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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-02-28 · 567 added, 624 removed, 123 unchanged (91% of the section changed)

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

The following discussion and analysis of U.S.

Physical Therapy, Incl and its subsidiaries (herein referred to as “we”, “us”, “our” or the “Company”) should be read in

conjunction with the Company’s consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.

Some of the information contained in this discussion and analysis, including information with respect

to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

You should review the “Risk Factors” and “Forward-Looking Statements” sections of this Annual Report on Form 10-K for a

discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2021 items and

year-to-year comparisons between 2022 and 2021 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended

December 31, 2022, filed with the Securities and Exchange Commission on February 28, 2023.

EXECUTIVE SUMMARY

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

Through our subsidiaries, we operate outpatient physical therapy

clinics that provide pre-and post-operative care for a variety of orthopedic-related disorders and sports-related injuries, treatment for neurological-related injuries and rehabilitation of injured workers.

We also have majority interests in

companies which are leading providers of industrial injury prevention services (“IIP”).

Services provided in these businesses include onsite injury prevention and rehabilitation, performance optimization, post-offer employment testing, functional

capacity evaluations and ergonomic assessments.

The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies.

We operate our business through our reportable segments which include the (1) physical therapy operations segment and (2) the industrial injury prevention services (“IIP”) segment.

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, post-offer employment testing, functional evaluations and ergonomic assessments.

The majority of these

services are contracted with and paid for directly by employers, including a number of Fortune 500 companies.

Other clients include large insurers and their contractors.

services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers (ATCs).

During the last three years, we completed the acquisitions of eleven multi-clinic practices and two industrial injury prevention services businesses as detailed below:

These services are performed through Industrial Sports Medicine

Professionals, consisting of both physical therapists and specialized certified athletic trainers (“ATCs”).

During the last three years, we completed the following acquisitions of clinic practices and IIP businesses detailed below:

October 2023 Acquisition

October 31, 2023

September 2023 Acquisition 1

September 29, 2023

September 2023 Acquisition 2

September 29, 2023

July 2023 Acquisition

July 31, 2023

May 2023 Acquisition

February 2023 Acquisition

February 28, 2023

November 2022 Acquisition

18 unchanged sentences

March 31, 2021

November 2020 Acquisition

November 30, 2020

September 2020 Acquisition

September 30, 2020

February 2020 Acquisition

February 27, 2020

Industrial injury prevention services business

The business includes six management contracts which have been in place for a number of years.

As of the date acquired, the contracts had a remaining term of five years.

The four clinics are in four separate partnerships.

The Company's interest in the four partnerships range from 10.0% to 83.8%, with an overall 65.0% based on the initial purchase

Besides the multi-clinic acquisitions referenced in the table above, during 2022 and 2021, we purchased the assets and business of three individual physical therapy clinics in separate transactions.

The clinics operate as satellite clinics of three of our existing clinic partnerships.

During the year ended December 31, 2022, we sold five clinics and closed eleven clinics.

The aggregate sales price was $0.3 million.

During the year ended December 31, 2021, we sold two clinics for an

aggregate sales price of $0.1 million, and we closed three clinics.

During the year ended December 31, 2020, we closed 34 clinics, and we sold 14 previously closed clinics for an aggregate sales price was $1.1 million.

Of the total sales price,

$0.7 million was paid in cash and $0.4 million in a note receivable which was fully received in June 2022.

We intend to continue to pursue additional acquisition opportunities as well as open new clinics and satellite clinics.

Impact of COVID-19

As previously disclosed in various filings with the Securities and Exchange Commission (the “SEC”), our results were negatively impacted by the effects of the COVID-19 pandemic especially in the years

ended December 31, 2021 and 2020.

The COVID-19 pandemic continues to evolve, and we cannot predict any future impact on our business, operating results, cash flows and financial condition.

In March 2020 in response to the COVID-19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The CARES Act provided 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.

For the years ended December 31, 2021 and 2020, we

recorded income of approximately $4.6 million and $13.5 million of payments under the CARES Act (“Relief Funds”) respectively.

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

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 and comply with the terms and conditions.

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

Medicare Accelerated and Advance Payment Program (“MAAPP Funds”)

The CARES Act allowed for qualified healthcare providers to receive advanced payments under the existing 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 MAAPP Funds from Centers for Medicare & Medicaid Services in April 2020.

We recorded the $14.1 million in advance payments received as a

During the quarter ended March 31, 2021, we repaid the MAAPP funds of $14.1 million rather than applying them to future services performed.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that have a significant impact on our results of operations and financial position involving significant estimates requiring our judgment.

accounting policies are:

Revenue Recognition.

Revenues are recognized in the period in which services are rendered.

Net patient revenue consists of revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative

care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries.

Net patient revenue (patient revenues less estimated contractual adjustments –

described below) is recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied.

There is an implied contract

between us and the patient upon each patient visit.

Separate contractual arrangements exist between us and third-party payors (e.g.

insurers, managed care programs, government programs, and workers' compensation programs) which establish the

amounts the third parties pay on behalf of the patients for covered services rendered.

While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the

patients covered by the third-party payors.

The payor contracts do not indicate performance obligations for us but indicate reimbursement rates for patients who are covered by those payors when the services are provided.

At that time, we are

obligated to provide services for the reimbursement rates stipulated in the payor contracts.

The execution of the contract alone does not indicate a performance obligation.

For self-paying customers, the performance obligation exists when we

provide the services at established rates.

The difference between our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue—contractual allowance.

Management contract revenue, which is included in other revenue in the consolidated statements of net income, is derived from contractual arrangements whereby we manage a clinic owned by a third

We do not have any ownership interest in these clinics.

Typically, revenues are determined based on the number of visits conducted at the clinic and recognized at the point in time when services are performed.

Costs, typically salaries for

our employees, are recorded when incurred.

Revenues from the industrial injury prevention services business, which are also included in other revenues in the consolidated statements of net income, are derived from onsite services we provide to

clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization.

Revenue from the industrial injury prevention services business is recognized when obligations under the terms of the contract are

Revenues are recognized at an amount equal to the consideration we expect to receive in exchange for providing injury prevention services to our clients.

The revenue is determined and recognized based on the number of hours and

respective rate for services provided in a given period.

Additionally, other revenue includes services we provide on-site at locations such as schools and industrial worksites for physical or occupational therapy services, athletic trainers and gym

membership fees.

Contract terms and rates are agreed to in advance between us and the third parties.

Services are typically performed over the contract period and revenue is recorded at the point of service.

If the services are paid in advance,

revenue is recorded as a contract liability over the period of the agreement and recognized at the point in time when the services are performed.

We determine allowances for credit losses based on the specific agings of receivables and payor classifications at each clinic.

The provision for credit losses is included in clinic operating costs in

the statements of net income.

Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for credit losses, includes only those amounts we estimate to be collectible.

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

December 31, 2022

December 31, 2021

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

an ergonomics software business (“October 2023 Acquisition”).

The following table provides a roll forward of our clinic count for the periods presented.

For the Year Ended

December 31, 2023

Net patient revenue

Other revenue

Net patient revenue from physical therapy operations

Revenue from management contracts

Revenue from industrial injury prevention services

Total revenue

Contractual Allowances.

Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by

both insurance companies and government sponsored healthcare programs for such services.

Medicare regulations and the various third-party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms

payable for the services provided in our clinics.

We estimate contractual allowances based on our interpretation of the applicable regulations, payor contracts and historical calculations.

Each month we estimate our contractual allowance for each

clinic based on payor contracts and the historical collection experience of the clinic and apply an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic.

historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow us to provide the necessary detail and accuracy with our collectability estimates.

However, the services authorized and

provided and related reimbursement are subject to interpretation that could result in payments that differ from our estimates.

Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management.

Our billing systems may not capture the exact change in our contractual allowance reserve estimate from period to period.

Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management

regularly compares our cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis.

In the aggregate, the historical difference between net revenues and corresponding cash collections in any given

fiscal year has generally reflected a difference within approximately 1.0% to 1.5% of net revenues.

Additionally, analysis of subsequent period’s contractual write-offs on a payor basis reflects a difference within approximately 1.0% to 1.5%

between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance.

As a result, we believe that a reasonable likely change in the

contractual allowance reserve estimate would not be more than 1% to 1.5% of gross billings in accounts receivable at December 31, 2022.

For purposes of demonstrating the sensitivity of this estimate on our Company’s financial condition, a 1% to

1.5% increase or decrease in our aggregate contractual allowance reserve percentage would decrease or increase, respectively, net patient revenue by approximately $1.4 million to $1.3 million for the year ended December 31, 2022.

believes the changes in the estimate of the contractual allowance reserve for the periods ended December 31, 2022, 2021 and 2020 have not been material to the statement of income.

