U S PHYSICAL THERAPY INC /NV 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of U.S. Physical Therapy, Inc. and its subsidiaries (herein referred to as “we,” “us,” “our” or the “Company”) should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; and (ii) our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2024 (“2023 Annual Report”). This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed below. FORWARD – LOOKING STATEMENTS We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to: • changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status; • revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction; • changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients; • compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply; • competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets; • the impact of future public health crises and epidemics/pandemics, such as was the case with the novel strain of COVID-19 and its variants; • one of our acquisition agreements contains a put right related to a future purchase of a majority interest in a separate company; • the impact of future vaccinations and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations; • our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing and our ability to operate our business; • changes as the result of government enacted national healthcare reform; • business and regulatory conditions including federal and state regulations; • governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs; • revenue and earnings expectations; • contingent consideration provisions in certain our acquisition agreements, the value of which may impact future financial results; • legal actions, which could subject us to increased operating costs and uninsured liabilities; • general economic conditions, including but not limited to inflationary and recessionary periods; • actual or perceived events involving banking volatility or limited liability, defaults or other adverse developments that affect the U.S. or international financial systems, may result in market wide liquidity problems which could have a material and adverse impact on our available cash and results of operations; • our business depends on hiring, training, and retaining qualified employees; 30 Table of Contents • 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; • our ability to identify and complete 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, or may interfere with our ability to file and process claims for payment which could interfere with our collection of revenues from third party payors; • maintaining clients for which we perform management, industrial injury prevention 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; • if our noncompetition covenants with employed therapists are nullified, we may lose staff to competitors; • maintaining adequate internal controls; • maintaining necessary insurance coverage; • availability, terms, and use of capital; and • weather and other seasonal factors. Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate. EXECUTIVE SUMMARY We operate our business through our reportable segments which include (1) the physical therapy operations segment and (2) the industrial injury prevention services (“IIP”) segment. Our physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre- and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the IIP segment include onsite injury prevention and rehabilitation, performance optimization, 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. These services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers. During the three months ended March 31, 2024 (“2024 First Quarter”) and for the year ended December 31, 2023, we completed the acquisitions of clinic practices and IIP businesses detailed below: % Interest Number of Acquisition Date Acquired Clinics March 2024 Acquisition March 29, 2024 50% 9 October 2023 Acquisition October 31, 2023 ** * September 2023 Acquisition 1 September 29, 2023 70% 4 September 2023 Acquisition 2 September 29, 2023 70% 1 July 2023 Acquisition July 31, 2023 70% 7 May 2023 Acquisition May 31, 2023 45% 4 February 2023 Acquisition February 28, 2023 80% 1 * IIP business. ** On October 31, 2023, we concurrently acquired 100% of an IIP business and a 55% equity interest in an ergonomics software business. 31 Table of Contents The following table provides a roll forward of our clinic count for the periods presented. Three Months Ended March 31, 2024 March 31, 2023 Number of clinics, beginning of period 671 640 Additions (1) 14 8 Closed or sold (6 ) (1 ) Number of clinics, end of period 679 647 (1) Includes clinics added through acquisitions. 