ATI Physical Therapy, Inc. (NYSE:ATIP) Q3 2022 Earnings Conference Call November 7, 2022 5:00 PM ET Company Participants Joanne Fong - Senior Vice President, Treasurer and Head of Investor Relations Sharon Vitti - Chief Executive Officer Eimile Tansey - Chief People Officer Ray Wahl - Chief Operating Officer Joseph Jordan - Chief Financial Officer Conference Call Participants Brian Tanquilit - Jefferies Jason Cassorla - Citi Operator Good afternoon, and welcome to ATI Physical Therapy’s Third Quarter 2022 E ...

Financial Data and Key Metrics Changes - Net operating revenue for Q2 2022 was $163.3 million, essentially flat compared to $164 million in Q2 2021 [21] - Net patient revenue increased by 1% year-over-year to $148.5 million, driven by higher volumes but partially offset by a lower rate per visit [21] - Adjusted EBITDA for the quarter was $5.4 million, a decrease from $24 million in the same quarter last year, reflecting the impact of a tight labor market and higher costs [27] Business Line Data and Key Metrics Changes - Visits per day per clinic increased to 24.2, up 1.3 visits from 22.9 in Q1 2022, driven by higher labor productivity [21][22] - The provider productivity metric rose to 9.1 visits per day per clinical FTE, an increase from 8.5 in Q1 2022 [10][17] - The annualized clinician turnover rate increased to 37% in Q2 2022, up from 28% in Q1 2022, indicating challenges in staff retention [18] Market Data and Key Metrics Changes - The company reported a 50% year-over-year growth in its Texas pilot program for workers' compensation and auto personal injury programs [14] - Referrals for ATI services are at approximately 90% to 96% of pre-COVID levels, indicating a recovery in demand [36] Company Strategy and Development Direction - The company is focused on three key areas: pipeline, provider productivity, and provider base, which are critical for near-term growth [9] - A comprehensive location review is underway to assess return on investment and inform future investment decisions [13][74] - The company plans to open approximately 35 new clinics in 2022, having already opened 22 year-to-date [31] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by a tight labor market, which has constrained the ability to meet patient volume projections [11][12] - The revised guidance for 2022 reflects anticipated impacts from the labor market, with revenue guidance adjusted to $635 million to $655 million [28][30] - Management remains optimistic about the company's future, emphasizing the importance of overcoming labor challenges to drive growth [15][78] Other Important Information - The company has made strides in launching technologies to improve treatment plans and clinical outcomes [8] - The company received an exceptional rating under the Merit-based Incentive Payment System for the third consecutive year [19] Q&A Session Summary Question: What is the source of the increase in referrals? - The majority of referrals are from traditional sources, with a mix of existing and new relationships, currently at about 90% to 96% of pre-COVID levels [36] Question: Is the goal to increase visits per day per clinic to the high 20s? - The focus is on adding clinicians to meet demand, which would help achieve higher visit rates [37][40] Question: What is the impact of contract labor on costs? - The reliance on contractors has increased costs per visit by approximately 15%, and contractor wages are about 60% higher than full-time PT salaries [45] Question: Are there any covenant issues with the revised guidance? - There are no covenant issues, and the company expects to maintain liquidity above the required levels [68] Question: What has been learned in the past 100 days? - The company has a strong culture and demand for services, with a focus on improving provider recruitment and retention strategies [76][82]

PART I - FINANCIAL INFORMATION - UNAUDITED [Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) The company reported a net loss of $135.7 million for Q2 2022 and $273.9 million for the six months ended June 30, 2022. The balance sheet reflects significant goodwill and intangible asset impairment, reducing total assets to $1.31 billion from $1.56 billion at year-end 2021. Cash flows from operations were negative $32.7 million for the first six months, while financing activities provided $81.4 million, primarily from a new debt and preferred stock issuance Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $79,680 | $48,616 | | Goodwill, net | $404,374 | $608,811 | | Total assets | $1,309,656 | $1,562,694 | | Long-term debt, net | $478,527 | $543,799 | | Total liabilities | $902,297 | $1,051,187 | | Total stockholders' equity | $267,019 | $511,507 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net operating revenue | $163,293 | $164,033 | $317,115 | $313,095 | | Goodwill and intangible asset impairment | $127,820 | $453,331 | $283,561 | $453,331 | | Operating loss | $(139,852) | $(444,270) | $(315,930) | $(451,055) | | Net loss | $(135,723) | $(439,126) | $(273,946) | $(456,944) | | Diluted loss per share | $(0.69) | $(3.12) | $(1.39) | $(3.39) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(32,737) | $(27,109) | | Net cash used in investing activities | $(17,618) | $(18,943) | | Net cash provided by (used in) financing activities | $81,419 | $(5,507) | | Net increase (decrease) in cash | $31,064 | $(51,559) | [Note 1. Overview of the Company](index=14&type=section&id=Note%201.