Jul 26, 2021
Operator
Good morning. My name is Rene, and I will be your conference operator today.
At this time, I'd like to welcome everyone to ATI Physical Therapy's Second Quarter 2021 Earnings Conference Call and Webcast. [Operator Instructions]
Operator
On the call today is Labeed Diab, Chief Executive Officer; Joseph Jordan, Chief Financial Officer; Ray Wahl, Chief Operating Officer; and Joanne Fong; Senior Vice President, Treasurer and Head of Investor Relations.
Operator
I would like now to turn the call over to Ms. Fong to read the forward-looking safe harbor statement.
Joanne Fong
Thank you, Rene, and good morning, everyone. We appreciate you joining us for today's call.
Joanne Fong
Before we begin, we'd like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us.
Although we believe these expectations are reasonable, we undertake no obligation to update them, other than as required by law. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements can be found in the Risk Factors section of the company's resale registration statement on Form S-1 filed on July 9, 2021, and any amendments thereto and other subsequent filings that are or will be filed with the Securities and Exchange Commission.
Joanne Fong
Additional information will also be set forth from ATI Physical Therapy's quarterly report on Form 10-Q for the period ended June 30, 2021, which is expected to be filed in early August.
Joanne Fong
In addition, please note that we will be discussing certain non-GAAP financial measures that the company believes are important in evaluating performance. Details on relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that was posted on ATI's website and filed with the SEC.
Joanne Fong
And with that, I'd like to turn the call over to Labeed.
Labeed Diab
Thank you, Joanne, and good morning, everyone. I'd like to welcome and thank you all for joining us on today's earnings call.
We have a lot to cover, so I'd like to get right into the key points that you'll hear from us today.
Labeed Diab
First, we are a leader in the large and growing physical therapy space, and we are positioned to benefit from long-term tailwinds, such as the aging population and shift to outpatient care.
Labeed Diab
Second, we are seeing growing demand for ATI's services, and that demand is getting stronger as the country emerges from the pandemic.
Labeed Diab
Third, in the second quarter, we experienced unexpectedly high levels of attrition among our therapists, which has continued into the third quarter. We'll unpack the drivers of this attrition, which we believe are, at least in part, rooted in the decisions that we made during the course of the pandemic.
We have identified the steps we need to take to address this attrition and will detail aggressive actions we have underway to restore our staffing levels.
Labeed Diab
Fourth, the labor supply and demand imbalance that emerged in the second quarter has impeded our ability to meet the demand that we have while increasing our expectations for labor costs. As a result, we are updating our forecast for the balance of the year.
Labeed Diab
Finally, we remain confident in the underlying fundamentals driving our business, the teams that we have in place and our ability to leverage our strong position in the market to drive growth and value over time. The headwinds that we will detail today do not change the strength of our brand, the drivers of our growth or strategy that we have in place to capitalize on the significant market opportunity ahead.
Labeed Diab
With that overview, let's get into the details of the quarter. Our results in the second quarter reflect the continued strong fundamentals supporting increased support demand for our services.
Our visit volumes were 85% of pre-COVID levels across our entire portfolio of clinics, and visits per day were up 10.5% compared to the first quarter of 2021 and more than 70% compared to the year ago period. Similar to the first quarter of 2021, volumes were in excess of 100% of pre-COVID levels in certain geographies in the South and followed by the Northeast, while the West and the Midwest continued to show steady improvement.
Labeed Diab
While the demand trends remain strong overall, unfavorable payor mix shift driven by the faster rebound and lower reimbursing versus higher reimbursement payor classes such as workers' compensation and auto personal injury resulted in a lower reimbursement rate for the quarter.
Labeed Diab
In addition, the acceleration of attrition in the second quarter has impeded our ability to meet that demand. To understand the drivers of this attrition, it's important to provide some broader context.
Labeed Diab
Throughout our history, we have been focused on being the employer of choice for physical therapy clinicians, and we are proud of the infrastructure we built to attract, develop and retain leaders in physical therapy. Historically, our fantastic culture, extensive support structure and strong development programs has resulted in very high retention with industry-leading low turnover.
