Item 1. Financial Statements
ITEM 1.
FINANCIAL STATEMENTS
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE
SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
June 30 , 2024
December 31, 2023
ASSETS
(unaudited)
Current assets:
Cash and cash equivalents
$
112,911
$
152,825
Patient accounts receivable, less provision for credit
losses of $ 3,184 and $ 2,736 ,
respectively
54,659
51,866
Accounts receivable - other
21,669
17,854
Other current assets
12,438
10,830
Total current assets
201,677
233,375
Fixed assets:
Furniture and equipment
65,775
63,982
Leasehold improvements
48,730
46,941
Fixed assets, gross
114,505
110,923
Less accumulated depreciation and amortization
( 88,277
)
( 84,821
)
Fixed assets, net
26,228
26,102
Operating lease right-of-use assets
105,484
103,431
Investment in unconsolidated affiliate
12,243
12,256
Goodwill
548,970
509,571
Other identifiable intangible assets, net
123,903
109,682
Other assets
4,629
2,821
Total assets
$
1,023,134
$
997,238
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST
Current liabilities:
Accounts payable - trade
$
4,100
$
3,898
Accrued expenses
58,056
55,344
Current portion of operating lease liabilities
35,243
35,252
Current portion of term loan and notes payable
9,700
7,691
Total current liabilities
107,099
102,185
Notes payable, net of current portion
1,511
1,289
Term loan, net of current portion and deferred financing costs
134,188
137,702
Deferred taxes
26,531
24,815
Operating lease liabilities, net of current portion
78,329
76,653
Other long-term liabilities
5,507
2,356
Total liabilities
353,165
345,000
Redeemable non-controlling interest - temporary equity
184,354
174,828
Commitments and Contingencies
U.S. Physical Therapy, Inc. (“USPH”) shareholders’ equity:
Preferred stock, $ 0.01
par value, 500,000 shares authorized, no shares issued and outstanding
-
-
Common stock, $ 0.01
par value, 20,000,000 shares authorized, 17,291,366 and 17,202,291 shares issued, respectively
172
172
Additional paid-in capital
285,462
281,096
Accumulated other comprehensive gain
4,084
2,782
Retained earnings
226,482
223,772
Treasury stock at cost, 2,214,737
shares
( 31,628
)
( 31,628
)
Total USPH shareholders’ equity
484,572
476,194
Non-controlling interest - permanent equity
1,043
1,216
Total USPH shareholders’ equity and non-controlling interest - permanent equity
485,615
477,410
Total liabilities, redeemable non-controlling interest, USPH shareholders’ equity and non-controlling interest - permanent
equity
$
1,023,134
$
997,238
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
3
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U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF
NET
INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS )
For the Three Months Ended
For the Six
Months Ended
June 30, 2024
June 30, 2023
June 30,2024
June 30, 2023
Net patient revenue
$
140,271
$
129,280
$
271,346
$
255,861
Other revenue
26,919
22,205
51,519
44,133
Net revenue
167,190
151,485
322,865
299,994
Operating cost:
Salaries and related costs
96,334
86,871
190,065
172,911
Rent, supplies, contract labor and other
35,277
30,844
67,193
60,944
Provision for credit losses
1,717
1,563
3,344
3,075
Total operating cost
133,328
119,278
260,602
236,930
Gross profit
33,862
32,207
62,263
63,064
Corporate office costs
14,249
12,145
28,334
26,004
Operating income
19,613
20,062
33,929
37,060
Other income (expense):
Interest expense, debt and other
( 1,980
)
( 2,633
)
( 3,948
)
( 5,193
)
Interest income from investments
1,074
517
2,617
517
Change in fair value of contingent earn-out consideration
( 4,046
)
708
( 3,434
)
10
Change in revaluation of put-right liability
( 223
)
( 50
)
( 303
)
( 199
)
Equity in earnings of unconsolidated affiliate
248
326
519
600
Relief Funds
-
-
-
467
Other
109
165
171
229
Total other income (expense)
( 4,818
)
( 967
)
( 4,378
)
( 3,569
)
Income before taxes
14,795
19,095
29,551
33,491
Provision for income taxes
3,083
4,231
6,222
7,200
Net income
11,712
14,864
23,329
26,291
Less: Net income attributable to non-controlling interest:
Redeemable non-controlling interest - temporary equity
( 3,314
)
( 2,920
)
( 5,541
)
( 5,640
)
Non-controlling interest - permanent equity
( 892
)
( 1,025
)
( 2,236
)
( 2,322
)
( 4,206
)
( 3,945
)
( 7,777
)
( 7,962
)
Net income attributable to USPH shareholders
$
7,506
$
10,919
$
15,552
$
18,329
Basic and diluted earnings per share attributable to USPH shareholders
$
0.47
$
0.64
$
0.93
$
1.22
Shares used in computation - basic and diluted
15,072
13,720
15,044
13,375
Dividends declared per common share
$
0.44
$
0.43
$
0.88
$
0.86
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
4
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U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS
OF
COMPREHENSIVE INCOME
(IN THOUSANDS)
For the Three Months Ended
For the Six
Months Ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
Net income
$
11,712
$
14,864
$
23,329
$
26,291
Other comprehensive ( loss ) gain:
Unrealized (loss) gain on cash flow hedge
( 31
)
2,881
1,750
1,064
Tax effect at statutory rate (federal and state)
8
( 736
)
( 447
)
( 272
)
Comprehensive income
$
11,689
$
17,009
$
24,632
$
27,083
Comprehensive income attributable to non-controlling interest
( 4,206
)
( 3,945
)
( 7,777
)
( 7,962
)
Comprehensive income attributable to USPH shareholders
$
7,483
$
13,064
$
16,855
$
19,121
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
5
Table of Contents
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS
OF
CASH FLOWS
(IN THOUSANDS)
For the Six Months Ended
June 30 , 2024
June 30 , 2023
OPERATING ACTIVITIES
Net income including non-controlling interest
$
23,329
$
26,291
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
Depreciation and amortization
8,609
7,615
Provision for credit losses
3,344
3,075
Equity-based awards compensation expense
3,916
3,592
Amortization of debt issue costs
210
210
Change in deferred income taxes
770
1,799
Change in revaluation of put-right liability
303
199
Change in fair value of contingent earn-out consideration
3,434
( 10
)
Equity of earnings in unconsolidated affiliate
( 519
)
( 600
)
Loss on sale of fixed assets
51
63
Changes in operating assets and liabilities:
Increase in patient accounts receivable
( 5,110
)
( 5,341
)
Increase in accounts receivable - other
( 2,351
)
( 85
)
(Increase) decrease in other current and long term assets
( 1,642
)
593
(Decrease) increase in accounts payable and accrued expenses
( 1,481
)
1,125
Increase in other long-term liabilities
548
253
Net cash provided by operating activities
33,411
38,779
INVESTING ACTIVITIES
Purchase of fixed assets
( 4,174
)
( 4,523
)
Purchase of majority interest in businesses, net of cash acquired
( 38,695
)
( 8,040
)
Purchase of redeemable non-controlling interest, temporary equity
( 6,230
)
( 7,804
)
Purchase of non controlling interest, permanent equity
( 527
)
( 39
)
Proceeds on sale of non-controlling interest, permanent equity
26
-
Proceeds on sale of partnership interest - redeemable non-controlling interest
69
237
Distributions from unconsolidated affiliate
532
502
Proceeds on sale of fixed assets
-
7
Other
244
-
Net cash used in investing activities
( 48,755
)
( 19,660
)
FINANCING ACTIVITIES
Proceeds from revolving facility
-
24,000
Proceeds from issuance of common stock pursuant to the secondary public offering, net of issuance costs
-
163,655
Distributions to non-controlling interest, permanent and temporary equity
( 8,318
)
( 8,431
)
Cash dividends paid to shareholders
( 13,264
)
( 11,238
)
Principal payments on notes payable
( 1,113
)
( 1,086
)
Payments on term loan
( 1,875
)
( 1,875
)
Payments on revolving facility
-
( 55,000
)
Net cash (used in) provided by financing activities
( 24,570
)
110,025
Net (decrease) increase in cash and cash equivalents
( 39,914
)
129,144
Cash and cash equivalents - beginning of period
152,825
31,594
Cash and cash equivalents - end of period
$
112,911
$
160,738
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes
$
4,932
$
1,241
Interest paid
$
3,708
$
4,011
Non-cash investing and financing transactions during the period:
Purchase of interest in businesses - seller financing portion
$
955
$
360
Deferred payments related to purchase of interest in business
$
-
$
180
Fair market value of initial contingent consideration related to purchase of interest of businesses
$
2,800
$
200
Offset of notes receivable associated with purchase of redeemable non-controlling interest
$
75
$
-
Notes payable related to purchase of non-controlling interest, temporary equity
$
22
$
-
Notes payable related to purchase of redeemable non-controlling interest, temporary equity
$
-
$
621
Notes receivable related to sale of redeemable non-controlling interest, temporary equity
$
402
$
2,687
Notes receivable related to the sale of non-controlling interest, permanent equity
$
243
$
-
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
6
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U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN
EQUITY
(IN THOUSANDS)
U.S.Physical Therapy, Inc.