%20Overview%20of%20the%20Company) ATI Physical Therapy is a national outpatient rehabilitation provider with 926 owned clinics and 20 managed clinics in 25 states as of June 30, 2022. The company finalized a Business Combination with Fortress Value Acquisition Corp. II (FAII) on June 16, 2021, which was accounted for as a reverse recapitalization. The company continues to monitor the impact of COVID-19 and has utilized funds from the CARES Act, with a remaining liability for Medicare advance payments and deferred Social Security taxes - As of June 30, 2022, the company operated **926 owned clinics** and **20 managed clinics** across **25 states**, specializing in outpatient rehabilitation[34](index=34&type=chunk) - The Business Combination with FAII on June 16, 2021, was accounted for as a reverse recapitalization, with the historical operations of Wilco Holdco being deemed those of the company[35](index=35&type=chunk) - Under the CARES Act, the company received **$26.7 million** in Medicare Accelerated and Advance Payment Program (MAAPP) funds. As of June 30, 2022, **$1.6 million** of this remains as a liability[38](index=38&type=chunk) [Note 5. Goodwill, Trade Name and Other Intangible Assets](index=20&type=section&id=Note%205.%20Goodwill%2C%20Trade%20Name%20and%20Other%20Intangible%20Assets) The company recorded significant non-cash impairment charges against goodwill and its trade name intangible asset during the first half of 2022. Triggering events, including a decrease in share price and changes in discount rates, prompted interim impairment tests. In Q1 2022, impairments were $116.3 million for goodwill and $39.4 million for the trade name. In Q2 2022, further impairments of $87.9 million for goodwill and $40.0 million for the trade name were recognized. These write-downs have increased the risk of future impairments Goodwill and Trade Name Impairment Charges (in thousands) | Period | Goodwill Impairment | Trade Name Impairment | Total Impairment | | :--- | :--- | :--- | :--- | | Q1 2022 | $116,300 | $39,400 | $155,700 | | Q2 2022 | $87,900 | $40,000 | $127,900 | | **H1 2022 Total** | **$204,200** | **$79,400** | **$283,600** | - Goodwill balance decreased from **$608.8 million** at Dec 31, 2021, to **$404.4 million** at June 30, 2022, primarily due to impairment charges of **$204.2 million**[65](index=65&type=chunk) - The carrying amounts of goodwill and the trade name have been written down to fair value, making them more susceptible to future impairment risk from unfavorable changes in assumptions like discount rates, growth rates, and market multiples[77](index=77&type=chunk) [Note 8. Borrowings](index=25&type=section&id=Note%208.%20Borrowings) On February 24, 2022, the company completed a major debt refinancing, replacing its 2016 credit facilities. It entered into a new $550.0 million credit facility, comprising a $500.0 million Senior Secured Term Loan due 2028 and a $50.0 million Revolving Loan facility due 2027. The refinancing settled the previous $555.0 million term loan, resulting in a $2.8 million loss on debt extinguishment. The new term loan bears interest at SOFR + 7.25% with a 1.0% floor as of June 30, 2022. The agreement includes financial covenants, such as maintaining minimum liquidity of $30.0 million through Q1 2024 - On Feb 24, 2022, the company executed a debt refinancing, entering a new **$550.0 million** credit facility, which includes a **$500.0 million** Senior Secured Term Loan and a **$50.0 million** Revolving Loan[87](index=87&type=chunk) - The refinancing was used to repay the existing **$555.0 million** 2016 first lien term loan, resulting in a **$2.8 million** loss on debt extinguishment[86](index=86&type=chunk) - The new credit agreement contains financial covenants requiring the company to maintain **$30.0 million** of minimum liquidity through Q1 2024, after which a Secured Net Leverage Ratio covenant will apply[93](index=93&type=chunk) [Note 10. Mezzanine and Stockholders' Equity](index=28&type=section&id=Note%2010.%20Mezzanine%20and%20Stockholders%27%20Equity) In connection with its 2022 debt refinancing, the company issued 165,000 shares of Series A Senior Preferred Stock for gross proceeds of $165.0 million. These shares are classified as mezzanine equity because they are contingently redeemable. The preferred stock carries a 12.0% initial dividend rate, payable in-kind. The company also issued 11.5 million new warrants (2022 Warrants) classified as equity. As of June 30, 2022, the aggregate stated value of the preferred stock, including paid-in-kind dividends, was $172.0 million - Issued **165,000 shares** of Series A Senior Preferred Stock with an initial stated value of **$165.0 million**, classified as mezzanine equity[104](index=104&type=chunk) - The preferred stock has an initial dividend rate of **12.0%** per annum, payable in-kind. As of June 30, 2022, accumulated paid-in-kind dividends were **$7.0 million**, bringing the aggregate stated value to **$172.0 million**[107](index=107&type=chunk)[108](index=108&type=chunk)[110](index=110&type=chunk) - Concurrently issued **11.5 million** warrants (Series I and Series II) to purchase common stock, which are classified as equity instruments[117](index=117&type=chunk) [Note 17. Commitments and Contingencies](index=40&type=section&id=Note%2017.