Labeed Diab
During the height of the COVID-19 pandemic, in response to the unprecedented decline in visits and revenue, we made a number of difficult decisions to align our business with the demand. This included staffing and compensation adjustments as well as reduced benefits and support for our clinicians.
Labeed Diab
As we have already detailed today, demand for our services has steadily increased throughout '21 as the country has emerged from the pandemic. We saw pockets of attrition in certain markets and took steps to address the causes of that attrition.
At the same time, the broader labor market dynamic intensified the battle of talent. Ultimately, the complement of these events resulted in the accelerated attrition that we experienced in the second quarter.
Labeed Diab
The good news is that we have already taken actions and well underway in addressing the root of the issue. We made several changes to our clinic operations to provide even more support for our therapists in the field to maximize time available to treat patients.
And we are taking additional steps to retain our talented staff across our platform, including adjustments to compensation and benefits in several other actions. We also launched several new hiring campaigns in select markets and will continue to be aggressive in accelerating hiring to meet demand.
In fact, we have been successfully hiring at or near all-time hire rates throughout the year, including in the second quarter.
Labeed Diab
In addition, we have had a leadership change in our human capital organization, and I will oversee the function directly while we conduct a comprehensive search for a new leader.
Labeed Diab
We remain laser focused on hiring the right talent for our clinics and being the clear employer of choice for the physical therapy profession in terms of career development opportunity, culture and working environment, and competitive compensation.
Labeed Diab
To win talent in the current labor market, we anticipate some wage inflation in the second half of 2021 and in 2022, combined with an incremental increase in labor costs from the additional support staff that will put pressure on our profit margins until we can scale once again and fully leverage our corporate platform.
Labeed Diab
Despite our success in hiring, the higher-than-expected attrition will take time to overcome as we work to restore headcount to plan levels in line with the increased demand. As a result, we have lowered our 2021 revenue and adjusted EBITDA forecast for the year.
Labeed Diab
While we are moving aggressively to address this challenge, we remain confident in the underlying fundamentals driving our business and our ability to drive growth and value over time. As a leading provider of outpatient physical therapy with nearly 900 locations across 24 states, we are well positioned to capitalize on the positive trends driving growth in the PT industry, including the aging population in the U.S.
and an increasing shift away from inpatient rehab hospitals to the lower-cost outpatient setting.
Labeed Diab
Physical therapy is an efficient treatment modality for many musculoskeletal issues that can reduce cost and improve outcomes. With our commitment to collecting and utilizing outcomes data in the treatment of patients across all our clinics and then sharing this data with payors to demonstrate therapeutic effectiveness and cost efficiency, we believe we are uniquely positioned to continue to expand our platform, drive growth and deliver value for our patients and our shareholders.
Labeed Diab
On June 16, 2021, we took another important step in executing our strategy by completing our merger with Fortress Value Acquisition Corp. II and began trading on the New York Stock Exchange under the stock ticker symbol ATIP.
Following the business combination, we have a strong balance sheet and liquidity position as we continue to invest in our business.
Labeed Diab
In the second quarter of 2021, we continued to execute on our growth plans in opening new clinics. Specifically, ATI opened 10 new clinics during the second quarter and increased our local density in several existing markets, including in Georgia, Massachusetts and Texas.
We remain committed to executing on our 3-pronged growth strategy to optimize same-clinic growth, invest in de novo clinics and expand through accretive M&A within our highly fragmented industry.
Labeed Diab
I am proud of the caliber of our team and the great platform that we've built. I'm excited about where we're going together and confident that the plans that we have in place today will put ATI in the best position to reach our full potential.
Labeed Diab
With that, I'd like to turn the call over to Joe to review our second quarter 2021 financial results and provide more detail regarding our revised forecast for 2021.
Joseph Jordan
Thank you, Labeed, and thanks, everyone, for joining the call today. As Labeed said, I will review our second quarter financial performance and then provide details regarding our revised 2021 forecast.
Joseph Jordan
For Q2 of 2021, net patient revenue was $146.7 million compared to $95 million in the second quarter of the prior year or an increase of 54.4%. The second quarter of 2020 was the lowest point during the pandemic, and social activity has steadily improved and COVID-19 restrictions have eased, albeit with local variations in the pace of recovery.
