $ (3,264 ) Income before taxes less net income attributable to non-controlling interest $ 12,811 $ 12,772 Provision for income taxes $ 3,557 $ 3,215 Effective income tax rate 27.8 % 25.2 % Net Income Attributable to Non-controlling Interest Net income attributable to non-controlling interest (temporary and permanent) was $3.0 million in the 2023 Third Quarter compared to $3.3 million in the 2022 Third Quarter. 2023 Nine Months Compared to 2022 Nine Months Results. Our reportable segments in the 2023 Nine Months include the physical therapy operations segment and the IIP segment. Also included in the physical therapy operations segment are revenues from management contract services and other services which include services we provide on-site, such as athletic trainers for schools. The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements: 39 Table of Contents Nine Months Ended September 30, 2023 2022 (In thousands) Net revenue: Physical therapy operations $ 391,919 $ 353,302 Industrial injury prevention services 58,082 58,660 Total Company $ 450,001 $ 411,962 Gross profit: Physical therapy operations $ 78,815 $ 71,513 Industrial injury prevention services 12,178 12,680 Total Company $ 90,993 $ 84,193 Total Assets: Physical therapy operations $ 534,848 $ 432,683 Industrial injury prevention services 475,338 367,025 Total Company $ 1,010,186 $ 799,708 Net Revenue Total net revenue for the 2023 Nine Months was $450.0 million, an increase of 9.2%, compared to $412.0 million for the 2022 Nine Months. The table below provides a breakdown of total net revenue. Nine Months Ended September 30, Variance 2023 2022 $ % Revenue related to: (In thousands, except percentages) Mature Clinics (1) $ 340,830 $ 332,629 $ 8,201 2.5 % 2023 clinic additions 5,888 - 5,888 * (2) 2022 clinic additions 35,965 7,294 28,671 * (2) Clinics sold or closed (3) 421 4,521 (4,100 ) * (2) Net patient revenue from physical therapy operations 383,104 344,444 38,660 11.2 % Other revenue 2,479 2,523 (44 ) (1.7 )% Physical therapy operations 385,583 346,967 38,616 11.1 % Industrial injury prevention services 58,082 58,660 (578 ) (1.0 )% Management contracts 6,336 6,335 1 0.0 % $ 450,001 $ 411,962 $ 38,039 9.2 % (1) See defined terms above. (2) Not meaningful. (3) Revenue from closed clinics includes revenue from the eight and 16 clinics closed or sold during the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively. Revenue from physical therapy operations increased $38.6 million, or 11.1%, to $385.6 million for the 2023 Nine Months from $347.0 million for the 2022 Nine Months primarily due to higher average visits per clinic per day (30.0 for the 2023 Nine Months versus 28.7 for the 2022 Nine Months) and an increase in volume from the 58 net new clinics added since the comparable prior year period, partially offset by a decrease in net rate per visit. The number of patient visits increased 12.2% to 3,737,584 for the 2023 Nine Months from 3,331,143 for the 2022 Nine Months, with patient visits at our mature clinics up 3.2% over the same periods. Net rate per patient visit decreased to $102.50 in the 2023 Nine Months from $103.40 in the 2022 Nine Months due to the combined Medicare rate reductions in 2022 and 2023, including the discontinuation of sequestration relief on Medicare visits effective in July 2022. 40 Table of Contents Revenue from IIP decreased slightly to $58.1 million for the 2023 Nine Months as compared to $58.7 million for the 2022 Nine Months. Operating Costs Operating costs were $359.0 million for the 2023 Nine Months, or 79.8% of net revenue, compared to $327.8 million, or 79.6% of net revenue, for the 2022 Nine Months. Nine Months Ended September 30, Variance 2023 2022 $ % Operating costs related to: (In thousands, except percentages) Mature Clinics (1) $ 273,031 $ 266,324 $ 6,707 2.5 % 2023 Clinic additions 5,701 - 5,701 * (2) 2022 Clinic additions 28,175 6,597 21,578 * (2) Clinics sold or closed (3) 880 3,877 (2,997 ) * (2) Physical therapy operations 307,787 276,798 30,989 11.2 % Industrial injury prevention services 45,904 45,980 (76 ) (0.2 )% Management contracts 5,317 4,991 326 6.5 % $ 359,008 $ 327,769 $ 31,239 9.5 % (1) See Glossary of Terms - Revenue Metrics for the definition. (2) Not meaningful. (3) Operating costs from closed clinics include costs from the eight and 16 clinics closed or sold during the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively Physical therapy operating costs increased $31.0 million, or 11.2%, to $307.8 million in the 2023 Nine Months from $276.8 million in the 2022 Nine Months primarily driven by costs associated with the 58 net new clinics added since the comparable prior year period as well as the 3.2% increase in patient visits at mature clinics. On a cost per patient visit basis, physical therapy operating costs were $82.35 for the 2023 Nine Months, a decrease of 0.9% from $83.09 for the 2022 Nine Months. Operating costs from IIP decreased slightly to $45.9 million during the 2023 Nine