Common Stock
Additional
Accumulated Other
Retained
Treasury Stock
Total Shareholders’
Non-Controlling
For the three months ended June 30, 2024
Shares
Amount
Paid-In Capital
Comprehensive Gain
Earnings
Shares
Amount
Equity
Interests
Total
Balance March 31, 2024
17,283
$
172
$
283,546
$
4,108
$
223,573
( 2,215
)
$
( 31,628
)
$
479,771
$
1,462
$
481,233
Net income attributable to USPH shareholders
-
-
-
-
7,506
-
-
7,506
-
7,506
Net income attributable to non-controlling interest - permanent equity
-
-
-
-
-
-
-
-
892
892
Issuance of restricted stock, net of cancellations
8
-
-
-
-
-
-
-
-
-
Revaluation of redeemable non-controlling interest
-
-
-
-
( 622
)
-
-
( 622
)
-
( 622
)
Compensation expense - equity-based awards
-
-
1,919
-
-
-
-
1,919
-
1,919
Sale of non-controlling interest
-
-
2
-
-
-
-
2
-
2
Purchase of partnership interests - non-controlling interest
-
-
( 5
)
-
-
-
-
( 5
)
( 18
)
( 23
)
Dividends paid to USPH shareholders
-
-
-
-
( 6,634
)
-
-
( 6,634
)
-
( 6,634
)
Distributions to non-controlling interest partners - permanent equity
-
-
-
-
-
-
-
-
( 1,291
)
( 1,291
)
Deferred taxes related to redeemable non-controlling interest - temporary equity
-
-
-
-
( 375
)
-
-
( 375
)
-
( 375
)
Other comprehensive gain
-
-
-
( 23
)
-
-
-
( 23
)
-
( 23
)
Transfer of RNCI due to separation agreement
-
-
-
-
3,033
-
-
3,033
-
3,033
Other
-
-
-
( 1
)
1
-
-
-
( 2
)
( 2
)
Balance June 30, 2024
17,291
172
285,462
4,084
226,482
( 2,215
)
( 31,628
)
484,572
1,043
485,615
U .S.Physical Therapy, Inc.
Common Stock
Additional
Accumulated Other
Retained
Treasury Stock
Total Shareholders’
Non-Controlling
For the six months ended June 30, 2024
Shares
Amount
Paid-In Capital
Comprehensive Loss
Earnings
Shares
Amount
Equity
Interests
Total
Balance December 31, 2023
17,202
$
172
$
281,096
$
2,782
$
223,772
( 2,215
)
$
( 31,628
)
$
476,194
$
1,216
$
477,410
Net income attributable to USPH shareholders
-
-
-
-
15,552
-
-
15,552
-
15,552
Net income attributable to non-controlling interest - permanent equity
-
-
-
-
-
-
-
-
2,236
2,236
Issuance of restricted stock, net of cancellations
89
-
-
-
-
-
-
-
-
-
Revaluation of redeemable non-controlling interest, net of tax
-
-
-
-
( 2,061
)
-
-
( 2,061
)
-
( 2,061
)
Compensation expense - equity-based awards
-
-
3,916
-
-
-
-
3,916
-
3,916
Sale of non-controlling interest
-
-
200
-
-
-
-
200
-
200
Purchase of partnership interests - non-controlling interest
-
-
( 350
)
-
-
-
-
( 350
)
( 56
)
( 406
)
Dividends paid to USPH shareholders
-
-
-
-
( 13,264
)
-
-
( 13,264
)
-
( 13,264
)
Distributions to non-controlling interest partners - permanent equity
-
-
-
-
-
-
-
-
( 2,351
)
( 2,351
)
Deferred taxes related to redeemable non-controlling interest - temporary equity
-
-
-
-
( 550
)
-
-
( 550
)
-
( 550
)
Other comprehensive gain
-
-
-
1,303
-
-
-
1,303
-
1,303
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
-
-
600
-
-
-
-
600
-
600
Transfer of RNCI due to separation agreement
-
-
-
-
3,033
-
-
3,033
-
3,033
Other
-
-
-
( 1
)
-
-
-
( 1
)
( 2
)
( 3
)
Balance June 30, 2024
17,291
172
285,462
4,084
226,482
( 2,215
)
( 31,628
)
484,572
1,043
485,615
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Table of Contents
U.S.Physical Therapy, Inc.
Common Stock
Additional
Accumulated Other
Retained
Treasury Stock
Total Shareholders’
Non-Controlling
For the three months ended June 30, 2023
Shares
Amount
Paid-In Capital
Comprehensive Gain
Earnings
Shares
Amount
Equity
Interests
Total
Balance March 31, 2023
15,277
$
152
$
112,123
$
2,651
$
234,760
( 2,215
)
$
( 31,628
)
$
318,058
$
1,418
$
319,476
Net income attributable to USPH shareholders
-
-
-
-
10,919
-
-
10,919
-
10,919
Net income attributable to non-controlling interest - permanent equity
-
-
-
-
-
-
-
-
1,025
1,025
Issuance of restricted stock, net of cancellations
9
-
-
-
-
-
-
-
-
-
Issuance of common stock, pursuant to the secondary public offering, net of issuance costs
1,916
20
163,635
-
-
-
-
163,655
-
163,655
Revaluation of redeemable non-controlling interest
-
-
-
-
( 2,865
)
-
-
( 2,865
)
-
( 2,865
)
Compensation expense - equity-based awards
-
-
1,786
-
-
-
-
1,786
-
1,786
Purchase of partnership interests - non-controlling interest
-
-
-
-
( 50
)
-
-
( 50
)
11
( 39
)
Dividends paid to USPH shareholders
-
-
-
-
( 5,621
)
-
-
( 5,621
)
-
( 5,621
)
Distributions to non-controlling interest partners - permanent equity
-
-
-
-
-
-
-
-
( 955
)
( 955
)
Deferred taxes related to redeemable non-controlling interest - temporary equity
-
-
-
-
237
-
-
237
-
237
Other comprehensive gain
-
-
-
2,145
-
-
-
2,145
-
2,145
Other
-
-
( 51
)
-
285
-
-
234
1
235
Balance June 30, 2023
17,202
172
277,493
4,796
237,665
( 2,215
)
( 31,628
)
488,498
1,500
489,998
U.S.Physical Therapy, Inc.