%20Commitments%20and%20Contingencies) The company is involved in several legal matters, including consolidated shareholder class action and derivative complaints alleging false and misleading statements related to its business combination and financial results. The company has filed motions to dismiss these complaints. Additionally, the company received a voluntary request for documents from the SEC regarding its July 2021 earnings forecast. A probable net settlement liability of $3.0 million was recorded for a billing dispute with a payor - The company is facing consolidated shareholder class action and derivative complaints related to disclosures made between February and October 2021. Motions to dismiss have been filed[169](index=169&type=chunk)[172](index=172&type=chunk) - In November 2021, the company received a voluntary request for documents from the SEC concerning its earnings forecast from July 2021. The company is cooperating with the request[173](index=173&type=chunk) - A charge of **$3.0 million** was recorded for a probable net settlement liability related to a billing dispute with a payor[165](index=165&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses key trends impacting performance, including a tight labor market for physical therapists, wage inflation, and reduced reimbursement rates from Medicare. Net patient revenue for Q2 2022 increased 1.2% YoY to $148.5 million, driven by higher visit volume but offset by a 2.5% decrease in revenue per visit. The company recorded significant goodwill impairment charges in H1 2022. Adjusted EBITDA was $5.4 million for Q2 2021, down from $24.0 million in Q2 2021. A major debt and equity financing in February 2022 provided liquidity, with the company holding $79.7 million in cash at quarter-end [Trends and Factors Affecting the Company's Future Performance](index=46&type=section&id=Trends%20and%20Factors%20Affecting%20the%20Company%27s%20Future%20Performance) The company's performance is influenced by several key trends. In Q2 2022, referral and patient visit volumes improved after a soft start to the year. However, the business faces significant headwinds from a tight labor market, leading to increased competition for therapists, higher attrition, and wage inflation. Additionally, rate per visit has decreased, primarily due to Medicare rate cuts effective January 1, 2022, and unfavorable payor mix shifts. These factors, particularly changes in discount rates and a lower share price, led to significant goodwill and intangible asset impairment charges in the first half of 2022 - Key business trends include improved referral and patient visit volumes in Q2 2022, a continued tight labor market causing wage inflation, and a decrease in rate per visit due to Medicare cuts and unfavorable payor mix[192](index=192&type=chunk)[193](index=193&type=chunk) - The company is focused on increasing clinical staffing levels and strengthening referral source relationships to drive visit volumes, but attrition remains above historical levels due to the tight labor market[199](index=199&type=chunk) - The company recorded non-cash impairment charges in H1 2022 totaling **$283.6 million** for goodwill and trade name assets, triggered by factors including changes in discount rates and a decrease in share price[194](index=194&type=chunk)[195](index=195&type=chunk) - Future reimbursement rates are at risk, with Medicare sequestration resuming in 2022 and a proposed **4.5%** reduction in the 2023 Medicare Physician Fee Schedule conversion factor[206](index=206&type=chunk) [Results of Operations](index=53&type=section&id=Results%20of%20Operations) For Q2 2022, net operating revenue was $163.3 million, a slight decrease of 0.5% YoY. Net patient revenue grew 1.2% to $148.5 million, as a 3.9% increase in patient visits was mostly offset by a 2.5% decline in revenue per visit. Salaries and related costs rose 10.7% due to wage inflation and higher staffing. A goodwill impairment of $127.8 million contributed to a net loss of $135.7 million, an improvement from a $439.1 million loss in Q2 2021 which included a larger impairment. For the six-month period, net operating revenue increased 1.3% to $317.1 million, with a net loss of $273.9 million Q2 2022 vs Q2 2021 Performance (in thousands) | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Operating Revenue | $163,293 | $164,033 | (0.5)% | | Net Patient Revenue | $148,506 | $146,679 | 1.2% | | Salaries and related costs | $89,606 | $80,917 | 10.7% | | Goodwill Impairment | $127,820 | $453,331 | (71.8)% | | Net Loss | $(135,723) | $(439,126) | 69.1% | - The **1.2%** increase in Q2 net patient revenue was driven by a **3.9%** rise in total patient visits, but partially offset by a **2.5%** decrease in net patient revenue per visit (from **$106.26** to **$103.57**) due to unfavorable payor mix and Medicare rate cuts[224](index=224&type=chunk)[225](index=225&type=chunk) H1 2022 vs H1 2021 Performance (in thousands) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Operating Revenue | $317,115 | $313,095 | 1.3% | | Net Patient Revenue | $287,431 | $278,950 | 3.0% | | Salaries and related costs | $177,021 | $161,571 | 9.6% | | Goodwill Impairment | $283,561 | $453,331 | (37.4)% | | Net Loss | $(273,946) | $(456,944) | 40.0% | [Non-GAAP Financial Measures](index=61&type=section&id=Non-GAAP%20Financial%20Measures) The company uses EBITDA and Adjusted EBITDA as key non-GAAP metrics to evaluate operating performance. Adjusted EBITDA for Q2 2022 was $5.4 million, a significant decrease from $24.0 million in Q2 2021. For the first six months of 2022, Adjusted EBITDA was $0.7 million, compared to $29.6 million in the prior year period. The adjustments to reconcile net loss to Adjusted EBITDA primarily include non-cash goodwill impairment charges, changes in fair value of liabilities, and costs related to legal matters, transactions, and debt extinguishment Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(135,723) | $(439,126) | $(273,946) | $(456,944) | | EBITDA | $(127,145) | $(425,528) | $(269,620) | $(424,156) | | Goodwill impairment charges | $127,820 | $453,331 | $283,561 | $453,331 | | Other adjustments | $4,761 | $(23,804) | $(7,200) | $(103,886) | | **Adjusted