The following table sets forth information regarding our patient accounts receivable as of the dates indicated (in thousands):

Gross patient accounts receivable

Less contractual allowances

Subtotal - accounts receivable

Less allowance for credit losses

Net patient accounts receivable

The following table presents our patient accounts receivable aging by payor class as of the dates indicated (in thousands):

December 31, 2022

December 31, 2021

Managed Care/ Commercial Plans

Medicare/Medicaid

Workers Compensation*

Workers compensation is paid by state administrators or their designated agents.

Other includes primarily litigation claims and, to a lesser extent, vehicular insurance claims.

Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of the acquired business assets, which include certain identifiable intangible

Historically, goodwill has been derived from acquisitions and, prior to 2009, from the purchase of some or all of a particular local management’s equity interest in an existing clinic.

Effective January 1, 2009, if the purchase price of a

non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.

Goodwill and other indefinite-lived intangible assets are not amortized but are instead subject to periodic impairment evaluations.

The fair value of goodwill and other identifiable intangible assets

with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events or conditions and are written down to fair value if considered impaired.

These events or conditions include but are not limited to a

significant adverse change in the business environment, regulatory environment, or legal factors;

a current period operating, or cash flow loss combined with a history of such losses or a projection of continuing losses;

or a sale or disposition

of a significant portion of a reporting unit.

The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge.

We evaluate indefinite-lived tradenames in conjunction with

our annual goodwill impairment test.

We operate our business through two segments consisting of our physical therapy clinics and our industrial injury prevention services business.

For purposes of goodwill impairment analysis, each of

our segments is further broken down into reporting units.

Reporting units within our physical therapy business comprise of regions primarily based on each clinic’s location.

In addition to the six regions, in 2022 and 2021, the industrial injury

prevention services businesses consisted of two reporting units.

As part of the impairment analysis, we are first required to assess qualitatively if we can conclude whether goodwill is more likely than not impaired.

If goodwill is more likely than not impaired, we

are then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount.

In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying

amount, we consider relevant events or circumstances that affect the fair value or carrying amount of a reporting unit.

We consider both the income and market approach in determining the fair value of its reporting units when performing a

quantitative analysis.

An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated

fair value of the reporting unit.

The evaluation of goodwill in 2021 and 2020 did not result in any goodwill amounts that were deemed impaired.

In 2022, we recorded a charge for goodwill impairment of $9.1 million related to one reporting unit in the industrial injury prevention services business.

The impairment is related to a change in the

reporting unit’s current and projected operating income as well as various inputs based on current market conditions, including the higher interest rate environment.

No impairment was recognized as part of our annual assessment of goodwill for the other seven reporting units.

Redeemable Non-Controlling Interest

The non-controlling interests that are reflected as redeemable non-controlling interest in our consolidated financial statements consist of those owners, including us, that have certain redemption

rights, whether currently exercisable or not, and which currently, or in the future, require that we purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met and the owners request the purchase

(“Put Right”).

We also have a call right (“Call Right”).

The Put Right or Call Right may be triggered by the owner or us, respectively, at such time as both of the following events have occurred:

1) termination of the owner’s employment,

regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically three to five years, as defined in the limited partnership agreement.

The Put Rights and Call Rights

are not automatic (even upon death) and require either the owner or us to exercise our rights when the conditions triggering the Put or Call Rights have been satisfied.

The purchase price is derived at a predetermined formula based on a multiple

of trailing twelve months earnings performance as defined in the respective limited partnership agreements.

On the date we acquire a controlling interest in a partnership and the limited partnership agreement for such partnerships contains redemption rights not under our control, the fair

value of the non-controlling interest is recorded in the consolidated balance sheet under the caption— Redeemable non-controlling interest .

each reporting period thereafter until it is purchased by us, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial value, based on the predetermined formula defined in the respective

limited partnership agreement.

As a result, the value of the non-controlling interest is not adjusted below its initial value.

We record any adjustment in the redemption value, net of tax, directly to retained earnings and not in the

consolidated statements of income.

Although the adjustments are not reflected in the consolidated statements of income, current accounting rules require that we reflect the adjustments, net of tax, in the earnings per share calculation.

amount of net income attributable to redeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statement of income .

We believe the redemption

the carrying amount) and fair value are the same.

Non-Controlling Interest

We recognize non-controlling interests, in which we have no obligation but the right to purchase the non-controlling interests, as equity in the consolidated financial statements separate from the

parent entity’s equity.

The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the consolidated statements of income.

Operating losses are allocated to non-controlling interests

even when such allocation creates a deficit balance for the non-controlling interest partner.

When we purchase a non-controlling interest and the purchase differs from the book value at the time of purchase, any excess or shortfall is recognized

as an adjustment to additional paid-in capital.

Number of clinics, beginning of period

Closed or sold

Number of clinics, end of period

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

In May 2023, we completed a secondary offering of 1,916,667 shares of its common stock at an 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

agreement while the remainder is expected to be used primarily for additional acquisitions.

Our Board of Directors raised our quarterly dividend to $0.44 per share, on February 27, 2024, and declared a quarterly dividend for the first quarter of 2024 at the higher rate.

Medicare Reimbursement

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”).

rehabilitation providers may enroll in Medicare as institutional outpatient rehabilitation facilities (i.e., rehab agencies) or individual physical or occupational therapists in private practice.

The majority of our clinicians are enrolled as

individual physical or occupational therapists in private practice while the remaining balance of providers are reimbursed through enrolled rehab agencies.

The following is a summary of significant regulatory changes which have affected our

results of operations as well as the policies and payment rates that may affect our future results of operations.

For calendar years 2021 and 2022, CMS’s expected decreases in Medicare reimbursement were mostly offset by one-time increases in payments as a result of other

legislation passed by Congress.

Payments under the 2023 MPFS physician fee schedule decreased by 2%, and for calendar year 2024, CMS’s final policies for 2024 will result in an approximately 3.5% decrease in Medicare payments for the therapy

In the final 2020 MPFS rule, CMS clarified that when the physical therapist is involved for the entire duration of the service and the physical

therapist assistant (“PTA”) provides skilled therapy alongside the physical therapist, the CQ modifier is not required.

Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS applies the de minimis

standard to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service.

For dates of service on and after January 1, 2022, CMS pays for physical therapy and occupational therapy services provided by PTAs and

occupational therapist assistants (“OTAs”) at 85% of the otherwise applicable Part B payment amount.

CMS allows a timed service to be billed without the CQ or CO modifier when a PTA or OTA participates in providing care, but the physical

therapist or occupational therapist meets the Medicare billing requirements without including the PTA’s or OTA’s minutes.

This occurs when the physical therapist or occupational therapist provides more minutes than the 15-minute midpoint.

calendar year 2024 MPFS final rule did not contain any policy changes concerning the modifiers for services provided by physical therapy and occupational therapy assistants.

RESULTS OF OPERATIONS

The defined terms with their respective description used in the following discussion are listed below:

Year ended December 31, 2022

Year ended December 31, 2021

Clinic Additions

Clinics opened or acquired during the year ended December 31, 2022 and 2021

2022 Clinic Additions

Clinics opened or acquired during the year ended December 31, 2022

2021 Clinic Additions

Clinics opened or acquired during the year ended December 31, 2021

Clinics Additions

Clinics opened or acquired during the year ended December 31, 2022 and 2021

Mature Clinics

Clinics opened or acquired prior to January 1, 2021 and are still operating

Selected Operating and Financial Data

The following table presents selected operating and financial data, used by management as key indicators of our operating performance:

For the Years Ended December 31,

Number of clinics at the end of period

Average visits per day per clinic

Total patient visits

Net patient revenue per visit

2022 Compared to 2021

For the 2022 Year, our net income attributable to our shareholders was $32.2 million as compared to $40.8 million for the 2021 Year.

In accordance with current accounting guidance, the revaluation of redeemable

non-controlling interest, net of taxes, is not included in net income but charged directly to retained earnings;

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

Including the charge for

revaluation of redeemable non-controlling interest, net of taxes, the amount is $29.3 million, or earnings per diluted share of $2.25, for the 2022 Year, and $31.1 million, or earnings per diluted share of $2.41 for the 2021 Year.

See table below (in thousands, except per share data):

Year Ended December 31,

Mature Clinics are clinics opened or acquired prior to January 1, 2022, and are still operating as of December 31, 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 daily visits per clinic is patient visits divided by the number of days in which normal business operations were

conducted during the periods presented and further divided by the average number clinics in operation during the periods presented.