Common Stock
Additional
Accumulated Other
Retained
Treasury Stock
Total Shareholders’
Non-Controlling
For the six months ended June 30, 2023
Shares
Amount
Paid-In Capital
Comprehensive Loss
Earnings
Shares
Amount
Equity
Interests
Total
Balance December 31, 2022
15,216
$
152
$
110,317
$
4,004
$
232,948
( 2,215
)
$
( 31,628
)
$
315,793
$
1,260
$
317,053
Net income attributable to USPH shareholders
-
-
-
-
18,329
-
-
18,329
-
18,329
Net income attributable to non-controlling interest - permanent equity
-
-
-
-
-
-
-
-
2,322
2,322
Issuance of restricted stock, net of cancellations
70
-
-
-
-
-
-
-
-
-
Issuance of common stock, pursuant to the secondary public offering, net of issuance costs
1,916
20
163,635
-
-
-
-
163,655
-
163,655
Revaluation of redeemable non-controlling interest, net of tax
-
-
-
-
( 2,746
)
-
-
( 2,746
)
-
( 2,746
)
Compensation expense - equity-based awards
-
-
3,592
-
-
-
-
3,592
-
3,592
Purchase of partnership interests - non-controlling interest
-
-
-
-
( 50
)
-
-
( 50
)
11
( 39
)
Dividends paid to USPH shareholders
-
-
-
-
( 11,238
)
-
-
( 11,238
)
-
( 11,238
)
Distributions to non-controlling interest partners - permanent equity
-
-
-
-
-
-
-
-
( 2,094
)
( 2,094
)
Deferred taxes related to redeemable non-controlling interest - temporary equity
-
-
-
-
374
-
-
374
-
374
Other comprehensive gain
-
-
-
792
-
-
-
792
-
792
Other
-
-
( 51
)
-
48
-
-
( 3
)
1
( 2
)
Balance June 30, 2023
17,202
172
277,493
4,796
237,665
( 2,215
)
( 31,628
)
488,498
1,500
489,998
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
8
Table of Contents
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation and Significant Accounting Policies
Nature of Business
U.S.
Physical Therapy, Inc. and its subsidiaries (the “Company”) operates its business through two reportable business segments which
include the physical therapy operations segment and the industrial injury prevention services (“IIP”) segment. The Company’s physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and
post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the IIP segment include onsite injury prevention and
rehabilitation, performance optimization and ergonomic assessments.
As of June 30, 2024,
the Company operated 681 clinics in 42
states. In addition to the 681 clinics, the Company also managed 41 physical therapy practices for unrelated physician groups and hospitals as of June 30, 2024.
D uring the six months ended June 30, 2024, and for the year-ended December 31,
2023, the Company completed the acquisitions of the following clinic practices and IIP businesses:
% Interest
Number of
Acquisition
Date
Acquired
Clinics
April 2024 Acquisition
April 30, 2024
**
*
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 April 30, 2024, one
of the Company’s primary IIP businesses, Briotix Health Limited Partnership, acquired 100 % of an IIP business.
***
On October 31, 2023, the Company concurrently acquired 100 % of an IIP business and a 55 %
equity interest in an ergonomics software business.
Basis of Presentation
The accompanying unaudited
consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q. However, the
statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes this report contains all necessary
adjustments (consisting only of normal recurring adjustments) to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. These unaudited consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and
Exchange Commission on February 29, 2024. Interim results are not necessarily indicative of the results the Company expects for the entire year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All significant
intercompany transactions have been eliminated.
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Segment Reporting
Operating segments are components of an enterprise for which separate financial information is
available and is evaluated regularly by chief operating decision makers in determining the allocation of resources and in assessing performance. The Company currently operates through two segments: physical therapy operations and IIP.
Use of Estimates
In preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to,
goodwill impairment, tradenames and other intangible assets, allocations of purchase price, allowance for receivables, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and
related disclosures. Actual results may differ from these estimates.
Goodwill and Other Indefinite-Lived Intangible Assets
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 assets. 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, permanent equity 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 triggering 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 triggering events or conditions could significantly
impact an impairment assessment, necessitating an impairment charge. The Company
evaluates indefinite-lived tradenames in conjunction with its annual goodwill impairment test.
The reporting units within the Company’s physical
therapy business are comprised of six regions primarily based on each clinic’s location. The IIP business consists of two reporting units.
As part of the impairment analysis, the Company is first required to assess qualitatively if it can
conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, it is 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, the Company considers relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. The
Company considers 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.
For the three and six months ended June 30, 2024, no triggering events or indicators were identified that would require impairment assessments for such period. During the three and twelve months ended December 31, 2023, the Company
recorded a charge of $ 15.8 million for goodwill impairment and a charge of $ 1.7 million for impairment of a tradename. The charges for impairment were related to one reporting unit in the IIP business. The impairment is related to a change in the
reporting unit’s current and projected operating income as well as various market inputs based on current market conditions. The Company did no t
recognize any impairment as a result of the Company’s annual assessment of goodwill and tradename for the other seven reporting units.
The Company also noted no impairment to long-lived assets for all reporting units.
The
Company will continue to monitor for any triggering events or other indicators of impairment.
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Investment in unconsolidated affiliate
Investments in unconsolidated affiliates, in which the Company has less than a controlling interest, are accounted for under the equity method of accounting and, accordingly, are adjusted for capital contributions,
distributions and the Company’s equity in net earnings or loss of the respective joint venture.
Non-Controlling Interest
The Company recognizes non-controlling interest, in which the Company has no obligation but the right to purchase the non-controlling interest, as permanent
equity in the unaudited consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interest is included in the consolidated net income on the face of the unaudited
consolidated statements of net income. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The
Company recognizes a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling equity investment on the deconsolidation date.
When the purchase price of a non-controlling interest by the Company exceeds the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital. Additionally,
operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner.
Redeemable Non-Controlling Interest
The non-controlling interest that is reflected as redeemable non-controlling interest in the unaudited consolidated financial statements consist of those in which the
owners and the Company have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, if certain
conditions are met. 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. The redemption rights can be triggered by
the owner or the Company 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 redemption rights are not automatic or mandatory (even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemption rights have been
satisfied.
On the date the Company acquires a controlling interest in a partnership, and the limited partnership agreement for such partnership contains redemption rights not under
the control of the Company, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption – Redeemable non-controlling interest – temporary equity. Then, in each reporting period thereafter until it
is purchased by the Company, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial carrying 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 carrying value. The Company records any adjustments in the redemption value, net of tax, directly to retained earnings and the adjustments are not
reflected in the unaudited consolidated statements of net income. Although the adjustments are not reflected in the unaudited consolidated statements of net income, current accounting rules require that the Company reflects 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 unaudited consolidated statements of net income. Management
believes the redemption value (i.e., the carrying amount) and fair value are the same.
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Revenue Recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606. For ASC 606, there is an implied contract between the Company and the patient upon each patient visit. Separate contractual arrangements exist between the
Company and third-party payors (e.g. insurers, managed care programs, government programs, workers’ compensation) 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 the Company but
indicate reimbursement rates for patients who are covered by those payors when the services are provided. At that time, the Company is 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 the Company provides the services at established rates. The difference between the Company’s established rate and the
anticipated reimbursement rate is accounted for as an offset to revenue—contractual allowance. Payments for services rendered are typically due 30
to 120 days after receipt of the invoice.
Patient Revenue
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 revenue less estimated contractual adjustments – as 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. Generally, this occurs as the Company provides physical and occupational therapy services, as each service provided is distinct
and future services rendered are not dependent on previously rendered services. The Company has agreements with third-party payors that provide payments to the Company at amounts different from its established rates.
Other Revenue
Revenue from the IIP business, which is included in other
revenue in the consolidated statements of net income, is derived from onsite services the Company provides to clients’ employees including injury prevention, rehabilitation, ergonomic assessments, post-offer employment testing and performance
optimization. Revenue from the Company’s IIP business is recognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to the consideration the company expects to receive in exchange for
providing injury prevention services to its clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period.
Management contract revenue, which is also included in other revenue, is derived from contractual arrangements whereby the Company manages a clinic for third party owners. The Company does not have any ownership interest in these
clinics. Typically, revenue is determined based on the number of visits conducted at the clinic and recognized at a point in time when services are performed. Costs, typically consisting of salaries , are recorded when incurred. Management contract revenue was $ 2.4 million and $ 2.2 million for the three months ended
June 30, 2024 and June 30, 2023, respectively, and was $ 4.8 million and $ 3.9 million for the six months ended June 30, 2024 and June 30, 2023, respectively.
