ATI Physical Therapy, Inc. (NYSE:ATIP) is a nationally recognized outpatient physical therapy provider in the United States, boasting a network of 874 clinics across 24 states as well as 16 clinics under management service agreements as of September 30, 2024. The company's unwavering commitment to providing evidence-based, patient-centric care has solidified its position as a leading force in the musculoskeletal care space.
Company Background
Founded in 1996 under the name Assessment Technologies Inc., ATI Physical Therapy has evolved into a comprehensive healthcare provider specializing in a variety of treatments including physical therapy, work injury rehabilitation, hand therapy, and other specialized services. The company's journey has been marked by significant growth and expansion, culminating in its current status as a nationally recognized healthcare company.
In 2020, ATI underwent a transformative process with the assistance of Fortress Value Acquisition Corp. II, a special purpose acquisition company. This collaboration facilitated ATI's initial public offering, leading to its rebranding as ATI Physical Therapy, Inc. The transaction provided ATI with additional resources to further expand its footprint and enhance its service offerings across the United States.
Challenges and Resilience
Throughout its history, ATI has faced and overcome numerous challenges. One of the most persistent has been navigating the competitive labor market for physical therapists and other healthcare providers. In response, the company has implemented a range of strategic initiatives focused on compensation, staffing levels, clinical and professional development, and other areas to attract and retain qualified therapists across its platform. These efforts have been crucial in managing the elevated clinician attrition levels experienced in recent years.
Another significant challenge for ATI has been adapting to changes in reimbursement rates from governmental and commercial payors, including reductions in Medicare reimbursement rates. The company has demonstrated resilience in the face of these headwinds by negotiating favorable contracts with commercial payors, adjusting its service mix, and improving clinician productivity and practice management.
ATI has also faced legal challenges, including securities litigation, which the company has addressed through negotiated settlements. Despite these obstacles, ATI has maintained its focus on delivering high-quality, evidence-based physical therapy services to patients. This commitment is reflected in the company's strong patient satisfaction levels, evidenced by a Google star rating of 4.9 out of 5.
Financials
Despite the headwinds, ATI Physical Therapy has demonstrated remarkable financial resilience. As of September 30, 2024, the company reported $23.5 million in cash and cash equivalents, though it had no available capacity under its revolving credit facility. The company's net patient revenue for the nine months ended September 30, 2024, stood at $512.9 million, a 9.1% increase compared to the same period in the prior year. This growth was primarily driven by a 6.4% increase in total patient visits and a 2.6% improvement in net patient revenue per visit.
However, the company's financial performance has not been without its challenges. For the nine months ended September 30, 2024, ATI Physical Therapy reported a net loss of $48.9 million, compared to a net loss of $61.6 million in the same period of the prior year. This improvement was largely attributed to higher revenue and lower corporate costs, partially offset by a higher loss on the change in fair value of the company's second lien paid-in-kind (PIK) convertible notes.
In the most recent quarter, ATI reported revenue of $189,987,000, a 7.1% increase year-over-year, driven by higher patient visit volumes and favorable net patient revenue per visit. However, the company experienced a net loss of $33,814,000, primarily due to an $18.8 million loss on the change in fair value of the company's 2L Notes. Operating cash flow for the quarter was negative $3,547,000, while free cash flow stood at negative $7,168,000. Despite these challenges, adjusted EBITDA increased to $12.1 million, or 6.4% of revenue, from $9.4 million in the prior year period.
Liquidity
As of September 30, 2024, ATI Physical Therapy had a total debt of $550.3 million, consisting of $441.5 million in long-term debt, net and $108.8 million in 2L Notes due to related parties. With equity of $161.1 million, the company's Debt/Equity ratio stood at -4.66. The company's liquidity position included $23.5 million in cash and cash equivalents. ATI has a $50 million revolving credit facility, of which $44.3 million was outstanding as of September 30, 2024, leaving no available capacity under the revolver.
The company's current ratio and quick ratio both stood at 1.12, indicating a relatively tight liquidity position.