Joseph Jordan
Breaking down our revenue change further, PT visits per day increased 70.6% with Q2 2021 visit volume ranging between approximately 75% and 105% of pre-COVID levels across our 5 geographies.
Joseph Jordan
PT rates decreased 9.5% in Q2 2021 as compared to Q2 2020. As Labeed referenced, this is primarily due to unfavorable payor mix shift driven by a faster rebound in lower reimbursing versus higher reimbursing payor classes such as workers' compensation and auto and personal injury.
We believe the lower volumes from high reimbursing workers' comp and auto and personal injury treatments are partially driven by the fact that many regions of the country, including those where we have many locations, continue to emerge from the pandemic, and residents are slowly returning to the routine.
Joseph Jordan
Our PT rate was further impacted by a mix shift out of higher reimbursing states. As always, we are closely monitoring pockets of increased competition, particularly in higher reimbursing states and taking action to ensure that we continue to maintain and grow our share in those markets by floating staff amongst clinics and extending hours while ensuring that our staff has the proper support as we work to deliver on the ATI brand and meet customers where and when they choose.
Joseph Jordan
Other revenue was $17.4 million compared to $12.8 million in the second quarter of 2020, a 36.1% increase. Clinic operating costs were $128.6 million in the second quarter of 2021 as compared to $96.6 million in the second quarter of the prior year or an increase of 33.1%, primarily due to the growth in clinic personnel to serve the strong demand for physical therapy at ATI as we navigate the return in visits since the low point during the pandemic.
Joseph Jordan
Salaries and related costs as a percent of revenue decreased 75 basis points to 49.3% from 50.1% due to higher labor productivity.
Joseph Jordan
Rent and other costs as a percentage of revenue decreased 905 basis points to 26.9% from 35.9%, primarily due to the fixed nature of rent and the higher leverage achieved from higher revenue.
Joseph Jordan
Provision for doubtful accounts as a percent of revenue decreased 147 basis points to 2.2% from 3.7% as a result of favorable cash collections during the second quarter.
Joseph Jordan
Clinic operating income was $35.5 million in the second quarter of 2021 compared to $11.1 million in the second quarter of 2020 with clinic operating margin increasing to 21.6% in Q2 from 10.3% in Q2 of the prior year or 11.3 percentage points higher due to higher revenue, which resulted in higher leverage of fixed costs.
Joseph Jordan
Corporate SG&A was $26.4 million in the second quarter of 2021 compared to $24.8 million in Q2 of 2020 or an increase of 6.5%, primarily due to transaction costs and higher share-based compensation expense in 2021, resulting from the transaction.
Joseph Jordan
Operating income was $9.1 million in the second quarter of 2021 compared to a loss of $13.7 million in the prior year. Operating margin was 5.5% in Q2 of 2021 compared to a negative margin of 12.7% in Q2 of the prior year due to the aforementioned causes.
Joseph Jordan
Net loss before taxes was $5.5 million in the second quarter of 2021 compared to net income before taxes of $8.2 million in the second quarter of 2020. Net loss tax margin was 3.4% in Q2 of the current year compared to net income before taxes margin of 7.8% in Q2 of the prior year.
The decrease was primarily due to the CARES Act grant income of $44.3 million recognized in Q2 of the prior year.
Joseph Jordan
Additionally, there were several nonoperating items in Q2 2021 related to the business combination with Fortress that largely offset, which includes several mark-to-market liabilities that we will continue to see for the foreseeable future.
Joseph Jordan
Adjusted EBITDA was $24 million in the second quarter of 2021 compared to $45.5 million in the second quarter of 2020. Q2 of 2020, as noted, also includes CARES Act grant revenue of $44.3 million.
Adjustments to adjusted EBITDA were $1.2 million in the second quarter compared to $7.1 million in the second quarter of the prior year. Notably lower business optimization and reorganization expenses incurred were partially offset by higher transaction costs and share-based compensation expense in Q2 of 2021 when compared to Q2 of 2020.
And as mentioned, there were a few offsetting nonoperating items in Q2 of 2021 related to the business combination with Fortress. Correspondingly, adjusted EBITDA margin was 14.6% in the second quarter compared to 42.2% in Q2 of the prior year, which includes the CARES Act grant revenue.