Additionally, other revenue from physical therapy
operations includes services the Company provides on-site at locations such as schools and industrial worksites for physical or occupational therapy services, athletic trainers for schools and gym membership fees. Contract terms and rates are
agreed to in advance between the Company 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.
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Contractual Allowances
The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience. 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 Company clinics. The Company estimates contractual allowances based on its interpretation of the applicable regulations, payor contracts and historical
calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to
the gross accounts receivable balances for each payor of the clinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow the Company to provide the
necessary detail and accuracy with its collectability estimates. However, the services authorized, provided and related reimbursement are subject to interpretation that could result in payments that differ from the Company’s estimates.
Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. The Company’s billing system does not capture the exact change in its contractual allowance reserve estimate from period
to period. In order to assess the accuracy of its revenues. Management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, historically the
difference between net revenues and corresponding cash collections for any fiscal year has generally reflected a difference between approximately 1.0 %
to 1.5 % of net revenues. As a result, the Company believes that a change in the contractual allowance reserve estimate would not
likely be more than 1.0 % to 1.5 %
on each balance sheet date.
Allowance for Credit Losses
The Company determines allowances for credit losses
based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in operating costs in the consolidated 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 the Company estimates to be collectible.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority.
The Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits no r was any interest expense recognized during the three and six months ended June 30, 2024, and June 30, 2023. The Company records any interest or penalties, if required, in interest and other expense, as
appropriate.
Fair Value of Financial Instruments
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based
upon the transparency of inputs to the valuation at the measurement date.
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The three levels of the fair value hierarchy are as follows:
●
Level 1 – Quoted prices in active markets for identical assets or
liabilities.
●
Level 2 – Inputs, other than the quoted prices in active markets, that
are observable either directly or indirectly.
●
Level 3 – Unobservable inputs based on the Company’s own assumptions.
The carrying amounts reported in the balance sheets for cash and cash equivalents, certain contingent earn-out payments, accounts receivable, accounts payable and notes payable approximate their fair values due to the
short-term maturity of these financial instruments. The carrying amount of the debt under the Third Amended and Restated Credit Agreement (defined as “Credit Agreement” in Note 8) approximates the fair value due to the proximity of the debt issue
date and the balance sheet date and the variable component of interest on debt. The interest rate on the Credit Agreement is tied to the Secured Overnight Financing Rate (“SOFR”).
The put right expiring in 2027 is associated
with the potential future purchase of a separate company within the Company’s IIP business. It is marked to fair value on a recurring basis using Level 3 inputs. In determining the value of the put right as of June 30 , 2024 , the Company used a Monte Carlo simulation model utilizing unobservable inputs including asset volatility of 20.0 % and a discount rate of 11.69 %. The value of this put
right increased $ 0.2 million for the three months ended June 30, 2024 , and increased $ 0.3
million for the six months ended June 30 , 2024 . The put right
was valued at approximately $ 1.2 million on June 30, 2024, and approximately $ 1.0 million on December 31, 2023.
The valuation of the Company’s interest rate derivative is measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to
reflect the credit quality of the Company and its counterparty, which is a Level 2 fair value measurement. See Note 9 for more information on the Company’s interest rate derivative.
The redemption value of redeemable non-controlling interests approximates the fair value. See Note 4 for the changes in the fair value of Redeemable non-controlling interest.
The consideration for some of the Company’s acquisitions includes future payments that are contingent upon the occurrence of future operational or financial objectives being met. The Company estimates the fair value of contingent
consideration obligations through valuation models designed to estimate the probability of such contingent payments based on various assumptions and incorporating estimated success rates. These fair value measurements are based on significant
inputs not observable in the market. The unobservable inputs used in the valuation of the contingencies as of June 30 , 2024 , include asset
volatility of 15.0 % and a discount rate of 7.1 %. Substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions
could have a material impact on the Company ’s financial position or
results of operations in any given period. The Company determined the fair value of its contingent consideration obligations to be $ 17.2
million on June 30, 2024, and $ 12.5 million on December 31, 2023.
Restricted Stock
Restricted stock issued to employees and directors is subject to continued employment or continued service on the board, respectively. Generally, restrictions on the stock granted to employees lapse in equal annual installments on the
following four anniversaries of the date of grant. For those shares granted to directors, the restrictions will lapse in equal
quarterly installments during the first year after the date of grant. For those granted to officers and certain other key employees,
the restriction will lapse in equal quarterly installments during the four years following the date of grant. Compensation expense for
grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the vesting period. The Company recognizes any forfeitures as they occur. The restricted stock issued is included in basic and diluted
shares for the earnings per share computation.
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New Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Leases (Topic
842): Common Control Arrangements, which requires companies to amortize leasehold improvements associated with related party leases under common control over the useful life of the leasehold improvement to the common control group. The ASU is
effective for annual reporting periods beginning on or after D ecember 15, 2023;
however, early adoption is permitted. The ASU can either be applied prospectively or retrospectively. The adoption of ASU 2023-01 did not have a material effect on the Company’s financial statements.
In November 2023, the FASB issued ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which
requires disclosure on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker and included within the reported measure of segment profit or loss. In addition, the ASU
requires disclosure of other segment expenses by reportable segment and a description of their composition to permit the reconciliation between segment revenue, significant segment expenses and the reported segment measure of profit or loss. The
ASU also requires disclosure of the name and title of the chief operating decision maker. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and
early adoption is permitted. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09 Income Taxes
(Topic 740): Improvements to Income Tax Disclosures, which requires disclosure on an annual basis, a tabular reconciliation, including both amount and percentage of specific categories of the effective tax rate reconciliation, including state and
local income taxes (net of Federal taxes), foreign taxes, effects of changes in tax laws and regulations, effects of cross-border tax laws, tax credits, changes in valuation allowances, nontaxable and nondeductible items and changes in unrecognized
tax benefits. Additional disclosures are required for certain items exceeding five percent of income from continuing operations multiplied by the statutory income tax rate. The standard also requires disclosure of income taxes paid between Federal,
state and foreign jurisdictions, including further disaggregation of those payments exceeding five percent of the total income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, and early adoption is permitted.
The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.
2. Earnings Per Share
Basic and diluted earnings per share is computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares
and participating securities. The restricted stock the Company grants are participating securities containing non-forfeitable rights to receive dividends. Accordingly, any unvested shares of restricted stock is included in the basic and diluted
earnings per share computation. Additionally, in accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 4 Redeemable Non-Controlling Interest), net of tax, charged directly to retained earnings
is included in the earnings per basic and diluted share calculation.
The computation of basic
and diluted earnings per share are as follows.
For the Three Months Ended
For the Six Months Ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
(In thousands, except per share data)
Earnings per share
Computation of earnings per share - USPH shareholders:
Net income attributable to USPH shareholders
$
7,506
$
10,919
$
15,552
$
18,329
Charges to retained earnings:
Revaluation of redeemable non-controlling interest
( 622
)
( 2,865
)
( 2,061
)
( 2,746
)
Tax effect at statutory rate (federal and state)
159
732
527
700
$
7,043
$
8,786
$
14,018
$
16,283
Earnings per share (basic and diluted)
$
0.47
$
0.64
$
0.93
$
1.22
Shares used in computation - basic and diluted
15,072
13,720
15,044
13,375
3. Acquisitions of Businesses
The Company’s strategy is to continue acquiring outpatient physical therapy practices, to develop outpatient physical therapy clinics as satellites in existing partnerships and to
continue acquiring companies that provide and serve the IIP sector. The consideration paid for each acquisition is derived through arm’s length negotiations and funded through working capital, borrowings under the Revolving Facility (as defined in
Note 8. Borrowings) or proceeds from the secondary equity offering completed in May 2023.
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The purchase price plus the fair value of the non-controlling interest for the acquisitions after June 30, 2023, were allocated to the fair value of the assets acquired, inclusive of
identifiable intangible assets (i.e. tradenames, referral relationships and non-compete agreements) and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as
goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final
allocation of the purchase price may differ from the preliminary estimates used on June 30, 2024, based on additional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimated valuation of
the tangible assets acquired, the completion of the valuation of identifiable intangible assets and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount
can be reasonably estimated, will likely result in adjustments to goodwill. The Company does not expect the adjustments to be material. The Company continues to evaluate the components for the purchase price allocations for other acquisitions in
2023 and 2024.
