ATI Physical Therapy, Inc. (NYSE: ATIP) is a nationally recognized outpatient physical therapy provider in the United States, specializing in delivering evidence-based, patient-centric care. With a steadfast commitment to enhancing the lives of its patients, ATI has established itself as a prominent player in the dynamic healthcare landscape.
Business Overview and History Established in 1996 under the name Assessment Technologies Inc., ATI Physical Therapy has undergone a remarkable transformation over the past two and a half decades. The company was initially founded to provide outpatient physical therapy services and has since expanded its offerings to include a diverse range of specialized treatments, such as work injury rehabilitation, hand therapy, and sports medicine services.
In the early years, ATI focused on establishing a strong presence in the Midwest, opening additional clinics across Illinois, Indiana, and Wisconsin. By the mid-2000s, the company had expanded its footprint to other regions of the United States, including the East Coast and West Coast. A significant milestone in ATI’s history came in 2011 when it was acquired by private equity firm Advent International. This acquisition provided ATI with additional resources and capital to accelerate its growth strategy through both organic expansion and strategic acquisitions of smaller physical therapy practices.
Over the next decade, ATI continued to grow its clinic network, reaching over 900 locations across 24 states by 2021. However, the company faced several challenges during this period. In 2020, the COVID-19 pandemic significantly disrupted ATI’s operations, leading to temporary clinic closures and a decline in patient volumes. The company also struggled with high clinician attrition rates, which put pressure on its ability to provide consistent, high-quality care.
To address these challenges, ATI implemented various operational and people-focused initiatives. This included investing in technology to improve clinic efficiency, as well as enhancing its employee recruitment and retention strategies. Despite the headwinds, the company was able to navigate these obstacles and emerge as a stronger, more resilient organization.
In 2020, ATI underwent a significant corporate restructuring, merging with Fortress Value Acquisition Corp. II (FVAC) and rebranding to ATI Physical Therapy, Inc. This strategic move allowed the company to leverage FVAC’s expertise and resources to drive further growth and expansion. As of September 30, 2024, ATI operates 874 clinics across 24 states, along with an additional 16 clinics under management service agreements.
Financial Performance and Liquidity
Financials ATI’s financial performance has demonstrated both resilience and challenges in recent years. For the fiscal year ended December 31, 2023, the company reported total revenue of $699.02 million, a decline from the previous year’s $635.67 million. However, the company’s net loss for the year improved from $492.38 million in 2022 to $69.80 million in 2023, a significant reduction. Operating cash flow (OCF) for 2023 was -$12.37 million, while free cash flow (FCF) stood at -$29.69 million.
In the third quarter of 2024, ATI reported net revenue of $189.99 million, a 7.1% increase year-over-year. This growth was driven by a 7.7% increase in net patient revenue, which reached $175 million. The company’s visits per day per clinic rose to 28.3, up from 25.9 in the prior-year quarter, reflecting improved clinic utilization. However, the company’s profitability faced some challenges, with a net loss of $32.87 million in the third quarter, compared to a net loss of $15 million in the same period of 2023. This increased loss was primarily due to higher salaries and related costs, as well as the impact of fair value adjustments on the company’s second lien notes and other liability-classified instruments. OCF for Q3 2024 was -$3.55 million, with FCF at -$7.17 million.
Liquidity The company’s liquidity position has been an area of focus, with cash and cash equivalents standing at $23.46 million as of September 30, 2024. ATI’s current ratio, a measure of short-term liquidity, stood at 1.12 as of the same date, indicating a relatively stable working capital position. The quick ratio also stood at 1.12x. Furthermore, the company’s debt-to-equity ratio was -3.62, suggesting a highly leveraged capital structure. As of September 30, 2024, ATI had no available credit line.
Revenue Segments ATI’s primary revenue stream is its net patient revenue, which accounted for 91.7% of total net revenue in the first nine months of 2024. Net patient revenue grew 9.1% year-over-year to $512.89 million, driven by an increase in total patient visits of 6.4% and a 2.6% increase in net patient revenue per visit to $108.86. The growth in patient visits was primarily attributable to higher clinician staffing levels, while the increase in net patient revenue per visit was driven by favorable payor contracting, service mix shifts, and certain favorable adjustments to transaction prices based on collections experience. These factors were partially offset by unfavorable state mix shifts and Medicare rate cuts.