Full Year 2023 refers to the year ended December 31, 2023.

Full Year 2022 refers to the year ended December 31, 2022.

Full Year 2023 versus Full Year 2022

Total net revenue for the Full Year 2023 increased $51.7 million, or 9.3%, to $604.8 million from $553.1 million for the Full Year 2022 while operating costs increased $42.2 million, or 9.6%, to

$483.3 million from $441.1 million over the same periods, respectively.

Total operating cost was $483.3 million for the 2023 Year, or 79.9% of total revenue, as compared to $441.1million or 79.7% of total revenue for the 2022 Year.

for the Full Year 2023 was $121.5 million, or 20.1% of net revenue, compared to $112.0 million for the Full Year 2022, or 20.3% of net revenue.

Net income attributable to our shareholders (“USPH net income”) was $28.2 million for Full Year 2023 compared to $32.2 million for Full Year 2022.

USPH net income included a non-cash impairment

charge, prior to allocation to non-controlling interest and income taxes, of $17.5 million in the year ended December 31, 2023 ($9.1 million net of $5.2 million allocated to non-controlling interest and $3.1 million income tax) and $9.1 million

in the year ended December 31, 2022 ($4.7 million net of $2.7 million allocated to non-controlling interest and $1.6 million income tax).

In accordance with Generally Accepted Accounting Principles (“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.

Earnings per share for Full Year 2023 were $1.28 compared to $2.25 for

Full Year 2022.

For the Year Ended

December 31, 2023

December 31, 2022

(In thousands, except per share data)

Earnings per share

Computation of earnings per share - USPH shareholders:

2 unchanged sentences

Revaluation of redeemable non-controlling interest

Tax effect at statutory rate (federal and state) of 25.55%

Tax effect at statutory rate (federal and state)

Earnings per share (basic and diluted)

Shares used in computation - basic and diluted

Non-GAAP Measures

Operating Results and Adjusted EBITDA 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 USPH shareholders presented in the consolidated financial statements.

Adjusted EBITDA is defined as net income attributable to our shareholders before interest income, interest expense, taxes, depreciation, amortization, goodwill impairment

charges, change in fair value of contingent earn-out consideration, Relief Funds, changes in revaluation of put-right liability, equity-based awards compensation expense, settlement of a legal matter, and related portion for non-controlling

Operating Results, a non-GAAP measure, equals net income attributable to our diluted shareholders per the consolidated statements of income, less a goodwill impairment charge

related to the industrial injury prevention services acquisition in November 2021 (“IIP Acquisition”), changes in fair value of contingent consideration, expenses related to executive officer transitions, settlement of a legal matter, and any

allocations to non-controlling interests, all net of taxes.

Operating Results per diluted share also exclude the impact of the revaluation of redeemable non-controlling interest and the associated tax impact.

The tables (in thousands, except per share data) below reconcile net income attributable to our shareholders calculated in accordance with GAAP to Operating Results and Adjusted EBITDA, non-GAAP measures defined

We use Operating Results and Adjusted EBITDA, which eliminate certain items described above that can be subject to volatility and unusual costs, as one the principal measures to evaluate and monitor financial performance period over

We believe that Operating Results and Adjusted EBITDA are useful information for investors to use in comparing the Company's period-to-period results as well as for comparing with other similar businesses since most do not have

redeemable instruments and therefore have different equity structures.

See table below for a detailed computation (in thousands, except per share data):

Year Ended December 31,

Computation of earnings per share - USPH shareholders:

We use Adjusted EBITDA and Operating Results, non-GAAP measures, which eliminate certain items described below 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 the Company's period-to-period results as well as for comparing with other

similar businesses since most do not have redeemable instruments and therefore have different equity structures.

Adjusted EBITDA is defined as net income attributable to our shareholders before interest income, interest expense, taxes, depreciation, amortization, non-cash asset impairment charge, change in

fair value of contingent earn-out consideration, Relief Funds, changes in revaluation of put-right liability, equity-based awards compensation expense, and related portions for non-controlling interests.

Operating Results equals net income attributable to our shareholders less non-cash asset impairment charge, 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.

The tables below reconcile net income attributable to our shareholders calculated in accordance with GAAP to Operating Results and Adjusted EBITDA.

ADJUSTED EBITDA AND OPERATING RESULTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

For the Year Ended

December 31, 2023

December 31, 2022

(In thousands, except per share data)

Adjusted EBITDA (a non-GAAP measure)

Net income attributable to USPH shareholders

Charges to retained earnings:

Revaluation of redeemable non-controlling interest

Tax effect at statutory rate (federal and state) of 25.55%

Earnings per share (basic and diluted)

Goodwill impairment charge

Change in fair value of contingent earn-out consideration

Provision for income taxes

Depreciation and amortization

Interest expense, debt and other, net

Interest income from investments

Impairment of goodwill and other intangible assets

Equity-based awards compensation expense

Change in revaluation of put-right liability

Expenses related to executive officer transitions

Settlement of a legal matter

Change in fair value of contingent earn-out consideration

Relief Funds*

Allocation to non-controlling interests

Revaluation of redeemable non-controlling interest

Tax effect at statutory rate (federal and state)

Operating Results (a non-GAAP measure)

Allocation to non-controlling interests

Tax effect at statutory rate (federal and state) of 25.55%

Operating Results (including Relief Funds) (a non-GAAP measure)

Basic and diluted Operating Results per share (a non-GAAP measure)

Including Relief Funds

Excluding Relief Funds

Shares used in computation - basic and diluted

Year Ended December 31,

Net income attributable to USPH shareholders

Depreciation and amortization

Goodwill impairment

Impairment of goodwill and other intangible assets

Change in fair value of contingent earn-out consideration

Settlement of a legal matter

Other and interest income

Change in revaluation of put-right liability

Interest expense - debt and other, net

Provision for income taxes

Equity-based awards compensation expense

Allocation to non-controlling interests

Adjusted EBITDA (a non-GAAP measure)

Allocation to non-controlling interests

Adjusted EBITDA (excluding Relief Funds) (a non-GAAP measure)

Revised to conform to current year presentation.

For the 2022 Year, our Adjusted EBITDA, a non-GAAP measure, was $73.7 million, as compared to $73.8 million, excluding Relief Funds for the 2021 Year.

Adjusted EBITDA including Relief Funds for the

2022 Year and 2021 Year was $73.7 million and $77.7 million, respectively.

For the 2022 Year, the Company’s Operating Results, a non-GAAP measure, was $35.0 million, or $2.70 per diluted share, as compared to $40.8 million (excluding Relief Funds), or $3.17 per diluted share, for the 2021

For the 2021 Year, the Company’s Operating Results including Relief Funds was $43.7 million, or $3.39 per diluted share.

Reported total revenue

Reported total revenue for the 2022 Year was $553.1 million, an increase of 11.7% as compared to $495.0 million for the 2021 Year.

table below for a detail of reported total revenue (in thousands):

For the Year Ended

December 31, 2022

December 31, 2021

Revenue related to Mature Clinics

Revenue related to 2022 Clinic Additions

Revenue related to 2021 Clinic Additions

Revenue from clinics sold or closed in 2022

Revenue from clinics sold or closed in 2021

Net patient revenue from physical therapy operations

Other revenue

Revenue from physical therapy operations

Revenue from management contracts

Revenue from industrial injury prevention services

Total revenue

Net patient revenue from physical therapy operations

Net patient revenue from physical therapy operations and other revenue from physical therapy operations increased $26.7 million, or 6.1%, to $468.0 million for the 2022 Year from $441.3 million in the

Included in net patient revenue from physical therapy operations are revenues related to clinics sold or closed of $2.8 million for the 2022 Year and $5.6 million for the 2021 Year.

During the 2022 Year, we sold our interest in five

clinics and closed eleven clinics.

Excluding revenue from the clinics sold or closed, net patient revenue from physical therapy operations was approximately $461.8 million for the 2022 Year and $432.7 million for the 2021 Year, an increase of

Revenue related to Mature Clinics increased $1.7 million, or 0.4%, for the 2022 Year compared to the 2021 Year.

The average net patient revenue per visit was $103.63 for the 2022 Year as compared to $103.88 for the 2021 Year, including all clinics operational during such periods.

Total patient visits were

4,483,282 for the 2022 Year and 4,219,576 for the 2021 Year, an increase of 6.2%.

Other revenue from physical therapy operations, management contracts and industrial injury prevention services

Other revenue was $3.4 million in the 2022 Year and $2.9 million in the 2021 Year.