The results of operations of the acquisi tions below have been included in the Company’s unaudited consolidated financial statements since their respective date of acquisition. Unaudited proforma consolidated financial information for the
acquisitions has not been included, as the results, individually and in the aggregate, were not material to current operations.
2024 Acquisitions
% Interest
Number of
Acquisition
Date
Acquired
Clinics
April 2024 Acquisition
April 30, 2024
**
*
March 2024 Acquisition
March 29, 2024
50 %
9
*
IIP business.
**
On April 30 , 2024, one of the Company ’s primary IIP businesses, Briotix Health Limited Partnership, acquired 100 % of an
IIP business.
On April 30, 2024 , the Company acquired 100 % of an IIP business through one of its primary IIP businesses, Briotix Health Limited Partnership, for a purchase price of approximately $ 24.0 million, of which $ 0.5 million was in the form of a note
payable. The note accrues interest at 5.0 % per annum and the principal and the interest are payable on May 1, 2025. As part of the
transaction, the Company agreed to additional contingent consideration if future operational objectives are met by the business. There is no maximum payout. The contingent consideration was valued at $ 2.1 million as of June 30, 2024.
On March 29, 2024, the Company 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 at 4.5 % per annum and the principal and the interest are payable on March 29, 2026. As part of the transaction, the Company agreed to additional
contingent consideration if future operational and financial objectives are met. There is no maximum payout. The contingent consideration was valued at $ 0.5
million on June 30, 2024.
Besides the multi-clinic acquisition referenced above, the Company purchased the assets and business of three physical therapy clinics, which were tucked into larger partnerships in separate transactions.
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The following table provides details on the preliminary purchase price
allocation for the acquisitions described above.
Physical Therapy
IIP
Operations
Total
(In thousands)
Cash paid, net of cash acquired
$
23,106
$
15,589
$
38,695
Seller note
455
500
955
Deferred payments
-
-
-
Contingent payments
2,100
700
2,800
Total consideration
$
25,661
$
16,789
$
42,450
Estimated fair value of net tangible assets acquired:
Total current assets
$
1,211
$
1,026
$
2,237
Total non-current assets
218
499
717
Total liabilities
( 541
)
( 500
)
( 1,041
)
Net tangible assets acquired
888
1,025
1,913
Customer and referral relationships
6,708
6,997
13,705
Non-compete agreement
261
338
599
Tradenames
1,331
1,723
3,054
Goodwill
16,473
23,607
40,080
Fair value of non-controlling interest (classified as redeemable non-controlling interest)
-
( 16,901
)
( 16,901
)
$
25,661
$
16,789
$
42,450
Total current assets primarily represent accounts receivable while total non-current assets consist of fixed assets and equipment used in the practice.
For the acquisitions in 2024, the values assigned to the customer and referral relationships and non-compete agreement are being amortized on a straight-line basis over their respective estimated lives. For customer and referral relationships,
the weighted-average amortization period is 12.0 years. For the non-compete agreements, the weighted-average amortization period is
5.0 years. The values assigned to tradenames are tested annually for impairment.
2023 Acquisitions
% Interest
Number of
Acquisition
Date
Acquired
Clinics
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, the Company concurrently acquired 100 %
of an IIP business and a 55 % equity interest in an ergonomics software business.
On
October 31, 2023, the Company concurrently acquired 100 % of an IIP business and a 55 % equity interest in an ergonomics software business. The previous owner of the ergonomics software business retained a 45 % equity interest. The total purchase price of the combined businesses was approximately $ 4.0 million and was paid in cash.
On
September 29, 2023, the Company acquired a 70 % equity interest in a four -clinic physical therapy practice. The original 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 in January
2024 and the second installment of $ 0.3 million is due on September 30, 2025.
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In a separate transaction, on September 29, 2023, the Company 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, the Company 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, the Company and a local partner together acquired a 75 % interest in a four -clinic physical therapy practice. After the transaction, the Company’s ownership interest is 45 % , the Company’s 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 the
Company, $ 1.1 million was paid in cash by the local partner, and $ 0.3 million was in the form of a note payable. The note was paid in full on July 1, 2024 ($ 0.2 million was paid by the Company and $ 0.1 million was paid by the local partner).
On February 28, 2023, the Company 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.
The aggregate purchase price for the 2023 acquisitions has been
preliminarily allocated as follows:
Physical Therapy
IIP
Operations
Total
(In thousands)
Cash paid, net of cash acquired
$
3,955
$
22,627
$
26,582
Seller note
-
985
985
Deferred payments
-
830
830
Contingent payments
-
200
200
Total consideration
$
3,955
$
24,642
$
28,597
Estimated fair value of net tangible assets acquired:
Total current assets
$
388
$
1,052
$
1,440
Total non-current assets
335
2,924
3,259
Total liabilities
( 41
)
( 3,296
)
( 3,337
)
Net tangible assets acquired
682
680
1,362
Customer and referral relationships
757
7,828
8,585
Non-compete agreement
37
416
453
Tradenames
187
1,684
1,871
Goodwill
2,566
24,868
27,434
Fair value of non-controlling interest (classified as redeemable non-controlling interest)
( 274
)
( 10,834
)
( 11,108
)
$
3,955
$
24,642
$
28,597
Besides the multi-clinic acquisitions referenced in the table
above, the Company purchased the assets and business of eight physical therapy clinics in separate transactions.
Total current assets primarily represent accounts receivable
while total non-current assets consist of fixed assets and equipment used in the practice.
For the acquisitions in 2023, the values assigned to the
customer and referral relationships and non-compete agreements are being amortized on a straight-line basis over their respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For the non-compete agreements, the weighted-average amortization period is 5.1 years. The values assigned to tradenames are tested annually for impairment.
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4. Redeemable Non-Controlling Interest
Physical Therapy Practice Acquisitions
When the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic (referred to as “Therapy Practice”), these Therapy Practice transactions
occur in a series of steps which are described below.
1.
Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity is owned by one or more individuals
(the “Selling Shareholders”) most of whom are physical therapists that work in the acquired Therapy Practice and provide physical therapy services to patients.
2.
In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limited partnership (“NewCo”), in exchange for one
hundred percent ( 100 %) of the limited and general partnership interests in NewCo. Therefore, in this step, NewCo becomes a
wholly-owned subsidiary of the Seller Entity.
3.
The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (ranges from 50 % to 90 %) of the limited
partnership interest and in all cases 100 % of the
general partnership interest in NewCo. The Company does not purchase 100 % of the limited partnership interest because the Selling
Shareholders, through the Seller Entity, want to maintain an ownership percentage. The consideration for the Acquisition is primarily payable in the form of cash at closing and a two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement does not contain any future earn-out or other contingent consideration that is payable
to the Seller Entity or the Selling Shareholders.
4.
The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the
limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo.
5.
As noted above, the Company does not purchase 100 %
of the limited partnership interests in NewCo and the Seller Entity retains a portion of the limited partnership interest in NewCo (“Seller Entity Interest”).
6.
In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”) with NewCo with an initial
term that ranges from three to five years (the “Employment Term”), with automatic one-year renewals, unless employment is terminated prior to the
end of the Employment Term. As a result, a Selling Shareholder becomes an employee (“Employed Selling Shareholder”) of NewCo. The employment of an Employed Selling Shareholder can be terminated by the Employed Selling Shareholder or NewCo,
with or without cause, at any time. In a few situations, a Selling Shareholder does not become employed by NewCo and is not involved with NewCo following the closing; in those situations, such Selling Shareholders sell their entire ownership
interest in the Seller Entity as of the closing of the Acquisition.
7.
The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary and commensurate with his or her responsibilities
based on other employees in similar capacities within NewCo, the Company and the industry.
8.
The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete
agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). A Non-Compete Agreement is executed with the Selling
Shareholders in all cases. That is, even if the Selling Shareholder does not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competing business during the Non-Compete Term.