Joseph Jordan
We ended the second quarter with cash on hand of $90.6 million and available undrawn revolver of $68.8 million, net of letters of credit, resulting in total liquidity of $159.4 million.
Joseph Jordan
As of June 30, gross debt was $559.1 million, while net debt was $468.6 million. With the latest 12 months adjusted EBITDA of $112.6 million, the gross and net debt leverage ratios were 5x and 4.2x, respectively.
Joseph Jordan
Days sales outstanding, or DSO, improved to just over 48 days from 53 at the end of 2020 as our revenue and related AR mix has shifted towards commercial and governmental payors.
Joseph Jordan
Now turning to our revised forecast for the year. Revenue is expected to be in the range of $640 million to $670 million and adjusted EBITDA to be in the range of $60 million to $70 million lowering from $731 million and $119 million, respectively.
Joseph Jordan
Let me provide a bit more color on the components of the revision at the adjusted EBITDA level. Roughly 2/3 of the change is driven by staffing dynamics that will be detailed earlier, including both lower-than-expected therapist headcount in the second quarter, which is expected to continue in the third quarter and elevated cost for therapists.
Joseph Jordan
We expect our hiring levels to continue at a high rate into the third quarter, while the actions we've taken and are taking to combat attrition are expected to yield tangible results. The net effect is that we are estimating that our therapist staffing levels at the end of 2021 will be roughly where we previously expected them to be during the third quarter of 2020.
This means that our ability to meet the ongoing demand for service will continue to grow in the third and fourth quarter as we exit the year.
Joseph Jordan
In addition to taking into account staffing levels at our existing locations, our 2021 forecast is impacted by the fact that we expect to reduce the number of new clinic openings from 90 to in between 55 and 65, largely driven by the tightness in the labor market.
Joseph Jordan
The remaining 1/3 of the downward revision in our forecast is a function of lower revenue rates tied to both payor and state mix shift. As the country continues to emerge from the pandemic, we expect the revenue rate will trend slightly higher from the first half of 2021 to reflect continued return of higher reimbursing sources.
However, we also anticipate that higher rates generated by an improvement in our payments will largely be offset by continued state mix challenges driven by outpaced growth in lower paying states and continued diversification of our national footprint in the second half of the year. As a result, we anticipate a flat aggregate rate per visit in the second half of 2021.
As we wrap up 2021, we will have more to say about our outlook for 2022.
Joseph Jordan
I'd now like to turn the call back over to Labeed for closing remarks.
Labeed Diab
Thanks, Joe. And before we open it up to Q&A, I'd like to thank our nationwide team for their hard work, dedication and sacrifices.
Our clinicians and corporate staff have worked tirelessly to navigate through the pandemic and withstand the company up as a publicly traded entity. I can assure you that the entire management team at ATI is laser-focused on retaining and supporting our teams in the field.
I'm extremely proud of how everyone has pulled together and continues to do so to deliver on the ATI brand and promise to provide exceptional patient-centered care and deliver industry-leading outcomes.
Labeed Diab
With that, let's open it up for Q&A.
Operator
[Operator Instructions] Your first question comes from Ralph Giacobbe from Citi.
Ralph Giacobbe
I was hoping you can give a little bit more detail on the magnitude of the attrition, what percentage of positions you need to refill or absolute numbers? And then is it just PTs or PTAs as well?
Labeed Diab
Ralph, it's Labeed. Thanks for the question.
So I just want to reiterate that our ability to hire is at an all-time high. So in Q2, and it's continuing into Q3, we are hiring physical therapists at an all-time high.
Labeed Diab
To answer your question on the attrition, it is predominantly focused on our physical therapist, and we saw that really come into fruition in Q2. As we discussed in our prepared remarks, I mean, there were lots of puts and takes, and attrition accelerated in the second quarter.
We had some defined pockets where there was dissatisfaction and attrition, and we took and have taken necessary steps to address it. We have hired nearly 300 clinicians in the first quarter and nearly 300 clinicians in the second quarter.
The increased demand route and the labor market dynamics combined to accelerate attrition beyond what we expected previously.
Ralph Giacobbe
Okay. And I guess I'm still trying to understand, do you think this is sort of industry issue?