Months from $46.0 million during the 2022 Nine Months. Salaries and Related Costs Salaries and related costs were $262.8 million or 58.4% of net revenue for the 2023 Nine Months versus $236.9 million or 57.5% of net revenue for the 2022 Nine Months. Salaries and related costs for physical therapy operations were $220.6 million in the 2023 Nine Months, or 57.2% of physical therapy operations revenue, as compared to $197.7 million in the 2022 Nine Months, or 57.0% of physical therapy operations revenue. On a cost per patient visit basis, physical therapy salaries and related costs per visit were $59.01 for the 2023 Nine Months, a decrease of $0.6% from $59.34 for the 2022 Nine Months. Salaries and related costs for our IIP business was $37.5 million in the 2023 Nine Months, or 64.6% of IIP revenue, as compared to $34.8 million in the 2022 Nine Months, or 59.3% of IIP revenue. Rent, Supplies, Contract Labor and Other Rent, supplies, contract labor and other costs as a percentage of total revenue were $91.7 million or 20.4% for the 2023 Nine Months versus $86.7 million or 21.0% for the 2022 Nine Months. Rent, supplies, contract labor and other costs for physical therapy operations were $82.4 million in the 2023 Nine Months, or 21.4% of physical therapy operations revenue, as compared to $75.0 million in the 2022 Nine Months, or 21.6% of physical therapy operations revenue. Rent, supplies, contract labor and other costs for the IIP business were $8.4 million in the 2023 Nine Months, or 14.5% of IIPrevenue, as compared to $11.1 million in the 2022 Nine Months, or 18.9% of net IIP revenue. 41 Table of Contents Provision for Credit Losses The provision for credit losses as a percentage of total revenue was 1.0% in both the 2023 Nine Months and the 2022 Nine Months. Gross Profit Gross profit increased $6.8 million, or 8.1%, to $91.0 million for the 2023 Nine Months from $84.2 million for the 2022 Nine Months. Gross profit margin decreased slightly to 20.2% in the 2023 Nine Months from 20.4% in the 2022 Nine Months. The following table provides a detailed breakdown of gross profit and related gross profit margins. Nine Months Ended September 30, 2023 2022 Variance $ Margin % $ Margin % $ % (In thousands, except percentages) Physical therapy operations $ 77,796 20.2 % $ 70,169 20.2 % $ 7,627 10.9 % Industrial injury prevention services 12,178 21.0 % 12,680 21.6 % (502 ) (4.0 )% Management contracts 1,019 16.1 % 1,344 21.2 % (325 ) (24.2 )% Gross profit $ 90,993 20.2 % $ 84,193 20.4 % $ 6,800 8.1 % Corporate Office Cost Corporate office costs were $38.1 million, or 8.5% of net revenue, for the 2023 Nine Months compared to $34.2 million, or 8.3% of net revenue, for the 2022 Nine Months. The increase of $3.9 million, or 11.3%, in corporate office costs was primarily due to higher salaries related to merit increases, staff additions to support a larger number of clinics and inflationary and related impacts. Operating Income Operating income increased 5.9%, to $52.9 million, or 11.8% of net revenues, for the 2023 Nine Months from $50.0 million, or 12.1% of net revenues, in the 2022 Nine Months. Other Income and Expense Total other (expense) income was ($3.7) million during the 2023 Nine Months compared to $1.0 million during the 2022 Nine Months. • Interest expense, net of $2.3 million savings from the interest rate swap arrangement discussed in the “Balance Sheet and Cash Flow” section below, was $7.3 million for the 2023 Nine Months compared to $3.5 million in the 2022 Nine Months. The increase in interest expense was primarily due to a higher effective interest rate and increased borrowings to fund acquisitions. The effective interest rate on the Company’s credit facilities, net of the savings from the interest rate swap, was 5.1% for the 2023 Nine Months, with an all-in interest rate, including all associated costs, of 5.7%. • Interest income from investing excess cash (proceeds from the secondary offering sale of our stock completed in May 2023) in high-yield savings account was $2.2 million during the 2023 Nine Months. • We revalued contingent earn-out consideration related to acquisitions and recognized $0.2 million as income (a reduction in the related liability) in the 2023 Nine Months compared to $2.0 million in the 2022 Nine Months. • The revaluation of a put-right liability resulted in $0.3 million of expense (an increase in the related liability) for the 2023 Nine Months compared to $0.8 million of income (a decrease in the related liability) for the 2022 Nine Months. The put-right, which expires in November 2026, relates to the potential future purchase of a company that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. • During the 2023 Nine Months, we recognized $0.5 million of income received under the Coronavirus Aid, Relief and Economic Security Act (“Relief Funds”). The Relief Funds were received in prior years but were subject to certain compliance requirements which were met in the first quarter of 2023. We do not expect to receive or recognize any future Relief Funds. No such income was recognized in the 2022 Nine Months. 