9.
The Non-Compete Term commences as of the date of the Acquisition and expires on the later
of :
a.
Two years after the date an Employed Selling
Shareholders’ employment is terminated (if the Selling Shareholder becomes an Employed Selling Shareholder) or
b.
Five to six years from the date of the Acquisition, as defined in the Non-Compete Agreement, regardless of whether the Selling Shareholder is employed by NewCo.
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10.
The Non-Compete Agreement applies to a restricted region which is a defined mileage radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in
competing Therapy Practices or activities outside the designated geography (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is not employed by NewCo immediately is permitted to engage in
the competing Therapy Practice or activities outside the designated geography.
The Partnership Agreement contains provisions for the redemption of the Seller Entity Interest, either at the option of the Company (the “Call Right”) or at the option
of the Seller Entity (the “Put Right”) as follows:
1.
Put Right
a.
In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to a specified anniversary of the Closing Date, the Seller Entity thereafter may
have an irrevocable right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below.
b.
In the event that any Selling Shareholder is not employed by NewCo as of a specified anniversary of the Closing Date and the Company has not exercised its Call Right with respect to the
Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable
Percentage of Seller Entity’s Interest at the purchase price described in “3” below.
c.
In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after a specified of the Closing Date, the Seller Entity has the Put Right, and upon
the exercise of the Put Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.
2.
Call Right
a.
If any Selling Shareholder’s employment by NewCo is terminated prior to a specified anniversary of the Closing Date, the Company thereafter has an irrevocable right to purchase from
Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below.
b.
In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after a specified anniversary of the Closing Date, the Company has the Call Right, and
upon the exercise of the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.
3.
For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes,
depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within
NewCo; therefore, the undistributed earnings amount is small, if any.
4.
The Purchase Price for the initial equity interest purchased by the Company, also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right
and the Call Right noted above.
5.
The Put Right and the Call Right do not have an expiration date, and the Seller Entity Interest is not required to be purchased by the Company or sold by the Seller Entity unless either
the Put Right or the Call Right is exercised.
6.
The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since the Company requires that such Selling Shareholders sell their entire
ownership interest in the Seller Entity at the closing of the Acquisition.
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ProgressiveHealth
Acquisition
On November 30, 2021,
the Company acquired a majority interest in ProgressiveHealth Companies, LLC (“Progressive”), which owns a majority interest in certain subsidiaries (“Progressive Subsidiaries”) that operate in the IIP business. The Progressive transaction was
completed in a series of steps which are described below.
1.
Prior to the acquisition, the Progressive Subsidiaries were owned by a legal entity (“Progressive Parent”) controlled by its individual owners (the “Progressive Selling Shareholders”),
who work in and manage the Progressive business.
2.
In conjunction with the acquisition, the Progressive Selling Shareholders caused the Progressive Parent to transfer its ownership of the Progressive Subsidiaries into a newly-formed
limited liability company (“Progressive NewCo”), in exchange for one hundred percent ( 100 %) of the membership interests in
Progressive NewCo. Therefore, in this step, Progressive NewCo became wholly-owned by the Progressive Selling Shareholders.
3.
The Company entered into an agreement (the “Progressive Purchase Agreement”) to acquire from the Progressive Selling Shareholders a majority of the membership interest in Progressive
NewCo. The consideration for the acquisition is primarily payable in the form of cash at closing, a relatively small portion paid in cash after the closing contingent on certain performance criteria, and a small note in lieu of an escrow
(the “Progressive Purchase Price”).
4.
The Company and the Progressive Selling Shareholders also executed an operating agreement (the “Progressive Operating Agreement”) for Progressive NewCo that sets forth the rights and
obligations of the members of Progressive NewCo.
5.
As noted above, the Company did not purchase 100 % of the membership
interests in Progressive NewCo and the Progressive Selling Shareholders retained a portion of the membership interest in Progressive NewCo (“Progressive Selling Shareholders’ Interest”).
6.
The Company and the Progressive Selling Shareholders executed a non-compete agreement (the “Progressive Non-Compete Agreement”) which restricts the Progressive Selling Shareholders from
competing for a specified period of time (the “Progressive Non-Compete Term”).
7.
The Progressive Non-Compete Term commences as of the date of the Progressive acquisition and expires on the later of:
a.
Two years after the date a Progressive Selling Shareholder no longer is
involved in the management of Progressive NewCo or
b.
Seven years from the date of the acquisition.
8.
The Progressive Non-Compete Agreement applies to the entire United States.
9.
The Progressive Put Right (as defined below) and the Progressive Call Right (as defined below) do not have an expiration date. The Progressive Operating Agreement contains provisions
for the redemption of the Progressive Selling Shareholder’s Interest, either at the option of the Company (the “Progressive Call Right”) or at the option of the Progressive Selling Shareholder (the “Progressive Put Right”) as follows:
1.
Progressive Put Right
a.
Each of the Progressive Selling Shareholders has the right to sell 30 %
of their respective residual interests on each of the 4th and 5th anniversaries of the acquisition closing, and then 10 % on
each of the 6th and 7th anniversaries.
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b.
In the event that any Progressive Selling Shareholder terminates his management relationship with Progressive NewCo for any reason on or after the seventh anniversary of
the Closing Date, the Progressive Selling Shareholder has the Progressive Put Right, and upon the exercise of the Progressive Put Right, the Progressive Selling Shareholder’s Interest shall be redeemed by the Company at the purchase
price described in “3” below.
2.
Progressive Call Rights
a.
If any Progressive Selling Shareholder’s ceases to perform management services on behalf of Progressive NewCo, the Company thereafter shall have an irrevocable right to
purchase from such Progressive Selling Shareholder his Interest, in each case at the purchase price described in “3” below.
3.
For the Progressive Put Right and the Progressive Call Right, the purchase price is derived from a formula based on a specified multiple of Progressive NewCo’s
trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of Progressive NewCo. Progressive NewCo’s
earnings are distributed monthly based on available cash within Progressive NewCo; therefore, the undistributed earnings amount is small, if any.
4.
The Progressive Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month
earnings that is used in the Progressive Put Right and the Progressive Call Right noted above.
5.
The Progressive Put Right and the Progressive Call Right do not have an expiration date.
Neither the Progressive Operating Agreement nor the Progressive Non-Compete Agreement contain any provision to escrow or “claw back” the equity interest in Progressive
NewCo held by the Progressive Selling Shareholders, in the event of a breach of the operating agreement or non-compete terms, or the management services agreement pursuant to which the Progressive Selling Shareholders perform services on behalf of
Progressive NewCo. The Company’s only recourse against the Progressive Selling Shareholder for breach of any of these agreements is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements
with a Progressive Selling Shareholder that would result in a forfeiture of the equity interest in Progressive NewCo held by a Progressive Selling Shareholder.
For both scenarios described above, an Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and the
Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do not contain any provision to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling
Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder
does not forfeit his or her right to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any portion of the Seller Entity Interest. The Company’s only recourse against the Employed Selling
Shareholder for breach of either the Employment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with an Employed Selling Shareholder that
would result in a forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest.