Or do you think it's related to your model and some of the standardized clinical approach that you guys have talked about, maybe taking away from some of the autonomy of your PTs or anything along those lines that may be more specific to ATI than general industry?
Ralph Giacobbe
And then I guess the next question as well is you've taken the de novo guidance down from 90 to sort of 60 at the midpoint. But I guess, why continue to add in an environment of all these labor challenges as opposed to kind of addressing the core facilities and putting all your focus there?
Labeed Diab
So I'll start, and then Joe will chime in on the de novos. Look, I mean, I really don't like to get into anecdotal data and information about what's happening in the industry.
I really want to keep this focus on what we're seeing here. Anecdotally, are we hearing that it's impacting others?
Yes. What we're seeing here is that we're able to hire at record hires here over the last several months, Q2 and going into Q3.
Labeed Diab
The attrition that was created is partly due to decisions that we made during the pandemic that impacted compensation and benefits. We have identified those issues and have absolutely gone and made the necessary adjustments.
So we feel confident in what we're doing, and we feel good that we are reversing the trend to slow down the attrition. It's not the hiring and our ability to attract, it's slowing down the attrition to ensure that we have the number of heads that we need to continue to meet the demand that is growing for ATI services across the country.
Joseph Jordan
And then, Ralph, on part 2 on the de novos, we've opened 20 de novos to date through Q2. So if you're using the midpoint of the range, to your point, that's another 40 for the year.
It's a significant scale back from where we originally at, say, 90 new clinics. Some of those new clinics, where I'd say we've opened 23 of them were acqui novos, 17 were de novos.
Some are acqui novos where they are coming with staff. So staffing is not a problem.
And on the back half of the year, that will continue to be part of the mix. And the pullback on the remainder is a result of some of the staffing attrition that we've seen.
But we've been thoughtful on which de novos it makes sense to open as we've laid out the rest of the year. Not every geography is the same, and there are pockets where staffing attrition is less of a challenge for us.
Operator
Your next question comes from Steph Wissink from Jefferies.
Stephanie Schiller Wissink
We have 2 follow-up questions as well. Just wanted to break down the wage inflation a bit.
Joe, if you could help us think through clinic margins as we look into the back half and maybe into fiscal '22. I think you mentioned you expect some inflation to affect the business into '22 as well.
And then just on a point of clarification, you said second half rate per visit flat. Is that flat sequentially to the first half or flat year-over-year to last year?
Joseph Jordan
Maybe, Step, the second one is a quick answer, so I'll tackle that first and then go back to the first question. So from a rate perspective, flat sequentially to the first half of the year.
And then as it relates to labor, to your point, to win talent in the current labor market, we do anticipate wage inflation in the second half of 2021 and into 2022, combined with not just wage inflation, but incremental increase in labor costs from adding additional support staff into the clinic. Those factors have been taken into account as part of the adjusted EBITDA forecast for 2021 and will certainly put pressure on profit margins until we can scale once again and fully leverage our corporate support platform.
Joseph Jordan
At this time, the granularity that we've gone into is that the revenue range level and adjusted EBITDA level. Obviously, you have revenue rate because you asked the question on revenue rate as well.
So I think from there, while we haven't commented directly on wage inflation because it's a combination of labor cost rises and additional support staff, you could back into a number on that.
Stephanie Schiller Wissink
Okay. So we should use the 2/3 of the adjustment to EBITDA as largely being in the clinic wage, right?
Joseph Jordan
It's a rough guide, but it will get you in the ballpark.
Stephanie Schiller Wissink
Okay. And then just a final follow-up question is just related to your de novo versus acqui nova, just in response to Chris' earlier question, why not lean more heavily into acqui novo.
The balance sheet is there to support it. Is there any reason to think that a higher percentage of the 40 in the back half wouldn't be acqui nova or acquiring with labor already in place?
Labeed Diab
Stephanie, this is Labeed. So both de novos and acqui novos are part of our strategy.
And so we've closed, as we mentioned in our Q1 release on several acqui novos, and we continue to look at that as an important part of our growth strategy and our pipeline. But as Joe mentioned and I'll reiterate, de novos are critically important, very accretive, and we're being very methodical in terms of where the de novos that are being opened in terms of geography where we have lower attrition and have the ability to hire and bring people in.