42 Table of Contents Through a subsidiary, we have a 49% joint venture interest in a company that provides physical therapy services for patients at hospitals. Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of September 30, 2023, is $12.3 million. Equity in earnings of this unconsolidated affiliate was $0.8 million and $1.0 million in the 2023 Nine Months and the 2022 Nine Months, respectively. Provision for Income Taxes The provision for income taxes was $10.8 million for the 2023 Nine Months compared to $11.0 million for the 2022 Nine Months. The provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 28.1% for the 2023 Nine Months and 27.0% for the 2022 Nine Months. computation of our effective income tax rate is as follows: Nine Months Ended September 30, 2023 2022 (In thousands, except percentages) Income before taxes $ 49,270 $ 51,011 Less: net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity (7,616 ) (7,220 ) Non-controlling interest - permanent equity (3,314 ) (3,288 ) $ (10,930 ) $ (10,508 ) Income before taxes less net income attributable to non-controlling interest $ 38,340 $ 40,503 Provision for income taxes $ 10,757 $ 10,952 Percentage 28.1 % 27.0 % Net Income Attributable to Non-controlling Interest Net income attributable to non-controlling interest (temporary and permanent) was $10.9 million for the 2023 Nine Months and $10.5 million for the 2022 Nine Months. 43 Table of Contents LIQUIDITY AND CAPITAL RESOURCES We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. On September 30, 2023, and December 31, 2022, we had $147.7 million and $31.6 million, respectively, in cash and cash equivalents. Additionally, we had $145.3 million of outstanding borrowings and $175.0 million in available credit under our revolving credit facilities as of September 30, 2023 compared to $179.1 million of outstanding borrowings and $144.0 million in available credit under our Revolving Credit Facilities as of December 31, 2022. As discussed above, in May 2023 we completed a secondary offering of our common stock resulting in net proceeds of $163.6 million, after deducting the underwriting discount and certain offering expenses. A portion of the net proceeds was used to repay the $35.0 million then outstanding under our Revolving Credit Facility while the remainder is expected to be used primarily for acquisitions. The Company’s cash is currently invested in a high-yield savings account which generated interest income of approximately $1.7 million and $2.2 million in the three and nine months ended September 30, 2023, respectively. We believe that our cash and cash equivalents and availability under our Credit Facilities are sufficient to fund the working capital needs of our operating subsidiaries through at least September 30, 2024. Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have, from time to time, purchased the non-controlling interests of limited partners in our existing partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using our cash, financing, or a combination of the two. We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMS approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the account receivable has been outstanding for 120 days or longer. As of September 30, 2023, we have accrued $8.0 million related to credit balances, a portion of which is due to patients and payors. The credit balances are expected to be resolved or paid in the next twelve months. Cash Flow A summary of our operating, investing and financing activities is discussed below. During the 2023 Nine Months, $55.1 million of cash was provided by operating activities, $36.6 million was used in investing activities, and $97.5 million was provided by financing activities. The major uses of cash for investing activities included: purchase of majority interest in businesses ($23.0 million), purchase of non-controlling interests from existing partners ($8.1 million) and purchase of fixed assets ($7.1 million), while cash provided by financing activities included: proceeds from the secondary offering discussed above ($163.6 million) offset by net payments of borrowings under our credit facilities ($33.8 million), dividends paid to shareholders ($17.7 million), and distributions to non-controlling interests ($11.8 million). Senior Credit Facilities On December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility. This agreement was amended and/or restated in August 2015, January 2016, March 2017, November 2017, and January 2021. On June 17, 2022, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and the lenders from time-to-time party thereto. 44 Table of Contents The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans will be available through the following facilities (collectively, the “Senior Credit Facilities”): 1) Revolving Facility: $175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit for the issuance of standby letters of credit and a $15 million sublimit for swingline loans (each, a “Swingline Loan”). 