Strategic Initiatives
People Strategies and Culture Refresh
One of the key drivers of ATI Physical Therapy's performance has been its focus on people strategies and culture refresh. The company's Chief People Officer, Eimile Tansey, has led initiatives to attract and retain skilled providers, enabling the company to expand access to high-quality care. Despite the ongoing labor market challenges, the company's clinician headcount grew by 3% year-over-year in the third quarter of 2024, and its annualized clinician attrition held steady at 21%, which the company believes is in line with the industry.
Operational Efficiency
In addition to its people strategies, ATI Physical Therapy has also been proactive in optimizing its operational efficiency. During the nine months ended September 30, 2024, the company closed eight clinics and divested one as part of its strategic real estate plan to refine its geographic footprint and align with patient population needs. These efforts, combined with improvements in clinician productivity, have allowed the company to better match demand with supply and leverage its clinical real estate and fixed costs.
Business Overview and Product Segments
ATI Physical Therapy operates primarily in the United States and offers a variety of physical therapy services including treatment for spine, shoulder, knee and neck injuries or pain, work injury rehabilitation, hand therapy, and other specialized services. The company's main product segments include:
1. Outpatient Rehabilitation Services: This is ATI's core business, providing outpatient physical therapy services under the ATI Physical Therapy brand. In the third quarter of 2024, net patient revenue for this segment was $174.73 million, up 7.7% compared to the same period in 2023. This increase was primarily driven by higher patient visit volumes, which rose 7.8% year-over-year, as well as one additional business day in the current quarter. Net patient revenue per visit remained relatively flat at $109.83.
2. ATI Worksite Solutions: This program provides on-site healthcare professionals at employer worksites. For the nine months ended September 30, 2024, revenue from this segment was $27.64 million, relatively flat compared to the same period in 2023.
3. Management Service Agreements: Under these arrangements, ATI provides management and physical therapy-related services to physician-owned physical therapy clinics. Revenue from this segment was $11.23 million for the first nine months of 2024, also relatively flat year-over-year.
4. Sports Medicine: This division provides certified healthcare professionals to various schools, universities and other institutions. Sports Medicine revenue was $7.80 million for the nine months ended September 30, 2024, up slightly from $7.74 million in the prior year period.
Industry Trends
The outpatient physical therapy market continues to grow, driven by an aging population and a focus on conservative, evidence-based care for musculoskeletal conditions. However, the physical therapy industry faces challenges with labor shortages and wage inflation for physical therapists and other clinical staff. ATI's ability to manage these industry-wide challenges while maintaining growth will be crucial to its future success.
Future Outlook
Looking ahead, ATI Physical Therapy has provided guidance for the fourth quarter of 2024, expecting revenue to be in the range of $182 million to $192 million and adjusted EBITDA to be in the range of $9 million to $14 million. This guidance reflects the dynamic market conditions and the strategies the company is employing to navigate and grow its clinical workforce, which in turn drives revenue and advances the overall clinic operations.
In the third quarter of 2024, ATI reported several key operational metrics that demonstrate the company's progress: - Visits per day per clinic increased to 28.3, up from 25.9 in Q3 2023 - Clinician productivity improved by more than 0.1 compared to Q3 2023 - Revenue of $190 million, up 7.1% year-over-year - Adjusted EBITDA of $12 million, representing a 6.4% margin, up from $9 million (5.3% margin) in Q3 2023
These metrics, along with the company's guidance, suggest that ATI is making progress in its strategic initiatives and operational efficiency efforts.
Conclusion
Despite the challenges faced by the industry, ATI Physical Therapy has demonstrated its ability to adapt and evolve. The company's commitment to providing high-quality, evidence-based care, coupled with its focus on people strategies and operational optimization, positions it as a resilient leader in the outpatient physical therapy space. As the company continues to navigate the ever-changing landscape, investors will be closely watching its ability to capitalize on the growing demand for musculoskeletal care services while maintaining its financial discipline. The company's performance in the coming quarters will be crucial in determining its long-term success and ability to overcome the current financial challenges.