Revenues from management contracts were $8.0 million in the 2022 Year as compared to $9.9 million in the 2021 Year.

revenue increased 75.5% to $77.1 million for the 2022 Year as compared to $43.9 million for the 2021 Year.

The 2022 Year includes revenue of $26.7 million related to the IIP Acquisition, compared to $2.2 million in the 2021 Year.

Operating cost

Total operating cost was $441.1 million for the 2022 Year, or 79.7% of total revenue, as compared to $377.8 million or 76.3% of total revenue for the 2021 Year.

Included in operating cost

for the 2022 Year was $33.2 million related to Clinic Additions, of which $20.8 million was associated with the 2021 Clinic Additions.

Included in operating cost for 2021 was $10.3 million related to 2021 Clinic Additions.

Operating cost related

to Mature Clinics increased by $16.7 million for the 2022 Year compared to the 2021 Year.

Operating cost related to management contracts decreased by $1.9 million in the 2022 Year compared to the 2021 Year.

In addition, operating cost related to

the industrial injury prevention services business increased by $27.9 million for the comparable period of which $22.4 million related to the industrial injury prevention services acquisition in November 2021.

We experienced pressure on labor

rates and other costs in the 2022 Year due to the inflationary economic environment.

See table below for a detail of operating cost (in thousands):

For the Year Ended

December 31, 2022

December 31, 2021

Operating cost related to Mature Clinics

Operating cost related to 2022 Clinic Additions

Operating cost related to 2021 Clinic Additions

Operating cost related to clinics sold or closed in 2022

Operating cost related to clinics sold or closed in 2021

Operating cost related to physical therapy operations

Operating cost related to management contracts

Operating cost related to industrial injury prevention services

Total operating cost

Operating Cost—Salaries and Related Costs

Salaries and related costs increased to $319.2 million for the 2022 Year from $278.5 million in 2021, an increase of $40.7 million, or 14.6%.

Included in salaries and related costs related to 2022

Clinic Additions for the 2022 Year was $8.0 million.

Salaries and related costs for clinics sold or closed in the 2022 Year and the 2021 Year were $1.8 million and $3.3 million in 2022 and 2021, respectively.

Salaries and related costs for Mature

Clinics increased $9.2 million in the 2022 Year compared to the 2021 Year.

Salaries and related costs for management contracts decreased $1.7 million in the 2022 Year compared to the 2021 Year.

Salaries and related costs for the industrial injury

prevention services business increased $19.6 million for the comparable periods.

Salaries and related costs as a percentage of net revenues were 57.7% for the 2022 Year and 56.3% for the 2021 Year.

Salaries and related costs for physical therapy

operations were $59.52 per visit in the 2022 Year as compared to $57.20 per visit in the 2021 Year, an increase of $2.32.

See table below for a detail of salaries and related costs (in thousands):

For the Year Ended

December 31, 2022

December 31, 2021

Physical therapy operations

Salaries and related costs related to Mature Clinics

Salaries and related costs related to 2022 Clinic Additions

Salaries and related costs related to 2021 Clinic Additions

Salaries and related costs related to clinics sold or closed in 2022

Salaries and related costs related to clinics sold or closed in 2021

Salaries and related costs related to physical therapy operations

Salaries and related costs related to management contracts

Salaries and related costs related to industrial injury prevention services

Total salaries and related costs

Operating Cost—Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs increased to $116.4 million in the 2022 Year from $94.1 million in the 2021 Year, an increase of $22.3 million, or 23.7%.

Included in rent, supplies,

contract labor and other costs for 2022 and 2021 related to Clinic Additions was $10.9 million in 2022 and $3.6 million in 2021.

Rent, supplies, contract labor and other costs for clinics related to partnership interests closed or sold in 2022

and 2021 were $0.9 million and $1.7 million, respectively.

Rent, supplies, contract labor and other costs related to Mature Clinics increased by $7.8 million in the 2022 Year compared to the 2021 Year.

Rent, supplies, contract labor and other

costs as a percent of net revenues was 21.0% for 2022 and 19.0% for 2021.

Rent, supplies, contract labor and other costs for physical therapy operations were $19.53 per visit in 2022 as compared to $18.77 per visit in 2021, an increase of $0.78

See table below for a detail of rent, supplies, contract labor and other costs (in thousands):

For the Year Ended

December 31, 2022

December 31, 2021

Physical therapy operations

Rent, supplies, contract labor and other costs related to Mature Clinics

Rent, supplies, contract labor and other costs related to 2022 Clinic Additions

Rent, supplies, contract labor and other costs related to 2021 Clinic Additions

Rent, supplies, contract labor and other costs related to clinics sold or closed in 2022

Rent, supplies, contract labor and other costs related to clinics sold or closed in 2021

Total Physical therapy operations

Rent, supplies, contract labor and other costs related to physical therapy management contracts

Rent, supplies, contract labor and other costs related to industrial injury prevention services

Total rent, supplies, contract labor and other costs

Operating Cost—Provision for Credit Losses

The provision for credit losses for net patient receivables was $5.5 million for 2022 and $5.3 million for 2021.

As a percentage of net patient revenues, the provision for credit

losses was 1.0% for 2022 and 1.1% for 2021.

The provision for credit losses at the end of each period is based on a detailed, clinic-by-clinic review of overdue accounts and is regularly reviewed in the aggregate in light of historical

Our provision for credit losses as a percentage of total patient accounts receivable was 5.17% on December 31, 2022, and 5.64% at December 31, 2021.

The average accounts receivable days outstanding was 31 days on December 31, 2022 and 32 days on December 31, 2021.

Net patient receivables in the amounts of $5.5 million and $4.6

million were written-off in 2022 and 2021, respectively.

Gross profit was $112.0 million for 2022, a decrease of $5.2 million, or 4.4% as compared to $117.2 million for 2021.

The gross profit percentage was 20.3% of total revenue for 2022 as

compared to 23.7% for 2021.

The gross profit percentage for our physical therapy operations was 20.2% for 2022 as compared to 23.8% for 2021.

The gross profit percentage on management contracts was 20.9% for 2022 as compared to 15.7% for 2021.

The gross profit percentage for industrial injury prevention services was 20.7% for 2022 as compared to 24.4% for 2021.

Gross profit in the 2022 Year was affected by pressure on labor rates and other costs due to the inflationary

economic environment.

The IIP margin in 2022 was impacted by the lower margin profile of the IIP Acquisition.

The table below details the gross profit (in thousands):

For the Year Ended

December 31, 2022

December 31, 2021

Relief Funds*

Allocation to non-controlling interest

Tax effect at statutory rate (federal and state)

Operating Results per share (a non-GAAP measure)

*In March 2020 in response to the COVID-19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

CARES Act provided waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, to be used

for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19.

The Company recorded income under the CARES

Act ("Relief Funds").

Adjusted EBITDA increased $4.1 million to $77.7 million for Full Year 2023 from $73.7 million in Full Year 2022 while Operating Results increased $1.2 million to $36.3 million, or $2.56 per share,

in Full Year 2023 from $35.0 million, or $2.70 per share, in the Full Year 2022.

The increase in both Adjusted EBITDA and Operating Results was primarily associated with clinic additions since the comparable prior year period and increased

volume at mature clinics.

Physical Therapy Operations

Management contracts

For the Year Ended December 31,

(In thousands, except percentages)

Revenue related to:

Mature Clinics (1)

Clinic additions (2)

Clinics sold or closed (3)

Net Patient Revenue

Operating costs (4)

Financial and operating metrics (not in thousands):

Net rate per patient visit (1)

Patient visits (1)

Average daily visits per clinic (1)

Salaries and related costs per visit, clinics (5)

Operating costs per visit, clinics (5)

Number of clinics at the end of the period

See defined terms above for definitions.

Clinic additions during the years ended 2023 and 2022.

Revenue from closed clinics includes revenues from the 15 and 16 clinics closed during the full year December 31, 2023 and 2022, respectively.

Includes revenues and costs from management contracts.

Excludes management contract costs.

Not meaningful.

Revenues increased $50.5 million, or 10.6%, to $526.5 million in Full Year 2023 compared to $476.1 million in Full Year 2022.

This increase was primarily due to a record-high average daily visits

per clinic for a full year in the Company’s history of 30.0 visits, and an increase in volume from the 31 net new clinics added since the comparable prior year period, partially offset by a decrease in net rate per patient visit to $102.80 for

Full Year 2023 compared to $103.63 for Full Year 2022.

Total patient visits were 5,005,426 for the 2023 Year and 4,483,282 for the 2022 Year, an increase of 11.6%, with visits at mature clinics up 3.1%.