2) Term Facility: $150 million term loan facility (the “Term Facility”). The Term Facility amortizes in quarterly installments of: (a) 0.625% in each of the first two years, (b) 1.250% in the third and fourth year, and (c) 1.875% in the fifth year of the Credit Agreement. The remaining outstanding principal balance of all term loans is due on the maturity date. The proceeds of the Revolving Facility have been and shall continue to be used by us for working capital and other general corporate purposes of our Company and its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by us to refinance the indebtedness outstanding under the Second Amended and Restated Credit Agreement, to pay fees and expenses incurred in connection with the loan facilities transactions, for working capital and other general corporate purposes. We will be permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $100 million plus (ii) an unlimited additional amount, provided that (in the case of clause (ii)), after giving effect to such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0:1.0, and the aggregate amount of all incremental increases under the Revolving Facility does not exceed $50,000,000. The interest rates per annum applicable to the Senior Credit Facilities (other than in respect of Swingline Loans) will be Term SOFR as defined in the agreement plus an applicable margin or, at our option, an alternate base rate plus an applicable margin. The interest rate for the 2023 Nine Months on our Senior Credit Facilities, net of the savings from the interest rate swap described below, was 5.1%, with an all-interest rate, including all associated costs, of 5.7%. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity. We will also pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). We may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions. The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends, and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement includes certain financial covenants which include the Consolidated Fixed Charge Coverage Ratio and the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary events of default. Our obligations under the Credit Agreement are guaranteed by our wholly owned material domestic subsidiaries (each, a “Guarantor”), and our obligations and any Guarantors are secured by a perfected first priority security interest in substantially all of our existing and future personal property and each Guarantor, subject to certain exceptions. As of September 30, 2023, $143.7 million, net of unamortized debt issuance costs of $1.6 million, was outstanding on the Term Facility while none was outstanding under the Revolving Facility resulting in $175.0 million of credit availability. As of September 30, 2023, we were in compliance with all of the covenants contained in the Credit Agreement. The average effective interest rate, net of the savings from interest rate swap discussed below, for borrowings under the Senior Credit Facility, inclusive of all associated costs, were 5.6% and 5.7% for the 2023 Third Quarter and 2023 Nine Months respectively. 45 Table of Contents Interest Rate Swap In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which became effective on June 30, 2022. It has a $150 million notional value adjusted concurrently with scheduled principal payments made on the term loan and has a maturity date of June 30, 2027. Beginning in July 2022, we receive 1-month SOFR, and pay a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period also includes an applicable margin based on our consolidated leverage ratio. In connection with the swap, no cash was exchanged between us and the counterparty. We designated our interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. As of September 30, 2023, the fair value of the interest rate swap was $7.7 million, an increase of $1.7 million, net of a $0.6 million, income tax effect, as compared to December 31, 2022. The fair value of the interest rate swap is included in other assets (current and long term) in our consolidated balance sheet while the increase in fair value is presented as unrealized gain in our unaudited consolidated statements of comprehensive income. The interest rate swap arrangement has generated $2.3 million in interest savings since its inception. The average interest rate for the term facility, net of the savings from the swap, in each of the 2023 Third Quarter and 2023 Nine Months was 4.9%. Notes Payable Related to Acquisitions We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payable primarily relate to the acquisitions of a business or acquisitions of majority interests in such businesses. At September 30, 2023, our remaining outstanding balance on these notes aggregated $5.3 million. $1.6 million of the outstanding notes payable are payable in 2023, $2.4 million is payable in 2024, and $1.3 million