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 IIP sector. Our Board of Directors declared a quarterly dividend of $0.44 per share payable on June 14, 2024 to shareholders of record on May 23, 2024. Regulatory Changes The following is a discussion of some of the significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our 2023 Annual Report. Medicare Reimbursement The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). Outpatient 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, 2022 and 2023, CMS’s expected decreases in Medicare reimbursement were partially offset by one-time increases in payments as a result of other legislation passed by Congress., resulting in decreases of approximately 3.5%, 0.75% and 2.0% in each of these years, respectively. For January 1 through March 8 of 2024, CMS’s final rule resulted in an approximate 3.5% decrease in Medicare payments for the therapy specialty. However, effective as of March 9, 2024, pursuant to the Consolidated Appropriations Act, 2024, Congress minimized the reduction in Medicare payments for therapy services for the balance of 2024, resulting in an approximate 1.8% reduction in Medicare payments for therapy services (rather than the 3.5% decrease). 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, an identification of the PTA’s participation (as denoted by a “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 a CQ (for PTA’s) or CO (for OTA’s) 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. The 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. 32 Table of Contents RESULTS OF OPERATIONS The defined terms, with their respective descriptions, used in the following discussions are listed below. • Mature clinics are clinics opened or acquired prior to January 1, 2023, and are still operating as of March 31, 2024. • 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 of clinics in operation during the periods presented. • 2024 First Quarter refers to the three months ended March 31, 2024. • 2023 First Quarter refers to the three months ended March 31, 2023. 2024 First Quarter versus 2023 First Quarter Three Months Ended Variance March 31, 2024 March 31, 2023 $ % (In thousands, except percentages) Net patient revenue $ 131,075 84.2 % $ 126,581 85.2 % $ 4,494 3.6 % Other revenue 24,600 15.8 % 21,928 14.8 % 2,672 12.2 % Net revenue 155,675 100.0 % 148,509 100.0 % 7,166 4.8 % Operating Cost: Salaries and related costs 93,731 60.2 % 86,040 57.9 % 7,691 8.9 % Rent, supplies, contract labor and other 31,916 20.5 % 30,100 20.3 % 1,816 6.0 % Provision for credit losses 1,627 1.0 % 1,512 1.0 % 115 7.6 % Total operating cost 127,274 81.8 % 117,652 79.2 % 9,622 8.2 % Gross Profit 28,401 18.2 % 30,857 20.8 % (2,456 ) -8.0 % Corporate office costs 14,085 9.0 % 13,859 9.3 % 226 1.6 % Operating Income 14,316 9.2 % 16,998 11.4 % (2,682 ) -15.8 % Other (expense) income: Interest expense, debt and other (1,968 ) -1.3 % (2,560 ) -1.7 % 592 -23.1 % Interest income from investments 1,543 1.0 % 64 0.0 % 1,479 2310.9 % Change in fair value of contingent earn-out consideration 612 0.4 % (698 ) -0.5 % 1,310 -187.7 % Change in revaluation of put-right liability (80 ) -0.1 % (149 ) -0.1 % 69 -46.3 % Equity in earnings of unconsolidated affiliate 271 0.2 % 274 0.2 % (3 ) -1.1 % Relief Funds - 0.0 % 467 0.3 % (467 ) -100.0 % Other 62 0.0 % - 0.0 % 62 * (1) Total other (expense) income 440 0.3 % (2,602 ) -1.8 % 3,042 -116.9 % Income before taxes 14,756 9.5 % 14,396 9.7 % 360 2.5 % Provision for income taxes 3,139 2.0 % 2,969 2.0 % 170 5.7 % Net income 11,617 7.5 % 11,427 7.7 % 190 1.7 % Less: Net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity (2,227 ) -1.4 % (2,720 ) -1.8 % 493 -18.1 % Non-controlling interest - permanent equity (1,344 ) -0.9 % (1,297 ) -0.9 % (47 ) 3.6 % (3,571 ) -2.3 % (4,017 ) -2.7 % 446 -11.1 % Net income attributable to USPH shareholders $ 8,046 5.2 % $ 7,410 5.0 % $ 636 8.6 % (1) Not meaningful. Total net revenue for the 2024 First Quarter increased $7.2 million, or 4.8%, to $155.7 million from $148.5 million for the 2023 First Quarter while operating costs increased $9.6 million, or 8.2%, to $127.3 million from $117.7 million over the same periods, respectively. Total operating cost was $127.3 million for the 2024 First Quarter, or 81.8% of total revenue, as compared to $117.7 million or 79.2% of total revenue for the 2023 First Quarter. Gross profit for the 2024 First Quarter was $28.4 million, or 18.2% of net revenue, compared to $30.9 million for the 2023 First Quarter, or 20.8% of net revenue. 