The decrease in net rate in the Full Year

2023 from the Full Year 2022 was primarily 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.

Other revenue was $12.0 million for the Full Year 2023 Year and $11.5 million for the Full Year 2022, of which management contracts was $8.6 million for the Full Year 2023 as compared to $8.1

million for the Full Year 2022.

Operating costs

Operating costs increased by $41.4 million or 10.9% to $421.5 million in the Full Year 2023 from $380.0 million in the Full Year 2022.

increase was primarily due to the higher volume from the new clinics added since the comparable year period as well as increased patient visits in Mature Clinics.

Operating costs for Mature Clinics increased $10.1 million year over year to

$363.2 million for the Full Year 2023 from $353.2 million for the Full Year 2022 due to increased visits in the comparable periods.

On a per visit basis (excluding management contracts), operating costs decreased to $82.79 for the Full Year

2023 compared to $83.34 for the Full Year 2022.

Salaries and related costs related to clinics increased to $296.3 million in the Full Year 2023 from $266.8 million in the 2022 Year, an

increase of $29.5 million, or 11.1%.

Salaries and related costs per visit (excluding management contracts), related to clinics decreased to $59.19 for the Full Year 2023 from 59.52 for the Full Year 2022 mostly due to the 31 new clinics added

year over year as well as increased visits from Mature Clinics.

Rent, supplies, contract labor and other costs related to clinics increased to $97.2 million in the Full Year 2023 from $87.6 million in the 2022 Year, an increase of $9.6 million, or 11.1% mostly

due to the 31 new clinics added year over year as well as increased visits from Mature Clinics.

Rent, supplies, contract labor and other costs, clinics decreased slightly on a per visit basis to $19.42 per visit for the Full Year 2023 compared to

$19.53 for the Full Year 2022.

Operating costs related to management contracts increased 10.7% from $6.4 million for the Full Year 2022 to $7.1 million in the Full Year 2023.

The provision for credit losses was $6.2 million for the Full Year 2023 and $5.5 million for the Full Year 2022.

As a percentage of net revenues, the provision for credit losses were 1.0% for both

2023 and 2022.

Our provision for credit losses as a percentage of total patient accounts receivable was 5.0% on December 31, 2023, and 5.2% on December 31, 2022.

Gross profit from physical therapy operations increased $9.0 million, or 9.4%, to $105.1 million for Full Year 2023 from $96.1 million for Full Year 2022 while the gross profit margin from physical

therapy operations decreased slightly to 20.0% for Full Year 2023 from 20.2% and Full Year 2022.

Industrial Injury Prevention Services

Goodwill Impairment

In 2022, we recorded a charge for goodwill impairment of $9.1 million related to the IIP Acquisition.

The impairment is related to a change in the IIP Acquisition’s current and projected operating income as well as

various inputs based on current market conditions, including the higher interest rate environment.

For the Year Ended December 31,

(In thousands, except percentages)

Operating costs

IIP business revenue increased $1.2 million to $78.3 million for the Full Year 2023 as compared to $77.1 million for the Full Year 2022.

Operating costs related to the IIP business increased 1.2% in

the Full Year 2023 to $61.8 million from $61.1 million for the Full Year 2022.

Gross profit increased $0.5 million, or 3.0%, to $16.4 million for Full Year 2023 from $16.0 million for the Full Year 2022 while gross profit margin percentage from

IIP operations increased slightly to 21.0% for Full Year 2023 from 20.7% for the Full Year 2022.

Corporate Office Costs

Corporate office costs were $46.1 million for 2022 compared to $46.5 million for 2021.

Corporate office costs were 8.3% of total revenue for 2022 as compared to 9.4% for 2021.

The decrease was

primarily due to lower estimated bonus expense in 2022 as compared to 2021.

Corporate office costs were $52.0 million, or 8.6% of net revenue, for the Full Year 2023 compared to $46.1 million, or 8.3% of net revenue, for the Full Year 2022.

The increase in corporate office

costs was primarily due to higher salaries and related costs to support the larger number of clinics.

Impairment of Goodwill and Other Intangible Assets

A non-cash impairment charge of $17.5 million was recognized during the Full Year 2023 related to a reporting unit in our IIP segment.

This compares to a $9.1 million non-cash impairment charge to

goodwill in the comparable prior year period related to the same reporting unit.

Operating Income

Operating income for 2022 was $56.8 million, and $70.6 million for 2021.

Operating income as a percentage of total revenue was 10.3% for 2022 as compared to 14.3% for 2021.

Operating income was $52.1 million for the Full Year 2023 compared to $56.8 million for the Full Year 2022.

Excluding the non-cash impairment charge of $17.5 million in the Full Year 2023 and $9.1

million in the Full Year 2022, operating income was $69.6 million for the twelve months ended 2023 compared to $65.9 million for the twelve months ended 2022.

Other (Expenses) Income

Interest Expense, Debt and Other

Interest expense, net of $3.3 million savings from an interest rate swap arrangement discussed below in the “ Liquidity and Capital Resources - Interest Rate Swap” , increased $3.5 million to $9.3 million for the Full Year 2023 compared to $5.8 million in the Full Year 2022 due to increased borrowings.

The interest rate on the Company’s term loan, was

4.9% for the Full Year 2023, with an all-in effective interest rate, including all associated costs, of 5.3%.

Interest income from investment

Interest income from investment amounted to $3.8 million for the Full Year 2023.

This interest income is a result of investing excess cash associated with proceeds from our secondary offering

completed in May 2023.

Change in fair value of contingent earn-out consideration

We revalued contingent earn-out consideration related to some of our acquisitions resulting in the elimination of $2.5 million of liabilities previously booked in 2022.

Equity in earnings of unconsolidated affiliate

Through a subsidiary, we have a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals.

Since we are deemed to not have a controlling interest in

the joint venture, our investment is accounted for using the equity method of accounting.

The investment balance of this joint venture as of December 31, 2022, is $12.1 million.

For 2022, we recognized income of $1.2 million on this joint

We revalued contingent earn-out consideration related to certain acquisitions resulting in an expense of $1.6 million for the Full Year 2023 compared to a gain of $2.5 million for the Full Year

Change in Revaluation of Put-Right Liability

For the 2022 Year, the valuation of the put-right liability remained relatively the same.

The put right 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.

The owners have the right to put this transaction to us in approximately five years from November 2021 with such right having a $3.5 million value as of both December 31, 2022 and 2021, as reflected on our consolidated balance sheet in Other long-term liabilities.

The value of this right will continue to be adjusted in future periods, as

Other and interest income

Other and interest income amounted to $0.9 million primarily derived from a gain of $0.6 million from the sales of various clinics during the 2022 Year.

Other and interest income was $0.2

million in the 2021 Year.

Interest Expense—Debt and Other, net

Interest expense—debt, net and other primarily from the $150 million term loan and revolving credit facility entered into in June 2022, details of which are disclosed in Note 10 to our financial

statements included in Item 8, amounted to $5.8 million mostly due to higher borrowings.

See discussion of Other Comprehensive Income below.

Interest expense, primarily from our revolving line of credit, was $0.9 million for the 2021 Year.

For the Full Year 2023, we recorded a gain of $2.6 million on the valuation of the put-right liability compared to a loss of less than $0.1 million for the Full Year 2022.

The put-right 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.

Equity in earnings of unconsolidated affiliate

For the Full Year 2023, we recognized income of $1.0 million compared to $1.2 million for the Full Year 2022 from a joint venture which provides physical

therapy services for patients at hospitals.

Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting.

Provision for Income Taxes

The provision for income tax was $12.2 million for 2022 and $15.3 million for 2021.

The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling

interest (effective tax rate) was 27.4% for 2022 and 27.2% for 2021.

See table below ($ in thousands):

The provision for income tax was $12.2 million for each of the years ended 2023 and 2022.

The provision for income tax as a percentage of income before taxes less net income attributable to

non-controlling interest (effective tax rate) was 30.1% for 2023 and 27.4% for 2022 as calculated below.

The increase in the effective tax rate was primarily due to return-to-provision adjustments mostly related to true up of differences between

tax and book basis of certain intangibles.

For the Year Ended

1 unchanged sentence

December 31, 2022

(In thousands, except percentages)

Income before taxes

4 unchanged sentences

Provision for income taxes

Effective income tax rate

Net Income Attributable to Non-controlling Interest

Net income attributable to redeemable non-controlling interest (temporary equity) was $6.9 million for 2022 and $11.4 million for 2021.