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Carrying Amounts of Redeemable Non-Controlling Interests
The following table
details the changes in the carrying amount (fair value) of the Company’s redeemable non-controlling interests:
For the Three Months Ended
For the Six Months Ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
(In thousands)
Beginning balance
$
190,733
$
164,283
$
174,828
$
167,515
Net income allocated to redeemable non-controlling interest partners
3,314
2,920
5,541
5,640
Distributions to redeemable non-controlling interest partners
( 3,867
)
( 4,179
)
( 5,967
)
( 6,337
)
Changes in the fair value of redeemable non-controlling interest
622
2,865
2,061
2,746
Purchases of redeemable non-controlling interest
( 3,550
)
( 2,659
)
( 6,327
)
( 8,821
)
Acquired interest
-
2,138
16,901
3,893
Sales of redeemable non-controlling interest
90
2,286
472
2,925
Changes in notes receivable related to redeemable non-controlling interest
45
( 2,140
)
( 122
)
( 2,047
)
Reduction due to separation agreement
( 3,033
)
-
( 3,033
)
-
Ending balance
$
184,354
$
165,514
$
184,354
$
165,514
The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interests:
As of
June 30, 2024
June 30, 2023
(In thousands)
Contractual time period has lapsed but holder’s employment has not terminated
$
72,411
$
73,640
Contractual time period has not lapsed and holder’s employment has not terminated
111,943
91,874
Holder’s employment has terminated and contractual time period has expired
-
-
Holder’s employment has terminated and contractual time period has not expired
-
-
$
184,354
$
165,514
5. Goodwill
The changes in the carrying amount of goodwill consisted of the following:
For the
Six Months Ended
For the
Year Ended
June 30, 2024
December 31, 2023
(In thousands)
Beginning balance
$
509,571
$
494,101
Acquisitions
40,080
28,083
Adjustments for purchase price allocation of businesses acquired in prior year
( 681
)
3,187
Impairment of goodwill
-
( 15,800
)
Ending balance
$
548,970
$
509,571
For the
three and six months ended June 30, 2024, and 2023, no triggering events or indicators were identified that would require impairment assessments as of such periods. During the year ended December 31, 2023, the Company recorded goodwill impairment
of $ 15.8 million related to a reporting unit in the Company’s IIP business.
6. Intangible Assets, Net
The Company’s intangible assets, net, consisted of the following:
As of June 30, 2024
As of December 31, 2023
Gross Amount
Accumulated Amortization
Net Carrying
Amount
Gross Amount
Accumulated Amortization
Net Carrying
Amount
(In thousands)
Customer and referral relationships
$
108,371
$
( 34,297
)
$
74,074
$
93,658
$
( 30,414
)
$
63,244
Tradenames
47,631
-
47,631
44,573
-
44,573
Non-compete agreements
10,146
( 7,948
)
2,198
9,459
( 7,594
)
1,865
$
166,148
$
( 42,245
)
$
123,903
$
147,690
$
( 38,008
)
$
109,682
Tradenames, customer and referral relationships and non-compete agreements are related to the businesses acquired. The value assigned to tradenames has an indefinite
life and is tested at least annually for impairment using the relief from royalty method in conjunction with the Company’s annual goodwill impairment test. The value assigned to customer and referral relationships is being amortized over their
respective estimated useful lives which range from 7.0 to 14.0 years. Non-compete agreements are amortized over the respective term of the agreements which range from 5.0 to 6.0 years. For the six months ended June 30, 2024, the weighted average
amortization period for customer and referral relationships was 12.6 years and the weighted average amortization period for non-compete
agreements was 5.5 years. During the year ended December 31, 2023, the Company recognized a charge of $ 1.7 million related to the impairment of a tradename related to an IIP acquisition.
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The following table details the amount of amortization expense recorded for
intangible assets for the periods presented:
For the Three Months Ended
For the Six Months Ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
(In thousands)
Customer and referral relationships
$
2,066
$
1,639
$
3,884
$
3,303
Non-compete agreements
191
149
354
302
$
2,257
$
1,788
$
4,238
$
3,605
Based on the balance of referral relationships and non-compete agreements as of June 30, 2024, the expected
amount to be amortized in 2024 and thereafter by year is as follows:
For the Year Ended December 31,
Customer and Referral
Relationships
Non-Compete
Agreements
(In thousands)
2024
(excluding the six months ended June 30, 2024)
$
4,037
$
360
2025
8,049
671
2026
7,582
531
2027
7,418
369
2028
7,149
228
Thereafter
39,839
39
Total
$
74,074
$
2,198
7. Accrued Expenses
Accrued expenses consisted of the following:
As of
June 30, 2024
December 31, 2023
(In thousands)
Salaries and related costs
$
24,353
$
25,641
Credit balances due to patients and payors
7,517
8,847
Group health insurance claims
2,665
2,301
Federal income taxes payable
2,579
1,006
Contingency payable
14,120
12,285
Other property taxes payable
416
355
Interest payable
267
235
Closure costs
604
231
Other
5,535
4,443
Total
$
58,056
$
55,344
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8. Borrowings
Amounts outstanding under the Company’s Senior Credit Facilities (as defined below) and notes payable
consisted of the following:
As of June 30, 2024
As of December 31, 2023
Principal
Amount
Unamortized
discount and
debt issuance
cost
Net Debt
Principal
Amount
Unamortized
discount and
debt issuance
cost
Net Debt
(In thousands)
Term Facility
$
142,500
$
( 1,232
)
$
141,268
$
144,375
$
( 1,468
)
$
142,907
Revolving Facility
-
-
-
-
-
-
Other
4,131
-
4,131
3,775
-
3,775
Total debt
146,631
( 1,232
)
145,399
148,150
( 1,468
)
146,682
Less: Current portion of long-term debt (1)
10,120
( 420
)
9,700
8,111
( 420
)
7,691
Long-term debt, net of current portion
$
136,511
$
( 812
)
$
135,699
$
140,039
$
( 1,048
)
$
138,991
(1)
The long-term portion is included as part of Other Long-Term Liabilities in the
unaudited Consolidated Balance Sheet.
Effective December 5, 2013, the Company 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, the Company 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 were made 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 shall be used by the Company for working capital and other general corporate purposes of the Company and
its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by the Company to refinance the indebtedness outstanding under the Amended Credit Agreement, to pay fees and
expenses incurred in connection with the transactions involving the loan facilities, for working capital and other general corporate purposes of the Company and its subsidiaries.
The Company is 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 Credit Agreement) plus an applicable margin or, at the option of the Company, an alternate base rate plus an applicable margin. Each Swingline Loan shall bear interest at
the base rate plus the applicable margin. The applicable margin for Term SOFR borrowings ranges from 1.50 % to 2.25 %, and the applicable
margin for alternate base rate borrowings ranges from 0.50 % to 1.25 % , in each case, based on the Consolidated Leverage Ratio of the Company and its subsidiaries. Interest is payable at the end of the selected
interest period but no less frequently than quarterly and on the date of maturity.
The Company is also required to 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”). Such unused fee will range between 0.25 % and 0.35 % per annum and is also based on the Consolidated Leverage Ratio of the Company and its subsidiaries. The
Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions.
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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.
The Company’s obligations under the Credit Agreement are guaranteed by its wholly
owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by a perfected first priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions.
As of June 30, 2024, $ 142.5 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 June 30, 2024, the Company was in compliance with all of the covenants contained in the Credit Agreement.
The interest rate on the Company’s Senior Credit Facilities was 4.7 % for the three months ended June 30, 2024, and 5.7 % for the three months ended June 30, 2023, with an all-in effective interest rate, including all associated costs, of 5.4 % and 6.0 % over the same periods,
respectively. The all-in effective interest rate on the Company’s Senior Credit Facilities for the six months ended June 30, 2024, was 5.4 %
and 5.7 % for the six months ended June 30, 2023.
The Company generally enters into various notes payable as a means of financing a portion of its
acquisitions and purchasing of non-controlling interests. In conjunction with acquisitions in the years ended December 31, 2022, 2023 and 2024, the Company entered into notes payable in the aggregate amount of $ 4.1 million, of which $ 1.3 million
is due by December 31, 2024, $ 1.6 million is due in 2025 and $ 1.2 million is due in 2026. Interest accrues in the range of 3.5 % to 8.5 % per annum and is payable with each principal installment.
9. Derivative Instruments
The Company is
exposed to certain market risks in the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use
derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk
management activities do not eliminate these risks.
Interest Rate Swap
In May 2022, the Company entered into an interest rate swap agreement,
effective on June 30, 2022, with Bank of America, N.A, which had a $ 150 million notional value, and a maturity date of June 30, 2027 . Beginning in July 2022, the Company receives 1-month SOFR, and pays a fixed rate of interest of 2.815 % on 1-month SOFR on a quarterly basis.
The total interest rate in any period will also include an applicable margin based on the Company’s consolidated leverage ratio. In connection with the swap, no cash was exchanged between the Company and the counterparty.
The Company designated its 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.