33 Table of Contents Net income attributable to our shareholders, a Generally Accepted Accounting Principle (“GAAP”) measure, was $8.0 million for the 2024 First Quarter compared to $7.4 million for the 2023 First Quarter. In accordance with GAAP, the revaluation of redeemable 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 the 2024 First Quarter was $0.46 compared to $0.58 for the 2023 First Quarter. The following table provides a calculation of earnings per share. Three Months Ended March 31, 2024 March 31, 2023 (In thousands, except per share data) Earnings per share Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 8,046 $ 7,410 Charges to retained earnings: Revaluation of redeemable non-controlling interest (1,439 ) 119 Tax effect at statutory rate (federal and state) 368 (30 ) $ 6,975 $ 7,499 Earnings per share (basic and diluted) $ 0.46 $ 0.58 Shares used in computation - basic and diluted 15,017 13,025 Non-GAAP Measures The following tables provide details of the basic and diluted earnings per share computation and reconcile net income attributable to our shareholders calculated in accordance with GAAP to Adjusted EBITDA and Operating Results (non-GAAP measures). Management believes providing Adjusted EBITDA and Operating Results to investors is useful information for 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. Management uses Adjusted EBITDA and Operating Results, which eliminate certain items described above that can be subject to volatility and unusual costs, as the principal measures to evaluate and monitor financial performance period over period. Adjusted EBITDA is defined as net income attributable to our shareholders before interest income, interest expense, taxes, depreciation, amortization, change in fair value of contingent earn-out consideration, Relief Funds, changes in revaluation of put-right liability, equity-based awards compensation expense, other income and related portions for non-controlling interests. Operating Results equals net income attributable to our shareholders less, changes in revaluation of a 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 excludes the impact of the revaluation of redeemable non-controlling interest and the associated tax impact. Adjusted EBITDA and Operating Results are not measures of financial performance under GAAP. Adjusted EBITDA and Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements. 34 Table of Contents Three Months Ended March 31, 2024 March 31, 2023 (In thousands, except per share data) Adjusted EBITDA (a non-GAAP measure) Net income attributable to USPH shareholders $ 8,046 $ 7,410 Adjustments: Provision for income taxes 3,139 2,969 Depreciation and amortization 4,095 3,788 Interest expense, debt and other, net 1,968 2,560 Interest income from investments (1,543 ) (64 ) Equity-based awards compensation expense 1,997 1,806 Change in revaluation of put-right liability 80 149 Change in fair value of contingent earn-out consideration (612 ) 698 Relief Funds - (467 ) Other income (62 ) - Allocation to non-controlling interests (432 ) (371 ) $ 16,676 $ 18,478 Operating Results (a non-GAAP measure) Net income attributable to USPH shareholders $ 8,046 $ 7,410 Adjustments: Change in fair value of contingent earn-out consideration (612 ) 698 Change in revaluation of put-right liability 80 149 Relief Funds - (467 ) Allocation to non-controlling interests - 33 Tax effect at statutory rate (federal and state) 136 (105 ) $ 7,650 $ 7,718 Operating Results per share (a non-GAAP measure) $ 0.51 $ 0.59 Adjusted EBITDA was $16.7 million for the 2024 First Quarter compared to $18.5 million in the 2023 First Quarter, with the variance due to the Medicare rate reductions that took effect at the beginning of the year and the adverse impact of weather events in January 2024. The Medicare rate reductions decreased Adjusted EBITDA by approximately $1.7 million while the adverse weather resulted in a decrease in Adjusted EBITDA of approximately $1.3 million. Operating Results was $7.7 million, or $0.51 per share, in the 2024 First Quarter as compared to $7.7 million, or $0.59 per share, in the 2023 First Quarter, with the decrease attributable to the increase in shares outstanding associated with the Company's secondary offering completed in May 2023, as well as the Medicare rate reduction and adverse impact of weather events in January 2024. 