Net income attributable to non-controlling interest (permanent

equity) was $4.3 million for 2022 and $5.7 million for 2021.

During 2022, $2.7 million of the goodwill impairment charge related to redeemable non-controlling interest (temporary equity).

Net income attributable to redeemable non-controlling interest (temporary equity) was $4.4 million for the Full Year 2023 and $6.9 million for the Full Year 2022.

Net income attributable to

non-controlling interest (permanent equity) was $4.6 million for the Full Year 2023 and $4.3 million for the Full Year 2022.

Other Comprehensive Income

1 unchanged sentence

The maturity date of the swap agreement is June 30, 2027.

It has a $150 million notional value adjusted

concurrently with scheduled principal payments made on the term loan.

It has a $150 million notional value

adjusted concurrently with scheduled principal payments made on the term loan.

Beginning in July 2022, we pay a fixed one-month Secured Overnight Financing Rate (“SOFR”) of interest of 2.815%.

The total interest rate in any period also includes an

applicable margin based on the Company’s consolidated leverage ratio.

In the 2022 Year, our interest rate including the applicable margin was 4.665%.

Unrealized gains and losses related to the fair value of the interest rate swap are recorded to

accumulated other comprehensive income (loss), net of tax.

The fair value of the interest rate swap at December 31, 2022, was $5.4 million, which has been included within Other assets (current and long term) in the accompanying Consolidated

Balance Sheet.

The impact of the interest rate swap on the accompanying Consolidated Statements of Comprehensive Income was an unrealized gain of $4.0 million, net of tax, for the 2022 Year.

The total interest rate in any period also includes

an applicable margin based on the Company’s consolidated leverage ratio.

In the Full Year 2023, our interest rate including the applicable margin was 4.9%.

Unrealized gains and losses related to the fair value of the interest rate swap are

recorded to accumulated other comprehensive income (loss), net of tax.

The fair value of the interest rate swap at December 31, 2023, was $3.7 million, and $5.4 million at December 31, 2022, which has been included within Other assets (current

and long term) in the accompanying Consolidated Balance Sheet.

The impact of the interest rate swap on the accompanying Consolidated Statements of Comprehensive Income was an unrealized loss of $1.2 million, net of tax, for the 2023 Year.

LIQUIDITY AND CAPITAL RESOURCES

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

On December 31, 2022, and December 31, 2021, we had $31.6 million and $28.6 million,

respectively, in cash and cash equivalents.

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 December 31,

Cash and cash equivalents increased by $3.0 million from December 31, 2021, to December 31, 2022.

During the 2022 Year, $58.5 million was provided by operations and $65.1 million, net of payments,

was provided by proceeds on our Credit Agreement (described below).

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

distributions to non-controlling interests inclusive of those classified as redeemable non-controlling

interest ($15.3 million), dividends paid to our shareholders ($21.3 million), purchase of non-controlling interest ($74.8 million), and purchase of fixed assets ($8.2 million).

On June 17, 2022, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and the lenders

from time-to-time party thereto.

Total cash and cash equivalents were $152.8 million as of December 31, 2023, compared to $31.6

million as of December 31, 2022.

Additionally, we had $144.4 million of outstanding borrowings and $175.0 million in available credit under our credit facilities as of December 31, 2023, compared to $179.1 million of outstanding borrowings and

$145.9 million in available credit under our credit facilities as of December 31, 2022.

On May 30, 2023, we completed a secondary offering of our common stock resulting in net proceeds of $163.6 million after deducting fees associated with the transaction.

A portion of the net proceeds

was used to repay the $35.0 million then outstanding under our Credit Agreement while the remainder is expected to be used primarily for acquisitions.

Our cash is currently invested in a high-yield savings account which generated interest income

of approximately $2.1 million in 2023.

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 February

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 balance has been outstanding for 120 days or longer.

As of December 31, 2023, we have accrued $8.8 million related to credit balances (included in accrued expenses), 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.

The average accounts receivable days outstanding was 29 days on December 31, 2023, and 31 days on December 31, 2022.

Net patient receivables in the amounts of $6.3 million and $5.5 million were

written-off in 2023 and 2022, respectively.

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

December 31, 2023

December 31, 2022

December 31, 2021

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Operating Activities

Cash provided by operating activities increased $23.4 million to $82.0 million for the year ended December 31, 2023 as compared to $58.5 million for the year ended December 31, 2022.

This increase

was mostly due to higher Adjusted EBITDA as well as increased collections from patient receivables.

Investing Activities

Cash used in investing activities during the year ended December 31, 2023 totaled $45.0 million and consisted of $9.3 million of fixed assets purchases and $37.8 million used in the purchase of

majority interests in businesses and non-controlling interest, temporary and permanent equity.

These were partially offset by $1.0 million proceeds from sale of non-controlling interest, temporary and permanent and $0.8 million distribution from

an unconsolidated affiliate.

Financing Activities

Cash provided by financing activities during the year ended December 31, 2023, totaled $84.3 million and consisted of $163.6 million proceeds from a secondary

offering completed in May 2023, partially offset by $31.0 million of net payments under our revolving credit facility, $24.1 million of dividends paid to our shareholders, $16.1 million distribution to non-controlling interest and payments of

$8.2 million on our debt.

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.

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”):

Such loans will be available through the following facilities

(collectively, the “Senior Credit Facilities”):

Revolving Facility:

$175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit

for the issuance of standby letters of credit and a $15 million sublimit for swingline loans (each, a “Swingline Loan”).

$175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit for the issuance of standby letters of credit and a $15 million sublimit for

swingline loans (each, a “Swingline Loan”).

Term Facility:

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The Term Facility amortizes in quarterly installments of:

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.

(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.

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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

We are permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $100 million plus (ii) an unlimited additional

amount, provided that (in the case of clause (ii)), after giving effect to such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0:1.0, and the aggregate amount of all incremental

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option, an alternate base rate plus an applicable margin.

Currently, our interest rate including the applicable margin is 4.665%.

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

The interest rate for the 2023 Year on our Senior Credit Facilities, net of 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

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first priority security interest in substantially all of our existing and future personal property and each Guarantor, subject to certain exceptions.

As of December 31, 2023, $144.4 million was outstanding on the Term Facility while none was outstanding under the Revolving Facility, resulting in $175.0 million of credit availability.

December 31, 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, was 5.3% for the Full Year 2023.

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 schedule principal payments made on the term loan, and has a maturity date of June 30, 2027.

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

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In connection with the swap, no cash was exchanged between us and the counterparty.

We designated its interest rate swap as a cash flow hedge and structured it to be highly effective.

We designated our interest rate swap as a cash flow hedge and structured it to be highly effective.

Consequently, unrealized gains and losses related to the fair value of the interest rate swap are

recorded to accumulated other comprehensive income (loss), net of tax.

On December 31, 2022, $150.0 million was outstanding on the Term Loan and the Revolving Facility remains available resulting in $175.0 million of availability.

As of December 31, 2022, we were in

compliance with all of the covenants thereunder.

Through the date of this report, we have drawn $31.0 million on the Revolving Facility.

recorded to accumulate other comprehensive income (loss), net of tax.

As of December 31, 2023, the fair value of the interest rate swap was $3.7 million, a decrease of $1.2 million, net of a $0.4 million, income tax effect, as compared to December 31, 2022.

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 loss in our unaudited consolidated statements of comprehensive

The interest rate swap arrangement generated $3.3 million in interest savings for the Full Year 2023.

The average interest rate for the term facility, net of the savings from the swap in the Full Year 2023 was 4.9%.

Notes Payable and Deferred Payments Related to Acquisitions

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

Our present outstanding notes payable primarily relate to the acquisitions of a business or acquisitions of

majority interests in such businesses.

At December 31, 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 was paid January 2024, and the second installment of $0.3 million is due on September 30, 2025.

In a separate transaction, on September 29, 2023, we acquired a 70% equity interest in a single clinic physical therapy practice.

The owner of the practice retained 30% of the equity interests.

The purchase price for the 70% equity interest was approximately $7.8 million, of which $7.4 million was paid in cash and $0.4 million is a deferred payment due on June 30, 2025.

On July 31, 2023, we acquired a 70% equity interest in a five-clinic practice.

The practice’s owners retained a 30% equity interest.

The purchase price for the 70% equity interest was

approximately $2.1 million, of which $1.8 million was paid in cash and $0.3 million is a deferred payment due on June 30, 2025.

On May 31, 2023, we and a local partner together acquired a 75% interest in a four-clinic physical therapy practice.

After the transaction, our ownership interest is 45%, our local partner’s

ownership interest is 30%, and the practice’s pre-acquisition owners have a 25% ownership interest.

