ATI Physical Therapy(ATIP) - 2021 Q4 - Annual Report

PART I Business 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] - 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][14] - 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] - 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][36] - 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][50][53][58] - 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][39] Risk Factors 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] - 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][84][87] - 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][142] - 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][164][166] - 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][168] - 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][187] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[190] Properties 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] - The corporate headquarters are located in Bolingbrook, Illinois, under a lease expiring in December 2032, covering approximately 135,000 square feet[190] Legal Proceedings 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] Mine Safety Disclosures This item is not applicable to the company - Not applicable[192] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - ATI has a policy of not paying cash dividends and intends to retain future earnings to finance business operations[195] 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 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][215] - 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][218][253] 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 $77.3 million of cash to its balance sheet[275][278][279] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate variability on variable-rate debt, which is hedged using interest rate swaps, and the impact of the LIBOR transition is currently under evaluation - The company is exposed to interest rate variability on its debt, which is indexed to rates like LIBOR[323] - To mitigate this risk, the company uses interest rate swaps, with management believing this reduces the risk of interest rate variability to an immaterial amount[323] - The company is evaluating the effects of the reference rate reform (transition from LIBOR) on its financial reporting[324] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021, 2020, and 2019, reflecting a significant net loss in 2021 driven by goodwill impairment and a decline in operating cash flow Consolidated Balance Sheet Data (as of Dec 31) | ($ 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][555][557] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[579] Controls and Procedures 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] - 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] - 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] Other Information The company reports no other information for this item - None[592] PART III Directors, Executive Officers and Corporate Governance 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][613] - 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] - The Board has four standing committees: Audit, Compensation, Nominating and Corporate Governance, and Health Care Compliance[620] - The Audit Committee is composed entirely of independent directors, with Jamie Parisi serving as Chair and designated as an "audit committee financial expert"[622] Executive Compensation 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] - 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] 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][653] - 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][686] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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 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][718] - The Sponsor purchased 5,933,333 Private Placement Warrants, of which 2,966,667 were surrendered at the business combination closing[719] - As part of the PIPE Investment, the Sponsor purchased 7,500,000 shares of Class A common stock for $75 million[722] - 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 $16.00) within ten years of the business combination[724] Principal Accountant Fees and Services This section details fees paid to PricewaterhouseCoopers LLP (PwC) for 2021 and 2020, with all services pre-approved by the Audit Committee Accountant Fees (PwC) | Fee Type | 2021 ($) | 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 | $1,678,280 | - The Audit Committee pre-approves all audit and permitted non-audit services provided by the independent registered public accounting firm[737] PART IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements, schedules, and exhibits filed with the Form 10-K, including Schedule II - Valuation and Qualifying Accounts - This section contains an index of all financial statements, schedules, and exhibits filed with the Form 10-K[739] Schedule II - Valuation and Qualifying Accounts (2021) | ($ 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 The company has not provided a summary for this item - None[748]