EBITDA** | **$5,436** | **$23,999** | **$741** | **$29,589** | - Adjusted EBITDA is calculated by adding back items such as income tax, interest, D&A, goodwill impairment, changes in fair value of liabilities, legal settlements, and transaction costs to net income[261](index=261&type=chunk) [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2022, the company had $79.7 million in cash and cash equivalents and $48.2 million available under its revolving credit facility. The company's liquidity was bolstered by a February 2022 debt and preferred stock financing which added approximately $77.3 million in cash. For the first six months of 2022, net cash used in operating activities was $32.7 million. Management believes existing cash, operating cash flow, and credit facility access will be sufficient to fund operations for at least the next 12 months - Cash and cash equivalents stood at **$79.7 million** as of June 30, 2022, up from **$48.6 million** at December 31, 2021[267](index=267&type=chunk) - In February 2022, the company completed a debt refinancing and preferred stock financing, adding approximately **$77.3 million** of cash to its balance sheet[286](index=286&type=chunk) - Net cash used in operating activities was **$32.7 million** for the six months ended June 30, 2022, an increase in cash used of **$5.6 million** from the prior year period, partly due to the application of MAAPP funds[288](index=288&type=chunk)[290](index=290&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=69&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate variability on its variable-rate debt. As of June 30, 2022, the debt is indexed to SOFR. The company uses an interest rate cap to hedge this exposure. A hypothetical 100 basis point increase in interest rates would increase annual cash interest expense by approximately $1.6 million, while a 100 basis point decrease would lower it by $1.4 million. The company has adopted hedge accounting expedients related to the transition from LIBOR to SOFR - The company is exposed to interest rate risk from its variable-rate debt indexed to SOFR[308](index=308&type=chunk) - A hypothetical **100 basis point** change in interest rates would impact annual cash interest expense by approximately **$1.4 million** to **$1.6 million**[308](index=308&type=chunk) - The company utilizes an interest rate cap derivative to hedge its exposure to variable-rate cash payments and has elected to apply hedge accounting expedients for the LIBOR-to-SOFR transition[308](index=308&type=chunk)[310](index=310&type=chunk) [Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) The company's management, including the Principal Executive Officer and Principal Financial Officer, concluded that as of June 30, 2022, disclosure controls and procedures were not effective. This conclusion is due to previously reported material weaknesses in internal control over financial reporting related to the income tax provision. The company is actively implementing a remediation plan, which includes hiring additional tax personnel and enhancing control design. Despite the material weaknesses, management asserts that the condensed consolidated financial statements are fairly presented in all material respects - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were not effective as of June 30, 2022[314](index=314&type=chunk) - The ineffectiveness is due to previously identified material weaknesses in internal control over financial reporting concerning the income tax provision[314](index=314&type=chunk)[316](index=316&type=chunk) - A remediation plan is in process, focusing on hiring tax personnel and improving control design and documentation for the income tax provision and valuation allowance assessment[316](index=316&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=73&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in legal proceedings and claims that arise in the ordinary course of business. For detailed information on these matters, the report refers to Note 17 of the condensed consolidated financial statements - The company is periodically involved in legal proceedings and claims. For specific details, refer to Note 17 - Commitments and Contingencies in the financial statements[321](index=321&type=chunk) [Risk Factors](index=73&type=section&id=Item%201A.%20Risk%20Factors) The company highlights several material risk factors. These include exposure to rising interest rates on its variable-rate debt, which could increase expenses. The restrictive covenants in its credit agreements and Series A Senior Preferred Stock could limit operational and financial decisions, with non-compliance potentially leading to debt acceleration. The ability to utilize significant net operating loss (NOL) carryforwards may be limited by future "ownership changes" under tax law. Lastly, there is currently no public market for its recently issued Series I and Series II Warrants, which could adversely affect their liquidity and price - The company's variable-rate debt under the 2022 Credit Agreement exposes it to rising interest rates, which could negatively affect cash flow and financial condition[322](index=322&type=chunk) - Restrictive covenants in debt agreements and the Series A Senior Preferred Stock impose significant operating and financial limitations, and failure to comply could result in default and acceleration of debt[324](index=324&type=chunk)[325](index=325&type=chunk) - The ability to use significant federal and state Net Operating Loss (NOL) carryforwards may be limited if the company experiences an "ownership change" as defined by the IRS[327](index=327&type=chunk)[328](index=328&type=chunk) - There is no