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The impact of the Company’s
derivative instruments on the accompanying Consolidated Statements of Comprehensive Income are presented in the table below.
For the Three Months Ended
For the Six Months Ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
(In thousands)
Net income
$
11,712
$
14,864
$
23,329
$
26,291
Other comprehensive (loss) gain:
Unrealized (loss) gain on cash flow hedge
( 31
)
2,881
1,750
1,064
Tax effect at statutory rate (federal and state)
8
( 736
)
( 447
)
( 272
)
Comprehensive income
11,689
17,009
24,632
27,083
Comprehensive income attributable to non-controlling interest
( 4,206
)
( 3,945
)
( 7,777
)
( 7,962
)
Comprehensive
income attributable to USPH shareholders
$
7,483
$
13,064
$
16,855
$
19,121
The valuations of the Company’s interest rate derivatives are measured as the
present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2
fair value measurement.
The carrying and fair value of the Company’s interest rate derivatives (included in other current assets and other assets) were as follows.
As of
June 30,
2024
June 30,
2023
(In thousands)
Other current assets
$
2,954
$
3,471
Other assets
2,532
2,971
$
5,486
$
6,442
10. Leases
The Company has operating leases for its corporate offices and operating facilities. The Company determines if an arrangement is a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset
during the lease term and operating lease liabilities represent net present value of the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date
based on the net present value of the fixed lease payments over the lease term. The Company’s operating lease terms are generally five years
or less. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating fixed lease expense is recognized on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease such as
increases in lease payments based on changes in index rates or usage are not included in the right-of-use assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense.
The components of lease expense were as follows.
For the Three Months Ended
For the Six Months Ended
June 30 , 2024
June 30 , 2023
June 30 , 2024
June 30 , 2023
(In thousands)
Operating lease cost
$
10,263
$
9,410
$
20,216
$
18,775
Short-term lease cost
256
284
521
559
Variable lease cost
2,563
2,373
4,932
4,504
Total lease cost *
$
13,082
$
12,067
$
25,669
$
23,838
* Sublease income was immaterial
Lease costs are reflected in the consolidated statement of net income in the line item – rent, supplies, contract labor and other.
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The supplemental cash flow informa tion
related to leases was as follows.
For the Three Months Ended
For the Six Months Ended
June 30, 2024
June 30, 2023
June 30 ,
2024
June 30 ,
2023
(In thousands)
Cash paid for amounts included in the measurement of operating lease liabilities
$
10,564
$
9,753
$
20,902
$
19,399
Right-of-use assets obtained in exchange for new operating lease liabilities
$
12,901
$
9,938
$
20,628
$
16,219
The aggregate future lease payments for operating leases as of June 30, 2024, were
as follows.
Amount
Fiscal Year
(In thousands)
2024 (excluding the six months ended June 30, 2024)
$
20,564
2025
35,568
2026
27,481
2027
18,994
2028 and thereafter
21,091
Total lease payments
$
123,698
Less: imputed interest
10,126
Total operating lease liabilities
$
113,572
Average lease terms and discount rates were as follows.
As of
June 30, 2024
June 30, 2023
Weighted-average remaining lease term - Operating leases
3.9 years
4.0 years
Weighted-average discount rate - Operating leases
4.4 %
3.5 %
11. Segment Information
The Company’s reportable segments include the physical therapy operations segment and the IIP segment. Also included in the physical therapy operations segment are
revenues from management contract services and other services which include services the Company provides on-site, such as athletic trainers for schools.
Physical Therapy Operations
The physical therapy operations segment primarily operates
through subsidiary clinic partnerships (“Clinic Partnerships”), in which the Company generally owns a 1 % general partnership interest in
all the Clinic Partnerships. The Company’s limited partnership interests generally range from 65 % to 75 % (the range is 10 % - 99 %) in the Clinic Partnerships. The managing therapist of each clinic owns, directly or indirectly, the remaining limited partnership interest in most
of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, the Company operates some clinics, through wholly-owned subsidiaries, under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned
Facilities”).
The Company continues to seek to attract for employment
physical therapists who have established relationships with physicians and other referral sources, by offering these therapists a competitive salary and incentives based on the profitability of the clinic that they manage. For multi-site clinic
practices in which a controlling interest is acquired by the Company, the prior owners typically continue on as employees to manage the clinic operations, retain a non-controlling ownership interest in the clinics and receive a competitive salary
for managing the clinic operations. In addition, the Company has developed satellite clinic facilities as part of existing Clinic Partnerships and Wholly-Owned Facilities, with the result that a substantial number of Clinic Partnerships and
Wholly-Owned Facilities operate more than one clinic location.
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Clinic Partnerships
For non-acquired Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly
or indirectly, are recorded within the balance sheets and income statements as non-controlling interest—permanent equity . For acquired Clinic Partnerships with redeemable non-controlling interests, the
earnings attributable to the redeemable non-controlling interests are recorded within the consolidated balance sheets and income statements as redeemable non-controlling interest—temporary equity .
Wholly-Owned Facilities
For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the clinic partners/directors.
The amount is expensed as compensation and included in clinic operating costs—salaries and related costs. The respective liability is included in current liabilities— accrued expenses on the consolidated
balance sheets.
Industrial Injury Prevention Services
Services provided in the IIP segment 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. Other clients include large insurers and their contractors. The Company
performs these services through Industrial Sports Medicine Professionals, consisting primarily of specialized certified athletic trainers.
Segment Financials
The Company evaluates performance of the segments based on gross profit. The Company has provided additional information regarding its reportable segments which
contributes to the understanding of the Company and provides useful information.
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The following table summarizes selected financial data for the Company’s reportable segments:
For the Three Months Ended
For the Six Months Ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
(In thousands)
(In thousands)
Net revenue:
Physical therapy operations
$
143,486
$
132,239
$
277,911
$
261,398
Industrial injury prevention services
23,704
19,246
44,954
38,596
Total Company
$
167,190
$
151,485
$
322,865
$
299,994
Operating Costs:
Salaries and related costs:
Physical therapy operations
$
81,452
$
74,394
$
161,226
$
148,281
Industrial injury prevention services
14,882
12,477
28,839
24,630
Total salaries and related costs
$
96,334
$
86,871
$
190,065
$
172,911
Rent supplies, contract labor and other:
Physical therapy operations
$
31,534
$
28,060
$
60,494
$
54,732
Industrial injury prevention services
3,743
2,784
6,699
6,212
Total rent, supplies, contract labor and other
$
35,277
$
30,844
$
67,193
$
60,944
Provision for credit losses:
Physical therapy operations
$
1,717
$
1,563
$
3,344
$
3,075
Industrial injury prevention services
-
-
-
-
Total provision for credit losses
$
1,717
$
1,563
$
3,344
$
3,075
Total Company
$
133,328
$
119,278
$
260,602
$
236,930
Gross profit:
Physical therapy operations
$
28,783
$
28,222
$
52,847
$
55,310
Industrial injury prevention services
5,079
3,985
9,416
7,754
Total Company
$
33,862
$
32,207
$
62,263
$
63,064
As of
June 30, 2024
June 30, 2023
Total Assets:
Physical therapy operations
$
853,045
$
849,907
Industrial injury prevention services
170,089
149,674
Total Company
$
1,023,134
$
999,581
12. Investment in Unconsolidated
Affiliate
Through one of its subsidiaries, the Company has a 49 % joint venture interest in a company
which provides physical therapy services for patients at hospitals. Since the Company is deemed to not have a controlling interest in the company, the Company’s investment is accounted for using the equity method of accounting. The investment
balance of this joint venture as of June 30, 2024, is $ 12.2 million and the earnings amounted to approximately $ 0.2 million and $ 0.5 million for the
three and six months ended June 30, 2024, respectively. Earnings in the comparable prior periods were $ 0.3 million and $ 0.6 million for the three and six months ended June 30, 2023, respectively.
13. Subsequent Events
On August 12, 2024, the Company’s Board of Directors declared a quarterly dividend of $ 0.44 per share payable on September 13, 2024 , to shareholders of
record on August 23, 2024 .
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.