The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by us, $1.1 million was

paid in cash by the local partner, and $0.3 million was in the form of a note payable (of which $0.2 million will be paid by us and $0.1 million will be paid by the local partner).

The note will be paid on July 1, 2024.

We guaranteed the full

payment of $0.3 million on its due date.

On February 28, 2023, we acquired an 80% interest in a one-clinic physical therapy practice.

The practice’s owners retained 20% of the equity interests.

The purchase price for the 80% equity

interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable.

The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025.

On November 30, 2022, we acquired an 80% interest in a thirteen-clinic physical therapy practice.

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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 an 60% interest in a fourteen-clinic physical therapy practice.

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.

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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 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.

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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 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.

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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 purchase price for the 70% equity interest

was approximately $11.5 million, of which $11.2 million was paid in cash and $0.3 million is in the form of a note payable.

The note accrues interest at 3.5% per annum and the principal and interest are payable on March 31, 2024.

On December 31, 2021, we acquired a 75% interest in a three-clinic physical therapy practice with the practice founder retaining 25%.

The purchase price for the 75% interest was approximately $3.7

million, of which $3.5 million was paid in cash and $0.2 million in the form of a note payable.

The note accrues interest at 3.25% per annum and the principal and interest are payable on December 31, 2023.

On November 30, 2021, we acquired approximately 70% interest in a leading provider of industrial injury prevention services.

The previous owners retained the

remaining interest.

The initial purchase price for the 70% equity interest was $63.2 million not inclusive of additional contingent consideration of $2.0 million if certain operational objectives were met, of which $62.2 million was paid in

cash, and $1.0 million is in the form of a note payable.

The note accrues interest at 3.25% and the principal and interest is payable on November 30, 2023.

The Company revalued the contingent earn-out consideration related to the acquisition

during the year ended December 31, 2022, resulting in the elimination of the $2.0 million liability previously booked.

As part of this transaction, the previous owners have a put right which 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.

The owners have the right to put this transaction to us in approximately five years from November 2021, with such put right having a fair value of $3.5 million on November 30, 2021.

The fair value of this put right remained $3.5 million on December 31, 2022 , as reflected on our consolidated balance sheet in Other

long-term liabilities.

The value of this right will be adjusted in future periods, as appropriate, with any change in fair value reflected in our consolidated statement of income.

On September 30, 2021, we acquired a company that specializes in return-to-work and ergonomic services, among other offerings.

The business generates more than $2.0 million in annual revenue.

acquired the company’s assets at a purchase price of approximately $3.3 million (which includes the obligation to pay an amount up to $0.6 million in contingent payment consideration in conjunction with the acquisition if specified future

operational objectives are met) and contributed those assets to our IIP subsidiary.

The initial purchase price, not inclusive of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and $0.3

million is in the form of a note payable.

The note accrues interest at 3.25% per annum and the principal and interest are payable on September 30, 2023.

On June 30, 2021, we acquired a 65% interest in an eight-clinic physical therapy practice with the practice founders retaining 35%.

The purchase price was approximately $10.3 million, of which $9.0

million was paid in cash, $1.0 million was payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable.

The business criteria were met and accordingly $1.0 million was paid in July 2022.

note accrues interest at 3.25% per annum and the principal and interest are payable on June 30, 2023.

Additionally, we have an obligation to pay an additional amount up to $0.8 million in contingent payment consideration in conjunction with the

acquisition if specified future operational objectives are met.

We recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment.

The earn-out payment will subsequently be remeasured

to fair value each reporting date.

On March 31, 2021, we acquired a 70% interest in a five-clinic physical therapy practice with the practice founders retaining 30%.

When acquired, the practice was developing a sixth clinic which has

been completed.

The purchase price for the 70% interest was approximately $12.0 million, of which $11.7 million was paid in cash and $0.3 million is in the form of a note payable.

The note accrues interest at 3.25% per annum and the principal

and interest are payable on March 31, 2023.

Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs.

We plan to continue developing new clinics and making additional

acquisitions.

We have from time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships.

We currently have $152.8 million of cash on hand, a significant

portion of which is available for deployment into development and other growth initiatives.

We plan to continue developing new clinics and making additional acquisitions.

We have from time to time purchased the non-controlling interests of

limited partners in our Clinic Partnerships.

We may purchase additional non-controlling interests in the future.

Generally, any acquisition or purchase of

non-controlling interests is expected to be accomplished using a combination of cash and financing.

Any large acquisition would likely require financing.

Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and

A large acquisition may require financing.

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.

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.

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

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.

We have future obligations for debt repayments, employment agreements and future minimum rentals under operating leases.

The obligations as of December 31, 2022 are summarized as follows (in

Credit Agreement

Notes Payable

Interest Payable

Employee Agreements

Operating Leases

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 businesses.

At December 31, 2022, our remaining outstanding balance on these notes aggregated $6.4 million.

The notes payable for the acquisition of businesses of $6.4 million are payable in 2023 and 2024.

Notes are generally payable in equal annual installments of principal over two years plus any accrued

and unpaid interest.

See above table for a detail of future principal payments.

Interest accrues at various interest rates ranging from 3.25% to 7.0% per annum.

The 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.

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.

Redeemable Non-Controlling Interest

Certain of our 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 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 December 31, 2023 was $174.8 million.

As of December 31, 2022, we have accrued $8.1 million related to credit balances and overpayments due to patients and payors.

This amount is expected to be paid in 2023.

From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our

common stock.

In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”).

Our Amended Credit Agreement permits share repurchases of up to $15,000,000 in the

aggregate, subject to compliance with covenants.

We are required to retire shares purchased under the March 2009 Authorization.

There is no expiration date for the share repurchase program.

As of December 31, 2022, there are currently an additional estimated 185,117 shares (based on the closing price of $81.03 on December 31,

2022) that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position.

We did not purchase any shares of our common stock during the years ended December 31, 2022, and

We have an investment in a joint venture that is accounted for using the equity method of accounting.

FACTORS AFFECTING FUTURE RESULTS

The risks related to our business and operations include:

the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19 and its variants, for which the total financial magnitude cannot be currently

changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;

revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;

changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients;

compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;

competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down

or write-off of goodwill and other intangible assets;

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 COVID-19 related vaccination and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations:

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;

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;

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, industrial injury prevention related services, and other services, as a breach or termination of those contractual arrangements by such clients could

cause operating results to be less than expected;

maintaining adequate internal controls;

maintaining necessary insurance coverage;

availability, terms, and use of capital; and

weather and other seasonal factors.

See also Risk Factors in Item 1A of this Annual Report on Form 10-K.

In the event that a limited non-controlling interest 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 non-controlling interest 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”).

Under the March 2009 Authorization, the Company has purchased a total of 859,499

In November 2023, the Board terminated the March 2009 Authorization such that any such repurchase of our common stock would be considered and determined by the Board at the time of repurchase.

We did not purchase any shares of our

common stock during the year ended December 31, 2023, or December 31, 2022.

Contractual Obligations

We have future obligations for debt repayments and associated interest payments as well as future minimum rentals under our non-cancellable operating leases.

The obligations as of December 31, 2023,

are summarized as follows:

(In thousands)

Term facility (1)

Notes payable (2)

Interest expense on Term Facility and notes payable (3)

Operating leases (4)

(1) Amounts due under our Term Facility discussed above.

(2) Amounts due related to certain acquisitions discussed above.

(3) Interest on our Senior Credit Facility was estimated using the average outstanding balance for the respective periods and our effective interest rate on our Term Facility at December 31, 2023, of 4.7%.

Interest on our other debt was

estimated using the stated rate in the debt agreement.

(4) Includes variable non-lease components, including but not limited to common area maintenance.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting

principles generally accepted in the United States.

The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, net sales and expenses, and disclosure of contingent

assets and liabilities.

Management bases estimates on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these estimates on an ongoing basis.

Actual results may differ from these

estimates under different assumptions or conditions.

We believe that the following critical accounting policies involve a higher degree of judgment and complexity.

See Note 2, Significant Accounting Policies, to our audited consolidated financial

statements which are included elsewhere in this Annual Report on Form 10-K for a complete discussion of our significant accounting policies.

The following reflect the significant estimates and judgments used in the preparation of our consolidated

financial statements.

Revenue Recognition

Revenues are recognized in the period in which services are rendered.

Net patient revenue consists of revenues from physical therapy and occupational therapy clinics that provide pre-and

post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries.

Net patient revenue (patient revenues less estimated contractual

adjustments – described below) is recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied.

implied contract between us and the patient upon each patient visit.