current trading market for the Series I and Series II Warrants, and one may not develop, which would negatively impact their liquidity and price[329](index=329&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the second quarter of 2022, the company did not have any sales of unregistered equity securities. The company did, however, repurchase equity securities by withholding 6,607 shares of common stock at an average price of $1.79 per share to satisfy employee tax withholding obligations related to the vesting of restricted stock awards - There were no sales of unregistered equity securities during the quarter ended June 30, 2022[331](index=331&type=chunk) Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | June 1 - June 30, 2022 | 6,607 | $1.79 | | **Total** | **6,607** | **$1.79** | - The shares purchased were withheld to satisfy employee minimum tax withholding obligations upon the vesting of stock awards and were not part of a publicly announced repurchase program[333](index=333&type=chunk)[334](index=334&type=chunk)

ATI Physical Therapy, Inc. (NYSE:ATIP) Q1 2022 Earnings Conference Call May 9, 2022 5:00 PM ET Company Participants Joanne Fong - Senior Vice President, Treasurer & Head of Investor Relations Jack Larsen - Chairman Ray Wahl - Chief Operating Officer Joseph Jordan - Chief Financial Officer Sharon Vitti - Chief Executive Officer Conference Call Participants Chris Neamonitis - Jefferies Stefanos Crist - CJS Securities Pito Chickering - Deutsche Bank Mike Petusky – Barrington\ Operator Good afternoon and welcom ...

PART I [Business](index=7&type=section&id=Item%201.%20Business) ATI Physical Therapy is the largest single-branded independent outpatient physical therapy provider in the U.S., operating 910 clinics and navigating significant regulatory and operational challenges - As of December 31, 2021, ATI is the **largest single-branded independent outpatient physical therapy provider** in the U.S. by clinic count, with **910 owned clinics** and 20 managed clinics across 25 states[12](index=12&type=chunk) - The company's core services include outpatient physical therapy, ATI Worksite Solutions (AWS) for employers, Management Service Agreements (MSA) for physician-owned clinics, and Sports Medicine arrangements[13](index=13&type=chunk)[14](index=14&type=chunk) - ATI's strategy focuses on exceeding customer expectations, strengthening relationships with referral sources and payors, allocating capital for growth (de novo clinics and acquisitions), and integrating services earlier in the musculoskeletal (MSK) treatment process[15](index=15&type=chunk) - The company faces a highly fragmented and competitive market from national, regional, and local providers, as well as hospital systems, with key competitive factors including quality of care, cost, treatment outcomes, and brand awareness[34](index=34&type=chunk)[36](index=36&type=chunk) - The business is significantly impacted by federal and state regulations, including Medicare/Medicaid reimbursement rules, the Anti-Kickback Law, the Stark Law (physician self-referral), and HIPAA for patient data privacy[46](index=46&type=chunk)[50](index=50&type=chunk)[53](index=53&type=chunk)[58](index=58&type=chunk) - In 2021, the company experienced elevated levels of clinician attrition, which it has sought to address through initiatives related to compensation, staffing, and professional development[21](index=21&type=chunk)[39](index=39&type=chunk) [Risk Factors](index=18&type=section&id=Item%201A.%20Risk%20Factors) The company faces substantial risks from government payor dependence, clinician attrition, COVID-19 impacts, potential goodwill impairment, and extensive healthcare regulatory compliance - A significant portion of revenue comes from governmental payors; in 2021, approximately **23.7%** was from Medicare and Medicaid, exposing the company to risks from legislative and regulatory changes that could reduce reimbursement rates, such as Medicare Physician Fee Schedule (MPFS) adjustments[66](index=66&type=chunk) - The COVID-19 pandemic has materially impacted operations, causing unpredictable reductions in patient visits and economic uncertainty, with future impacts depending on evolving factors like new variants, vaccine effectiveness, and government mandates[80](index=80&type=chunk)[84](index=84&type=chunk)[87](index=87&type=chunk) - The company competes for physical therapists and experienced elevated attrition in 2021, which has increased labor costs and may continue to adversely affect business operations and the ability to open new clinics[99](index=99&type=chunk)[142](index=142&type=chunk) - The company recorded significant non-cash impairment charges for goodwill and other intangible assets in 2021 due to reductions in its forecast, with further impairments possible if business conditions deteriorate[162](index=162&type=chunk)[164](index=164&type=chunk)[166](index=166&type=chunk) - Material weaknesses in internal control over financial reporting related to income taxes were identified as of December 31, 2021, due to not maintaining a sufficient complement of tax personnel and ineffective controls over valuation allowances for deferred tax assets[167](index=167&type=chunk)[168](index=168&type=chunk) - As Advent International controls over **50%** of the voting power, ATI is a "controlled company" under NYSE rules, exempting it from certain corporate governance requirements, such as having a majority of independent directors on its board[185](index=185&type=chunk)[187](index=187&type=chunk) [Unresolved Staff Comments](index=43&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[190](index=190&type=chunk) [Properties](index=43&type=section&id=Item%202.