35 Table of Contents Physical Therapy Operations Three Months Ended Variance March 31, 2024 March 31, 2023 $ % (In thousands, except percentages) Revenue related to: Mature Clinics (1) $ 123,267 $ 125,485 $ (2,218 ) (1.8 )% Clinic additions (2) 7,561 371 7,190 * (6) Clinics sold or closed (3) 247 725 (478 ) * (6) Net Patient Revenue 131,075 126,581 4,494 3.6 % Other (4) 3,350 2,578 772 29.9 % Total 134,425 129,159 5,266 4.1 % Operating costs (4) 110,361 102,070 8,291 8.1 % Gross profit $ 24,064 $ 27,089 $ (3,025 ) (11.2 )% Financial and operating metrics (not in thousands): Net rate per patient visit (1) $ 103.37 $ 103.12 $ 0.25 0.2 % Patient visits (1) 1,268,002 1,227,490 40,512 3.3 % Average daily visits per clinic (1) 29.5 29.8 (0.3 ) (1.0 )% Gross margin 17.9 % 21.0 % Salaries and related costs per visit, clinics (5) $ 61.42 $ 59.14 $ 2.28 3.9 % Operating costs per visit, clinics (5) $ 85.50 $ 81.97 $ 3.53 4.3 % (1) See Glossary of Terms - Revenue Metrics for definitions. (2) Includes 14 clinics added during the 2024 First Quarter and 46 clinic added during the year ended December 31, 2023. (3) Includes six clinics closed during the 2024 First Quarter and 15 clinics closed during the year ended December 31, 2023. (4) Includes revenues and costs from management contracts. (5) Per visit costs excludes management contract costs. (6) Not meaningful. Revenues Net revenue from physical therapy operations increased $5.3 million, or 4.1%, to $134.4 million for the 2024 First Quarter from $129.2 million for the 2023 First Quarter. This increase was primarily due to the increase in visits from the 32 net new clinics added since the comparable prior year period partially offset by an approximate $3.6 million adverse impact of weather in January 2024. Additionally, net rate per patient visit increased to $103.37 for the 2024 First Quarter from $103.12 for the 2023 First Quarter. This increase was mainly driven by higher reimbursement rates from commercial and other payors as a result of contract negotiations and an increase in workers compensation as a percent of the Company’s total net patient revenues, partially offset by the Medicare rate reductions that took effect at the beginning of the year which decreased net patient revenues by approximately $1.9 million for the 2024 First Quarter. The Medicare rate reductions will be less impactful in future quarters as the Consolidated Appropriations Act of 2024 adjusted the Medicare rate reduction to 1.8% from 3.5%, effective on March 9, 2024. Other revenues increased $0.8 million, or 29.9%, to $3.4 million for the 2024 First Quarter from $2.6 million for the 2023 First Quarter due to the increase in the number of management contracts since the comparable prior year period. Average daily visits per clinic was 29.5 for the 2024 First Quarter compared to 29.8 in the comparable prior year quarter. Total patient visits were 1,268,002 in the 2024 First Quarter, a 3.3% increase from 2023 First Quarter. Average daily visits per clinic in January 2024 of 27.4 were lower than the prior year of 28.9, while average daily visits per clinic in February and March of 2024 were higher than the prior year, the highest volumes for those two months in the Company’s history. Operating costs Operating costs from physical therapy operations increased by $8.3 million or 8.1% to $110.4 million in the 2024 First Quarter from $102.1 million in the 2023 First Quarter primarily driven by costs associated with the 32 net new clinics added since the comparable prior year period. Operating costs were 82.1% of net revenue for the 2024 First Quarter compared to 79.0% of net revenue for the 2023 First Quarter. On a per visit basis (excluding management contracts), operating costs increased to $85.50 for the 2024 First Quarter from $81.97 for the 2023 First Quarter. 36 Table of Contents Salaries and related costs related to clinics (excluding management contracts) increased to $77.9 million in the 2024 First Quarter from $72.6 million, in the 2023 First Quarter, an increase of $5.3 million, or 7.3%. Salaries and related costs per visit, related to clinics increased to $61.42 for the 2024 First Quarter from $59.14 for the 2023 First Quarter. Rent, supplies, contract labor and other costs related to clinics (excluding management contracts) increased to $28.9 million in the 2024 First Quarter from $26.5 million in the 2023 First Quarter, an increase of $2.4 million, or 9.0% mostly due to the 32 net new clinics added since the comparable prior year period. Rent, supplies, contract labor and other costs, increased on a per visit basis to $22.80 for