ATI Physical Therapy, Inc. (ATIP) is a nationally recognized outpatient physical therapy provider in the United States, specializing in outpatient rehabilitation and adjacent healthcare services. The company operates 884 clinics located in 24 states (as well as 18 clinics under management service agreements) as of March 31, 2023. ATI's commitment to providing evidence-based, patient-centric care has positioned it as a leader in the industry.

Business Overview

Founded in 1996 under the name Assessment Technologies Inc., ATI Physical Therapy, Inc. was originally organized in 2020 as Fortress Value Acquisition Corp. II (FVAC). The company offers a variety of services within its clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services; hand therapy; and other specialized treatment services.

In addition to providing services to physical therapy patients at outpatient rehabilitation clinics, ATI offers services through its ATI Worksite Solutions (AWS) program, Management Service Agreements (MSA), and Sports Medicine arrangements. AWS provides an on-site team of healthcare professionals at employer worksites, while MSA arrangements typically include the company providing management and physical therapy-related services to physician-owned physical therapy clinics. Sports Medicine arrangements provide certified healthcare professionals to various schools, universities and other institutions to perform on-site physical therapy and rehabilitation services.

Financials

For the full year 2023, ATI reported annual net income of -$69,795,000, annual revenue of $699,016,000, annual operating cash flow of -$12,366,000, and annual free cash flow of -$29,688,000. The company's financial performance has been impacted by various factors, including the tight labor market, wage inflation, and the need to invest in initiatives to improve clinical staffing levels, clinician productivity, and patient access.

In the first quarter of 2024, ATI reported net revenue of $181,472,000, a 8.7% increase from the prior year period. Net patient revenue grew 9.7% year-over-year to $165,407,000, driven by a 5.0% increase in total patient visits and a 4.5% improvement in net patient revenue per visit to $108.42. The company's other revenue, which includes its AWS, MSA, and Sports Medicine service lines, remained relatively flat at $16,065,000.

The increase in net patient revenue was primarily attributable to higher visit volumes, as the company's average visits per day per clinic grew 7.6% year-over-year to 26.9. This was driven by the company's focus on increasing clinical staffing levels and improving clinician productivity. ATI's rate per visit improvement was largely due to favorable payor contracting, lower denials experience, and favorable service mix shifts, partially offset by Medicare rate cuts that became effective on January 1, 2024.

Salaries and related costs, the company's largest expense, increased 9.5% year-over-year to $99,328,000 in the first quarter of 2024. This was primarily driven by higher compensation due to a larger number of clinicians and support staff, wage inflation, and higher incentive compensation. Rent, clinic supplies, contract labor and other costs increased 4.5% to $55,261,000, mainly due to higher contract labor expenses.

ATI's selling, general and administrative (SG&A) expenses decreased 14.4% year-over-year to $26,202,000 in the first quarter of 2024. This was primarily due to lower transaction costs, non-ordinary legal and regulatory costs, and higher legal cost insurance reimbursements, partially offset by higher employee salaries and incentive awards expenses.

The company reported an operating loss of $4,778,000 in the first quarter of 2024, an improvement from the $11,369,000 operating loss in the prior year period. This was driven by the higher revenue from increased visit volumes and rate per visit, as well as the decrease in SG&A expenses.

Notable below-the-line items in the first quarter included a $5,407,000 gain from the decrease in the fair value of the company's 2L Notes, and a $103,000 gain from the change in fair value of its warrant liability and contingent common shares liability. Interest expense increased 3.9% year-over-year to $14,483,000, primarily due to lower interest rate hedge benefits, partially offset by lower balances on the company's senior secured term loan and revolver.

ATI reported a net loss of $13,523,000 in the first quarter of 2024, an improvement from the $25,210,000 net loss in the prior year period. The company's adjusted EBITDA, a non-GAAP metric, increased to $6,463,000 in the first quarter of 2024, compared to $4,790,000 in the prior year period.

Outlook

Looking ahead, ATI provided guidance for the second quarter of 2024. The company expects revenue to be in the range of $185 million to $195 million, representing growth of approximately 7% to 13% over the prior year period. Adjusted EBITDA is expected to be between $15 million and $20 million, which would equate to an adjusted EBITDA margin of 8% to 11%.

The company's performance continues to be sensitive to its hiring efforts and the challenging labor market. While ATI has made progress in improving clinician retention and productivity, the tight labor market for physical therapy and other healthcare providers remains a headwind. The company is focused on executing its strategies to increase clinical staffing levels, improve clinician productivity, control costs and capital expenditures, and drive growth in patient visit volumes, referrals, and rate per visit.

Risks and Challenges

ATI's liquidity position remains a concern, as the company had $23.7 million in cash and cash equivalents and no available capacity under its revolving credit facility as of March 31, 2023. The company has continued to generate negative operating cash flows and net losses, which has been exacerbated by its current capital structure and the tight labor market. ATI is at risk of insufficient funding to meet its obligations and potential non-compliance with its minimum liquidity financial covenant under its 2022 Credit Agreement.

To address its liquidity needs, the company completed a debt restructuring transaction in June 2023, which included a $25 million delayed draw new money financing. ATI plans to continue its efforts to improve its operating results and cash flow, but there can be no assurance that the company's plan will be successful. The company is also exploring additional liquidity sources, including raising additional debt or equity capital, disposing of assets, and considering other strategic alternatives.

Conclusion

Overall, ATI Physical Therapy, Inc. has faced significant challenges in recent years, including the tight labor market, wage inflation, and the need to invest in initiatives to improve its operations. While the company has made progress in driving growth and improving its financial performance, its liquidity position remains a concern. ATI's ability to successfully execute its strategies and address its liquidity needs will be crucial in determining its future performance and long-term viability.