%20Properties) ATI leases all its clinical locations and corporate headquarters, with clinics typically 1,000-5,000 square feet and executive offices occupying 135,000 square feet - All clinic properties are leased, with terms typically ranging from **7 to 10 years**[190](index=190&type=chunk) - The corporate headquarters are located in Bolingbrook, Illinois, under a lease expiring in December 2032, covering approximately **135,000 square feet**[190](index=190&type=chunk) [Legal Proceedings](index=43&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal proceedings arising in the ordinary course of business, with further details provided in Note 18 of the consolidated financial statements - The company may be involved in legal proceedings from time to time, with further details provided in Note 18 - Commitments and Contingencies[191](index=191&type=chunk) [Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[192](index=192&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=44&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's Class A common stock and Public Warrants are listed on the NYSE, with no cash dividends paid, and shares were withheld for employee tax obligations in Q4 2021 - The company's Class A common stock and Public Warrants trade on the New York Stock Exchange under the symbols "**ATIP**" and "**ATIP WS**"[194](index=194&type=chunk) - ATI has a policy of not paying cash dividends and intends to retain future earnings to finance business operations[195](index=195&type=chunk) Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 1 - October 31, 2021 | — | — | | November 1 - November 30, 2021 | 3,931 | $3.60 | | December 1 - December 31, 2021 | 25,860 | $3.14 | | **Total** | **29,791** | **$3.20** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) ATI's 2021 financial results were significantly impacted by clinician attrition, increased labor costs, and a **$962.3 million** goodwill impairment, leading to a substantial net loss and requiring debt refinancing Consolidated Results of Operations (2021 vs. 2020) | Metric ($ in thousands) | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net operating revenue | $627,871 | $592,253 | 6.0% | | Total cost of services | $533,797 | $488,846 | 9.2% | | Goodwill and intangible asset impairment charges | $962,303 | $0 | n/m | | Operating loss | ($980,038) | ($913) | n/m | | Net loss | ($782,028) | ($298) | n/m | - The company's 2021 performance was adversely affected by elevated clinician attrition, increased labor market competition and wage inflation, a less favorable payor mix, and lower than expected patient referral volumes[214](index=214&type=chunk)[215](index=215&type=chunk) - Due to revised forecasts, the company recorded non-cash impairment charges totaling **$962.3 million** in 2021, including **$726.8 million** for goodwill and **$234.3 million** for its trade name intangible asset[217](index=217&type=chunk)[218](index=218&type=chunk)[253](index=253&type=chunk) Key Business Metrics (2019-2021) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Number of clinics owned (end of period) | 910 | 875 | 872 | | Average visits per day | 20,608 | 18,274 | 25,152 | | Total patient visits (in millions) | 5.30 | 4.70 | 6.41 | | Net patient revenue per visit | $105.94 | $112.76 | $111.88 | | Same clinic revenue growth rate | 4.6% | (26.9)% | 2.8% | - In February 2022, the company refinanced its debt, entering a new credit agreement for a **$500.0 million** term loan and a **$50.0 million** revolving facility, concurrently issuing **$165.0 million** of Series A Senior Preferred Stock and warrants, adding approximately **$77.3 million** of cash to its balance sheet[275](index=275&type=chunk)[278](index=278&type=chunk)[279](index=279&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate variability on variable-rate debt, which is hedged using interest rate swaps, and the impact of the LIBOR transition is currently under evaluation - The company is exposed to interest rate variability on its debt, which is indexed to rates like LIBOR[323](index=323&type=chunk) - To mitigate this risk, the company uses interest rate swaps, with management believing this reduces the risk of interest rate variability to an immaterial amount[323](index=323&type=chunk) - The company is evaluating the effects of the reference rate reform (transition from LIBOR) on its financial reporting[324](index=324&type=chunk) [Financial Statements and Supplementary Data](index=71&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2021, 2020, and 2019, reflecting a significant net loss in 2021 driven by goodwill impairment and a decline in operating cash flow Consolidated Balance Sheet Data (as of Dec 31) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | | **Total Assets** | **$1,562,694** | **$2,610,372** | | Goodwill, net | $608,811 | $1,330,085 | | **Total Liabilities** | **$1,051,187** | **$1,709,255** | | Long-term debt, net | $543,799 | $991,418 | | **Total Stockholders' Equity** | **$511,507** | **$901,117** | Consolidated Statement of Operations Data (Year Ended Dec 31) | ($ in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net operating revenue | $627,871 | $592,253 | $785,458 | | Goodwill and intangible asset impairment charges | $962,303 | $0 | $0 | | **Net (loss) income** | **($782,028)** | **($298)** | **$9,749** | Consolidated Statement of Cash Flows Data (Year Ended Dec 31) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | | Net cash (used in) provided by operating activities | ($42,100) | $138,604 | | Net cash used in investing activities | ($39,889) | ($21,809) | | Net cash used in financing activities | ($11,523) | ($12,970) | | **Net (decrease) increase in cash** | **($93,512)** | **$103,825** | - The company is involved in shareholder class action lawsuits and a derivative complaint following its revised 2021 forecast, and also received a voluntary request for documents from the SEC related to the same matter[551](index=551&type=chunk)[555](index=555&type=chunk)[557](index=557&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=126&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) This item is not applicable to the company - Not applicable[579](index=579&type=chunk) [Controls and Procedures](index=126&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting related to the income tax provision - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[582](index=582&type=chunk) - Material weaknesses were identified in internal control over financial reporting related to the income tax provision, with root causes being an insufficient complement of experienced tax personnel and ineffective controls related to valuation allowances for deferred tax assets[588](index=588&type=chunk) - A remediation plan is being developed to hire additional tax personnel, refine the use of external advisors, and enhance the design of controls related to the income tax provision[589](index=589&type=chunk) [Other Information](index=128&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[592](index=592&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=129&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section details the company's board structure and corporate governance, noting ATI is a 'controlled company' due to Advent International's majority ownership, which exempts it from certain NYSE governance requirements - The company's board consists of **eight members** and is classified into three classes with staggered three-year terms[612](index=612&type=chunk)[613](index=613&type=chunk) - ATI is a "controlled company" under NYSE listing rules because Advent International beneficially owns a majority of the voting power, exempting the company from certain governance requirements, including the need for a majority of independent directors[618](index=618&type=chunk) - The Board has four standing committees: Audit, Compensation, Nominating and Corporate Governance, and Health Care Compliance[620](index=620&type=chunk) - The Audit Committee is composed entirely of independent directors, with Jamie Parisi serving as Chair and designated as an "audit committee financial expert"[622](index=622&type=chunk) [Executive Compensation](index=136&type=section&id=Item%2011.%20Executive%20Compensation) The executive compensation program emphasizes long-term equity incentives, with a discretionary **50% funding** for 2021 annual bonuses despite underperformance, and details employment agreements and severance benefits - The executive compensation program is heavily weighted towards equity awards to align NEO interests with long-term stockholder value[634](index=634&type=chunk) - Despite underperforming against the initial EBITDA target for the Annual Incentive Bonus (AIB) Plan, the Compensation Committee approved a discretionary **50% funding** for 2021 bonuses to recognize performance efforts and retain talent[649](index=649&type=chunk) 2021 Annual Incentive Bonus Payouts | Name | 2021 AIB Target Opportunity ($) | Discretionary 2021 Annual Bonus Earned ($) | | :--- | :--- | :--- | | Joseph Jordan | $337,500 | $168,750 | | Ray Wahl | $337,500 | $168,750 | | Diana Chafey | $269,325 | $134,663 | | Joseph Zavalishin | $269,325 | $134,663 | | Augustus Oakes | $162,500 | $81,250 | - In 2021, NEOs were granted long-term equity incentives consisting of a mix of Restricted Stock Units (RSUs) and stock options, both vesting over three years[651](index=651&type=chunk)[653](index=653&type=chunk) - Employment agreements for key executives provide for severance payments in the event of termination without cause or for good reason, with enhanced benefits if the termination occurs within 18 months following a change in control[682](index=682&type=chunk)[686](index=686&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=152&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section details beneficial ownership of common stock as of February 17, 2022, with Advent International holding **56.1%** and Fortress Acquisition Sponsor II LLC holding **9.0%** Beneficial Ownership of Common Stock (as of Feb 17, 2022) | Name of Beneficial Owner | Beneficial Ownership (%) | | :--- | :--- | | Advent International Corporation | **56.1%** | | Fortress Acquisition Sponsor II LLC | **9.0%** | | All Directors and Executive Officers as a group (14 persons) | **<1%** | [Certain Relationships and Related Transactions, and Director Independence](index=154&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) This section outlines related party transactions, including Founder Shares and Private Placement Warrants for Fortress, a PIPE investment, and contingent Earnout Shares for Advent-affiliated entities based on stock price targets - Fortress Acquisition Sponsor II LLC (Sponsor) purchased Founder Shares which converted into Common Stock subject to vesting based on stock price targets[716](index=716&type=chunk)[718](index=718&type=chunk) - The Sponsor purchased **5,933,333 Private Placement Warrants**, of which **2,966,667** were surrendered at the business combination closing[719](index=719&type=chunk) - As part of the PIPE Investment, the Sponsor purchased **7,500,000 shares** of Class A common stock for **$75 million**[722](index=722&type=chunk) - Entities affiliated with Advent have a contingent right to receive up to **15.0 million Earnout Shares** if