is payable in 2025. Notes are generally payable in equal annual installments of principal over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 8.0% per annum. On September 29, 2023, we acquired a 70% equity interest in a four-clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $6.0 million, of which $5.4 million was paid in cash, and $0.6 million was in the form of a note payable. The note accrues interest at 5.0% per annum and the principal and interest are payable in two installments. The first payment of principal and interest of $0.3 million is due on January 31, 2024, and the second installment of $0.3 million is due on September 30, 2025. In a separate transaction, on September 29, 2023, we acquired a 70% equity interest in a single clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $7.8 million, of which $7.4 million was paid in cash and $0.4 million is a deferred payment due on June 30, 2025. On July 31, 2023, we acquired a 70% equity interest in a five-clinic practice. The practice’s owners retained a 30% equity interest. The purchase price for the 70% equity interest was approximately $2.1 million, of which $1.8 million was paid in cash and $0.3 million is a deferred payment due on June 30, 2025. On May 31, 2023, we and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, our ownership interest is 45%, our local partner’s ownership interest is 30%, and the practice’s pre-acquisition owners have a 25% ownership interest. The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by us, $1.1 million was paid in cash by the local partner, and $0.3 million was in the form of a note payable, (of which $0.2 million will be paid by us and $0.1 million will be paid by the local partner). The note will be paid on July 1, 2024. We guaranteed the full payment of $0.3 million on its due date. On February 28, 2023, we acquired an 80% interest in a one-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable. The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025. 46 Table of Contents On November 30, 2022, we acquired an 80% interest in a thirteen-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $25.0 million, of which $24.2 million was paid in cash and $0.8 million in the form of a note payable. The note accrues interest at 7.0% per annum and the principal and interest are payable on November 30, 2024. On October 31, 2022, we acquired a 60% interest in a fourteen-clinic physical therapy practice. The practice’s owners retained 40% of the equity interests. The purchase price for the 60% equity interest was approximately $19.5 million, with a potential additional amount to be paid at a later date based on the performance of the business. This contingent consideration had a fair value of $8.1 million on September 30, 2023. The fair value of this contingent consideration will be adjusted quarterly based on certain criteria and market inputs. There is no maximum payout for this contingency. On September 30, 2022, we acquired an 80% interest in a two-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $4.2 million, of which $3.9 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on September 30, 2024. On August 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $3.5 million, of which $3.3 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on August 31, 2024. On March 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $11.5 million, of which $11.2 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.5% per annum and the principal and interest are payable on March 31, 2024. Redeemable Non-Controlling Interest Certain limited partnership agreements, as amended, provide that, upon the triggering events, we have a call right and the selling entity or individual has a put right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the put right and the call right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon the exercise of either the put right or the call right is calculated per the terms of the respective agreements and classified as redeemable non-controlling interest (temporary equity) in our consolidated balance sheets. The fair value of the redeemable non-controlling interest at September 30, 2023 was $174.7 million. 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. Share Repurchase Program In March 2009, the Board authorized the repurchase of up to 10% of our common stock (“March 2009 Authorization”). Our Credit Agreement permits share repurchases of up to $50.0 million in the aggregate, subject to compliance with certain covenants. We are required to retire shares purchased under the March 2009 Authorization. There is no expiration date for the share repurchase program. As of September 30, 2023, there are currently an additional estimated 163,523 shares (based on the closing price of $91.73 on September 30, 2023) that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during the three and nine months ended September 30, 2023, or during the year ended December 31, 2022. 47 Table of Contents