ATI also generates revenue from other service offerings, which accounted for 8.3% of total net revenue in the first nine months of 2024. This includes revenue from the ATI Worksite Solutions program, which provides on-site healthcare services at employer worksites, as well as revenue from management service agreements with physician-owned physical therapy clinics and sports medicine arrangements. Other revenue remained relatively flat year-over-year at $46.68 million.
Cost Structure ATI’s primary costs are salaries and related costs, which grew 8.6% year-over-year to $307.44 million and accounted for 54.9% of net revenue. This increase was driven by higher compensation due to a larger number of clinicians and support staff, as well as wage inflation. Rent, clinic supplies, contract labor, and other costs grew 4.4% to $162.92 million, or 29.1% of net revenue, primarily due to higher contract labor and third-party services costs. The provision for doubtful accounts increased 25.4% to $12.33 million, or 2.2% of net revenue, driven by a return to more normal collection levels after very favorable cash collections in the prior year period.
Selling, general, and administrative (SG&A) expenses decreased 20.8% to $73.06 million, or 13.1% of net revenue, primarily due to lower debt and capital transaction costs, lower non-ordinary legal and regulatory costs, and lower corporate insurance costs, partially offset by lower legal cost insurance reimbursements.
Recent Developments and Operational Highlights In the third quarter of 2024, ATI reported net revenue of $190 million, a 7.1% increase year-over-year. This growth was driven by a 7.7% increase in net patient revenue, which reached $175 million. The company’s visits per day per clinic rose to 28.3, up from 25.9 in the prior-year quarter, reflecting improved clinic utilization.
Navigating Workforce Challenges and Operational Enhancements The physical therapy industry, including ATI, has grappled with ongoing workforce challenges, characterized by elevated clinician attrition and difficulties in recruiting and retaining skilled professionals. To address these headwinds, ATI has implemented a range of initiatives focused on employee engagement, compensation, and professional development.
In the third quarter of 2024, the company’s clinician headcount grew by 3% year-over-year, and annualized clinician attrition held steady at 21%, which management believes is in line with industry trends. ATI has also made strides in improving operational efficiencies, with clinician productivity increasing from 9.3 visits per day in the prior-year quarter to 9.4 visits per day in the third quarter of 2024.
Guidance and Outlook For the third quarter of 2024, ATI reported that they achieved both their revenue and adjusted EBITDA guidance, demonstrating the continued strength of their business. For the fourth quarter of 2024, ATI has provided guidance for net revenue in the range of $182 million to $192 million and adjusted EBITDA between $9 million and $14 million. This guidance reflects the company’s ongoing efforts to navigate the dynamic market conditions, including workforce challenges and reimbursement headwinds.
Risks and Challenges ATI Physical Therapy faces several key risks and challenges that may impact its future performance. The highly competitive nature of the physical therapy industry, coupled with the company’s reliance on a limited number of large customers, introduces revenue concentration risks. Additionally, the company’s substantial debt burden and leverage, as well as its exposure to regulatory changes in government-sponsored healthcare programs, such as Medicare, pose ongoing challenges.
The company has been involved in several legal proceedings, including stockholder class action complaints and a stockholder derivative complaint. These are described in detail in Note 14 – Commitments and Contingencies in the financial statements. The Company has also received voluntary requests for document production from the SEC related to the Company’s July 2021 earnings forecast and financial information.
The physical therapy industry is facing challenges related to a tight labor market and competition for available physical therapists, which has contributed to elevated attrition and the need for increased use of contract labor. The Company has implemented various initiatives to attract and retain clinical staff, but these headwinds are expected to persist in the near-term.
Conclusion ATI Physical Therapy has demonstrated its resilience and adaptability in the face of evolving industry dynamics. While the company has navigated workforce challenges and profitability pressures, it remains focused on improving operational efficiencies, enhancing patient experiences, and pursuing strategic initiatives to drive long-term growth. As ATI continues to navigate the complex healthcare landscape, its ability to address operational and financial headwinds will be crucial in determining its future success.
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