the 2024 First Quarter compared to $21.60 for the 2023 First Quarter. Operating costs related to management contracts increased $0.5 million from $1.4 million in the 2023 First Quarter to $1.9 million in the 2024 First Quarter. The provision for credit losses was $1.6 million for the 2024 First Quarter and $1.5 million for the 2023 First Quarter. As a percentage of net revenues, the provision for credit losses was 1.0% for both the 2024 First Quarter and the 2023 First Quarter. Our provision for credit losses as a percentage of total patient accounts receivable was 5.0% on both March 31, 2024, and December 31, 2023. Gross Profit Gross profit from physical therapy operations in the 2024 First Quarter decreased $3.0 million, or 11.2%, to $24.1 million from $27.1 million in the 2023 First Quarter. The gross profit margin from physical therapy operations decreased to 17.9% in the 2024 First Quarter from 21.0% in the 2023 First Quarter. Industrial Injury Prevention Services Three Months Ended Variance March 31, 2024 March 31, 2023 $ % (In thousands, except percentages) Net revenue $ 21,250 $ 19,350 $ 1,900 9.8 % Operating costs 16,913 15,582 1,331 8.5 % Gross profit $ 4,337 $ 3,768 $ 569 15.1 % Gross margin 20.4 % 19.5 % IIP revenues increased $1.9 million, or 9.8%, to $21.3 million for the 2024 First Quarter as compared to $19.4 million for the 2023 First Quarter. IIP operating costs increased $1.3 million, or 8.5%, versus the comparable prior year period. Gross profit from IIP operations in the 2024 First Quarter increased $0.6 million, or 15.1%, to $4.3 million from $3.8 million in the 2023 First Quarter. The gross profit margin from IIP operations increased to 20.4% in the 2024 First Quarter from 19.5% in the 2023 First Quarter. Corporate Office Costs Corporate costs increased $0.2 million, or 1.6%, to $14.1 million in the 2024 First Quarter from $13.9 million in 2023 First Quarter due to an increase in support costs related to the larger number of clinics and the timing of certain expenses. Operating Income Operating income was $14.3 million for the 2024 First Quarter compared to $17.0 million for the 2023 First Quarter. 37 Table of Contents Other (Expenses) Income Interest Expense, Debt and Other Interest expense decreased $0.6 million to $2.0 million (net of $0.9 million savings from the Company’s interest rate swap arrangement discussed below in the “ Liquidity and Capital Resources – Interest Rate Swap” ) for the 2024 First Quarter compared to $2.6 million (net of $0.6 million savings from the interest rate swap arrangement) in the 2023 First Quarter due to a lower outstanding balance on our revolver, which we paid down in May 2023. The interest rate on the Company’s term loan was 4.7% for the 2024 First Quarter and 4.9% for the 2023 First Quarter, with an all-in effective interest rate, including all associated costs, of 5.3% and 5.5% over the same periods, respectively. Interest income from investment Interest income from investing excess cash (primarily proceeds from the secondary offering sale of the Company’s stock completed in May 2023) in a high-yield savings account was $1.5 million during the 2024 First Quarter. Change in fair value of contingent earn-out consideration We revalued contingent earn-out consideration related to certain acquisitions resulting in a gain of $0.6 million for the 2024 First Quarter compared to an expense of $0.7 million for the 2023 First Quarter. Change in Revaluation of Put-Right Liability We recorded an expense of $0.1 million on the revaluation of a put right liability for both 2024 First Quarter and 2023 First Quarter. The put-right relates to a prior IIP acquisition and 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 both the 2024 First Quarter and 2023 First Quarter, we recognized an income of $0.3 million 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 taxes was $3.1 million in the 2024 First Quarter compared to $3.0 million during the 2023 First Quarter while the effective tax rates were 28.1% and 28.6% over the same periods, respectively. Three Months Ended March 31, 2024 March 31, 2023 (In thousands, except percentages) Income before taxes $ 14,756 $ 14,396 Less: Net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity (2,227 ) (2,720 ) Non-controlling interest - permanent equity (1,344 ) (1,297 ) $ (3,571 ) $ (4,017 ) Income before taxes less net income attributable to non-controlling interest $ 11,185 $ 10,379 Provision for income taxes $ 3,139 $ 2,969 Effective income tax rate 28.1 % 28.6 % 38 Table of Contents Net Income