the company's stock price achieves specified targets (**$12.00, $14.00, and $16.00**) within ten years of the business combination[724](index=724&type=chunk) [Principal Accountant Fees and Services](index=157&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) This section details fees paid to PricewaterhouseCoopers LLP (PwC) for 2021 and 2020, with all services pre-approved by the Audit Committee Accountant Fees (PwC) | Fee Type | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Audit Fees | $1,380,593 | $1,672,880 | | Audit Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $5,400 | $5,400 | | **Total Fees** | **$1,385,993** | **$1,678,280** | - The Audit Committee pre-approves all audit and permitted non-audit services provided by the independent registered public accounting firm[737](index=737&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=159&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists consolidated financial statements, schedules, and exhibits filed with the Form 10-K, including Schedule II - Valuation and Qualifying Accounts - This section contains an index of all financial statements, schedules, and exhibits filed with the Form 10-K[739](index=739&type=chunk) Schedule II - Valuation and Qualifying Accounts (2021) | ($ in thousands) | Beginning Balance | Additions | Deductions/Adjustments | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Allowance for doubtful accounts | $69,693 | $16,369 | ($32,529) | $53,533 | | Valuation allowance for deferred tax assets | $22,581 | $35,731 | $0 | $58,312 | [Form 10-K Summary](index=162&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has not provided a summary for this item - None[748](index=748&type=chunk)

ATI Physical Therapy, Inc. (NYSE:ATIP) Q4 2021 Earnings Conference Call February 25, 2022 8:00 AM ET Company Participants Joanne Fong - Senior Vice President, Treasurer & Head of Investor Relations Jack Larsen - Executive Chairman Ray Wahl - Chief Operating Officer Joseph Jordan - Chief Financial Officer Conference Call Participants Steph Wissink - Jefferies Jason Cassorla - Citi Larry Solow - CJS Securities Bill Sutherland - Benchmark Operator Good morning and welcome to ATI Physical Therapy Fourth Quarter ...

Financial Data and Key Metrics Changes - Net operating revenue in Q3 2021 was $159 million, a 7% increase year-over-year from $149 million in Q3 2020 [15] - Net patient revenue was $142 million, increasing 6.8% year-over-year, while other revenue was $17 million, increasing 8.2% year-over-year [15] - Operating loss in Q3 2021 was $509 million, decreasing year-over-year from income of $2 million in Q3 2020 [20] - Net loss in Q3 2021 was $326 million, decreasing year-over-year from net income of $1 million in Q3 2020 [21] - Adjusted EBITDA in Q3 2021 was $9 million, or a 5.4% margin, decreasing year-over-year from $17 million, or an 11.7% margin in Q3 2020 [21] Business Line Data and Key Metrics Changes - Visits per day per clinic for Q3 2021 was 23.1, a decrease from 24.3 in Q2 2021 [15] - Annualized clinician headcount turnover decreased from 50% in July to just over 30% in September [10] - Total clinical FTE increased by 91 from July to September [11] Market Data and Key Metrics Changes - Visit volume softened slightly in Q3 2021 to 26,674 visits per day, down from about 21,570 visits per day in Q2 2021 [12] - Some clinics in the South and Northeast are running close to or exceeding pre-COVID levels, while key states in the Midwest and Northwest are lagging [12][13] Company Strategy and Development Direction - The company is focused on driving visit volume to scale the business and leverage fixed costs [24] - Investments are being made in field-based sales representatives and digital marketing campaigns to increase referrals [13] - The company plans to open between 55 to 65 new clinics for the full year [23] Management's Comments on Operating Environment and Future Outlook - Management acknowledged that financial performance for 2021 did not meet expectations but believes they are laying the foundation for improvement [10] - The company is committed to transparency and has included supplemental tables summarizing key performance metrics in earnings releases [14] - Management expressed confidence in the recovery of visit volumes and referrals, despite some markets lagging behind [32][33] Other Important Information - The company recorded impairment charges of $300 million for goodwill and $201 million for trading, primarily due to revised forecasts [20] - Available liquidity at September 30 was $135 million, comprised of $66 million in cash equivalents and $69 million in available undrawn revolver capacity [22] Q&A Session Summary Question: Update on referral sources and their strength - Management indicated that while some markets are lagging, they are working to rebuild referral relationships and improve visit volumes [32][33] Question: Impact of labor constraints and COVID on Midwest markets - Management acknowledged challenges in the Midwest, attributing some issues to competitors and systemic factors rather than solely COVID [47][48] Question: Changes to compensation and benefits packages - Positive feedback has been received regarding changes to compensation and support structures, which have helped with retention and recruitment [40][42] Question: Guidance for Q4 and full year - The guidance reflects a cautious outlook due to softer visit volumes and the time required for investments in sales to pay off [77][78] Question: Urban vs. rural market performance - Management stated that market performance does not strictly follow urban-rural divides, with each market having unique challenges [60][62]