Separate contractual arrangements exist between us and third-party payors (e.g.

insurers, managed care programs, government programs, and workers' compensation programs) which

establish the amounts the third parties pay on behalf of the patients for covered services rendered.

While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided

to the patients covered by the third-party payors.

The payor contracts do not indicate performance obligations for us but indicate reimbursement rates for patients who are covered by those payors when the services are provided.

At that time, we

are obligated to provide services for the reimbursement rates stipulated in the payor contracts.

The execution of the contract alone does not indicate a performance obligation.

For self-paying customers, the performance obligation exists when we

provide the services at established rates.

The difference between our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue—contractual allowance.

Management contract revenue, which is included in other revenue in the consolidated statements of net income, is derived from contractual arrangements whereby we manage a clinic owned by a third

We do not have any ownership interest in these clinics.

Typically, revenues are determined based on the number of visits conducted at the clinic and recognized at the point in time when services are performed.

Costs, typically salaries for

our employees, are recorded when incurred.

Revenues from the IIP business, which are also included in other revenues in the consolidated statements of net income, are derived from onsite services we provide to clients’ employees including

injury prevention, rehabilitation, ergonomic assessments, and performance optimization.

Revenue from the IIP business is recognized when obligations under the terms of the contract are satisfied.

Revenues are recognized at an amount equal to the

consideration we expect to receive in exchange for providing injury prevention services to our clients.

The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period.

Additionally, other revenue includes services we provide on-site at locations such as schools and industrial worksites for physical or occupational therapy services, athletic trainers and gym

membership fees.

Contract terms and rates are agreed to in advance between us and the third parties.

Services are typically performed over the contract period and revenue is recorded at the point of service.

If the services are paid in advance,

revenue is recorded as a contract liability over the period of the agreement and recognized at the point in time when the services are performed.

allowances for credit losses based on the specific agings of receivables and payor classifications at each clinic.

The provision for credit losses is included in clinic operating costs in the statements of net income.

Patient accounts receivable,

which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for credit losses, includes only those amounts we estimate to be collectible.

Our provision for credit losses was 1.0% of total net revenue

for each years ended December 31, 2023, 2022 and 2021, respectively.

Management believes that this is reasonable because the majority of our payors consist of highly solvent, highly regulated, commercial insurance companies as well as government

programs, including Medicare.

Contractual Allowances

Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare

programs for such services.

Medicare regulations and the various third-party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in our clinics.

contractual allowances based on our interpretation of the applicable regulations, payor contracts and historical calculations.

Each month we estimate our contractual allowance for each clinic based on payor contracts and the historical collection

experience of the clinic and apply an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic.

Based on our historical experience, calculating the contractual allowance reserve

percentage at the payor level is sufficient to allow us to provide the necessary detail and accuracy with our collectability estimates.

However, the services authorized and provided and related reimbursement are subject to interpretation that

could result in payments that differ from our estimates.

Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management.

Our billing systems may not capture the exact change in our

contractual allowance reserve estimate from period to period.

Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management regularly compares our cash collections to corresponding net

revenues measured both in the aggregate and on a clinic-by-clinic basis.

In the aggregate, the historical difference between net revenues and corresponding cash collections in any given fiscal year has generally reflected a difference within

approximately 1.0% to 1.5% of net revenues.

Additionally, analysis of subsequent period’s contractual write-offs on a payor basis reflects a difference within approximately 1.0% to 1.5% between the actual aggregate contractual reserve percentage

as compared to the estimated contractual allowance reserve percentage associated with the same period end balance.

As a result, we believe that a reasonable likely change in the contractual allowance reserve estimate would not be more than 1.0%

to 1.5% of gross billings in accounts receivable at December 31, 2023.

For purposes of demonstrating the sensitivity of this estimate on our Company’s financial condition, a 1.0% to 1.5% increase or decrease in our aggregate contractual allowance

reserve percentage would decrease or increase, respectively, net patient revenue by approximately $1.4 million to $1.5 million for the year ended December 31, 2023.

Management believes the changes in the estimate of the contractual allowance

reserve for the periods ended December 31, 2023, 2022 and 2021 have not been material to the statement of income.

Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of the acquired business assets, which include certain identifiable intangible

Historically, goodwill has been derived from acquisitions and, prior to 2009, from the purchase of some or all of a particular local management’s equity interest in an existing clinic.

Effective January 1, 2009, if the purchase price of a

non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.

Goodwill and other indefinite-lived intangible assets are not amortized but are instead subject to periodic impairment evaluations.

The fair value of goodwill and other identifiable intangible

assets with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events or conditions and are written down to fair value if considered impaired.

These events or conditions include but are not limited

to a significant adverse change in the business environment, regulatory environment, or legal factors;

a current period operating, or cash flow loss combined with a history of such losses or a projection of continuing losses;

disposition of a significant portion of a reporting unit.

The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge.

We evaluate indefinite-lived tradenames in

conjunction with our annual goodwill impairment test.

We operate our business through two segments consisting of our physical therapy clinics and our IIP business.

For purposes of goodwill impairment analysis, each of our segments is further broken

down into reporting units.

Reporting units within our physical therapy business comprise of regions primarily based on each clinic’s location.

In addition to the six regions, in 2023 and 2022, the IIP business consisted of two reporting units.

As part of the impairment analysis, we are first required to assess qualitatively if we can conclude whether goodwill is more likely than not impaired.

If goodwill is more likely than not impaired,

we are then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount.

In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying

amount, we consider relevant events or circumstances that affect the fair value or carrying amount of a reporting unit.

We consider both the income and market approach in determining the fair value of its reporting units when performing a

quantitative analysis.

An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated

fair value of the reporting unit.

The evaluation of goodwill in 2021 did not result in any goodwill amounts that were deemed impaired.

We recorded a charge for goodwill impairment of $15.8 million and $9.1 million in the years ended December 31, 2023, and December 31, 2022, respectively.

We also recorded a charge of $1.7 million

for the impairment of a tradename during the year ended December 31, 2023.

The charges for impairment related to one reporting unit in the IIP business.

The impairments are a result of a change in the reporting unit’s current and projected

operating income as well as various market inputs based on current market conditions.

During the year ended December 31, 2023, we did not recognize any additional impairment as a result of the Company’s annual assessment of goodwill and tradenames for the other seven reporting units.

We also noted no impairment to long-lived assets for all reporting units.

We will continue to monitor for any triggering events or other indicators of impairment.

No impairment was recognized as part of our annual assessment of goodwill for the other seven reporting units.

Redeemable Non-Controlling Interest

The non-controlling interests that are reflected as redeemable non-controlling interest in our consolidated financial statements consist of those owners, including us, that have certain redemption

(“Put Right”).

We also have a call right (“Call Right”).

The Put Right or Call Right may be triggered by the owner or us, respectively, at such time as both of the following events have occurred:

1) termination of the owner’s employment,

The Put Rights and Call Rights

are not automatic (even upon death) and require either the owner or us to exercise our rights when the conditions triggering the Put or Call Rights have been satisfied.

The purchase price is derived at a predetermined formula based on a multiple

of trailing twelve months earnings performance as defined in the respective limited partnership agreements.

On the date we acquire a controlling interest in a partnership and the limited partnership agreement for such partnerships contains redemption rights not under our control, the fair value of the

non-controlling interest is recorded in the consolidated balance sheet under the caption— Redeemable non-controlling interest .

Then, in each reporting period thereafter until it is purchased by us, the

redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial value, based on the predetermined formula defined in the respective limited partnership agreement.

As a result, the value of the

non-controlling interest is not adjusted below its initial value.

We record any adjustment in the redemption value, net of tax, directly to retained earnings and not in the consolidated statements of net income.

Although the adjustments are not

reflected in the consolidated statements of net income, current accounting rules require that we reflect the adjustments, net of tax, in the earnings per share calculation.

The amount of net income attributable to redeemable non-controlling

interest owners is included in consolidated net income on the face of the consolidated statement of income.

We believe the redemption value (i.e.

the carrying amount) and fair value are the same.

Non-Controlling Interest

We recognize non-controlling interests, in which we have no obligation but the right to purchase the non-controlling interests, as equity in the consolidated financial statements separate from the

parent entity’s equity.

The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the consolidated statements of net income.

Operating losses are allocated to non-controlling

interests even when such allocation creates a deficit balance for the non-controlling interest partner.

When we purchase a non-controlling interest and the purchase differs from the book value at the time of purchase, any excess or shortfall is

recognized as an adjustment to additional paid-in capital.

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-K

Item 7. Management’s Discussion and Analysis