Attributable to Non-controlling Interest Net income attributable to redeemable non-controlling interest (temporary equity) was $2.2 million in the 2024 First Quarter compared to $2.7 million in the 2023 First Quarter. Net income attributable to non-controlling interest (permanent equity) was $1.3 million for both the 2024 First Quarter and the 2023 First Quarter. LIQUIDITY AND CAPITAL RESOURCES We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. Total cash and cash equivalents were $132.3 million as of March 31, 2024 and $152.8 million as of December 31, 2023. Additionally, we had $143.4 million of outstanding borrowings and $175.0 million in available credit under our Revolving Facility as of March 31, 2024, compared to $144.4 million of outstanding borrowings and $175.0 million in available credit under our Revolving Facility as of December 31, 2023. We believe that our cash and cash equivalents and availability under our Senior Credit Facilities are sufficient to fund the working capital needs of our operating subsidiaries through at least March 31, 2025. Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have, from time to time, purchased the non-controlling interests of limited partners in our existing partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using our cash, financing, or a combination of the two. We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMS approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the account receivable has been outstanding for 120 days or longer. As of March 31, 2024, we have accrued $7.9 million related to credit balances, a portion of which is due to patients and payors. The credit balances are expected to be resolved or paid in the next twelve months. Cash Flow A summary of our operating, investing and financing activities is discussed below. Three Months Ended March 31, 2024 March 31, 2023 Net cash provided by operating activities $ 4,419 $ 11,349 Net cash used in investing activities (20,464 ) (12,681 ) Net cash (used in) provided by financing activities (4,490 ) 2,343 Operating Activities Cash provided by operating activities was $4.4 million for the 2024 First Quarter as compared to $11.3 million for the 2023 First Quarter. This decrease in cash provided was mostly due to the timing of payments related to payroll. 39 Table of Contents Investing Activities Cash used in investing activities for the 2024 First Quarter totaled $20.5 million and consisted of $19.2 million used in the purchase of interests in businesses and non-controlling interests (temporary and permanent), and $1.8 million of fixed assets purchases. These uses were partially offset by $0.1 million proceeds from the sale of non-controlling interests (temporary and permanent) and $0.4 million distributions received from an unconsolidated affiliate. Financing Activities Cash used in financing activities for the 2024 First Quarter, totaled $4.5 million and was comprised primarily of $3.2 million in distributions to non-controlling interests (temporary and permanent) and payments of $1.3 million related to notes payable and the term note. 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”): 1) Revolving Facility: $175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit for the issuance of standby letters of credit and a $15 million sublimit for swingline loans (each, a “Swingline Loan”). 2) Term Facility: $150 million term loan facility (the “Term Facility”). The Term Facility amortizes in quarterly installments of: (a) 0.625% in each of the first two years, (b) 1.250% in the third and fourth year, and (c) 1.875% in the fifth year of the Credit Agreement. The remaining outstanding principal balance of all term loans is due on the maturity date. The proceeds of the Revolving Facility have been and shall continue to be used by us for working capital and other general corporate purposes of our Company and its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by us to refinance the indebtedness outstanding under the Second Amended and Restated Credit Agreement, to pay fees and expenses incurred in connection with the loan facilities transactions, for working capital and other general corporate purposes. We 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 increases under the Revolving Facility does not exceed $50,000,000. The interest rates per annum applicable to the Senior Credit Facilities (other than in respect of Swingline Loans) will be Term SOFR as defined in the agreement plus an applicable margin or, at our option, an alternate base rate plus an applicable margin. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity. We will also pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). We may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions. 40 Table of Contents The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends, and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement includes certain financial covenants which include the Consolidated Fixed Charge Coverage Ratio and the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary events of default. Our obligations under the Credit Agreement are guaranteed by our wholly owned material domestic subsidiaries (each, a “Guarantor”), and our obligations and any Guarantors are secured by a perfected first priority security interest in substantially all of our existing and future personal property and each Guarantor, subject to certain exceptions. As of March 31, 2024, $142.1 million, net of unamortized debt issuance costs of $1.4 million, was outstanding on the Term Facility while none was outstanding under the Revolving Facility resulting in $175.0 million of credit availability. As of March 31, 2024, we were in compliance with all of the covenants contained in the Credit Agreement. The interest rate on the Company’s term loan was 4.7% for the 2024 First Quarter and 4.9% for the 2023 First Quarter, with an all-in effective interest rate, including all associated costs, of 5.3% and 5.5% over the same periods, respectively. 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. It has a $150 million notional value adjusted concurrently with scheduled principal payments made on the term loan and has a maturity date of June 30, 2027. Beginning in July 2022, we receive 1-month SOFR, and pay a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period also includes an applicable margin based on our consolidated leverage ratio. In connection with the swap, no cash was exchanged between us and the counterparty. We designated our interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. As of March 31, 2024, the fair value of the interest rate swap was $5.5 million, an increase of $1.3 million, net of a $0.5 million, income tax effect, as compared to December 31, 2023. The fair value of the interest rate swap is included in Other assets (current and long term) in our consolidated balance sheet while the increase in fair value is presented as unrealized gain in our unaudited consolidated statements of comprehensive income. The interest rate swap arrangement has generated $0.9 million in interest savings for the period March 31, 2024. The average interest rate for the term facility, net of the savings from the swap, in the 2024 First Quarter was 4.7%. 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 March 31, 2024, our remaining outstanding balance on these notes aggregated $3.9 million, of which $3.1 million is payable in 2025, and $0.8 million is payable in 2026. 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 3.5% to 8.5% per annum. On March 29, 2024, we acquired a 50% equity interest in a nine-clinic physical therapy and hand therapy practice. The original owners of the practice retained the remaining 50%. The purchase price for the 50% equity interest was approximately $16.4 million, of which $0.5 million was in the form of a note payable. The note accrues interest of 4.5% per annum and the principal and the interest are payable on March 29, 2026. Additionally, we have an obligation to pay an additional amount based on certain future operational objectives being met. There is no maximum payout. 41 Table of Contents 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. Redeemable Non-Controlling Interest Certain limited partnership agreements, as amended, provide that, upon the triggering events, we have a call right and the selling entity or individual has a put right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the put right and the call right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon the exercise of either the put right or the call right is calculated per the terms of the respective agreements and classified as redeemable non-controlling interest (temporary equity) in our consolidated balance sheets. The fair value of the redeemable non-controlling interests on March 31, 2024, was $190.7 million. In the event that a limited non-controlling partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition date, we have agreed to certain contractual provisions which enable such minority partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.