Labeed Diab
Again, as a reminder, when we open de novos, we open them with team members that had experience within ATI and then the goal is to backfill those folks with external hires from the marketplace or new grads.
Operator
Your next question comes from Michael Petusky from Barrington Research.
Michael Petusky
I was wondering if you all could give a little more specifics around what you actually did in terms of comp and benefits that seems to have had a reaction among some of your PTs. Can you specify what actually was done there?
Labeed Diab
Yes. This is Labeed.
So the changes that we made during the COVID-19 pandemic related to compensation and benefits did have an impact on our team members. I want to be very clear that we have absolutely identified those comp and benefit-related issues and have reversed them.
Labeed Diab
Some of them were we had to reduce hours. We have to put people on furlough.
We took away benefits that we're realizing are very important to our people from our wearables program to our continuing education programs. Those things have all been identified and have been reversed, and that has been communicated into the field.
But the confluence of the events that resulted in the accelerated attrition from what we did, coupled with the increased demand for our services, the labor market dynamics that increased competition for the available physical therapy providers in the workplace created the headwinds that we're dealing with today. But also, I want to reiterate that we've identified those issues, have reversed them and feel confident that we are going to lower our attrition for the back half.
Michael Petusky
So yes, I absolutely hear that you guys have tried to act aggressively to reverse this. Can I ask though, how many physical therapists have actually left the company, say, in the first half of '21?
Labeed Diab
So we have not gone out with turnover numbers. And candidly, there's not -- there's hardly any industry benchmarks in terms of what turnover looks for.
We know what great looks like for us. And we know that in Q2, we have this unexpected attrition, and we know what we need to do to fix it and put those programs in place.
But just -- in all transparency, we have not gone out with any turnover numbers. And I want to reiterate, there are no industry benchmarks for us to compare ourselves to.
Michael Petusky
Okay. Can I ask one more question?
Labeed Diab
Sure.
Michael Petusky
On the visit volumes, it seems like you guys said roughly 85% of pre-COVID, some areas above 100, which -- 100% pre-COVID, which would indicate that maybe there are some areas that you may be sort of around 70% or thereabouts of pre-COVID visit volumes. Can you talk about what parts of the country if it's regional?
Or what's going on there? Because that really does seem to be -- if you really do have clinics that are 70% of volume that, that would seem to really be lagging the recovery.
Labeed Diab
Sure. So this is Labeed again.
As I mentioned in my remarks, we have parts of the country like the South, Southeast and the Northeast catching up pretty close that are at pre-COVID numbers and even higher. We still have geographies like the West, the Pacific Northwest and the Midwest that are recovering at steady rates but not quite up to pre-COVID numbers.
Labeed Diab
So we anticipate that visit volume will continually steadily increase throughout the remainder of 2021, although there continues to be local variation with the supply and demand of PT services at the local level.
Michael Petusky
Okay. So are you essentially saying that sort of attrition in some of these places is more responsible for the lower volumes?
Or is that not what you're saying?
Labeed Diab
I think there's 2 things. I think the country for us is recovering at different paces, as we've discussed in the past.
And then coupled with the attrition that we witnessed and saw in Q2, that is continuing into Q3, are driving that.
Labeed Diab
With that, I think it's important to understand that the demand is coming and referrals, even in those geographies, are outpacing our visits. So attrition definitely is a contributor.
But the good news is, as I've mentioned and I'll continue to mention, we're addressing the drivers of attrition. And the better news is that the referrals are there, and the business is there for us to be had.
Operator
Your next question comes from Larry Solow from CJS Securities.
Lawrence Solow
Great. Just maybe one sort of just a follow-up, sort of global question.
You mentioned, obviously, a significant speed bump here occurring in your projected growth. Just trying to figure out from a high level without getting into real timing, but you discussed potential impairment charge and whatnot.
And obviously, a bunch of these triggers seem to be temporary, but I'm just trying to figure out, as you look out long term, do you view these potential higher wages and whatnot and ability to maybe hire as many people as you'd like as something that could potentially slow the longer-term growth trajectory as we look out over the next, say, 3 to 5 years?
Joseph Jordan
Larry, it's Joe. I could start on that.
I'm sure Labeed will chime in here. But I mean maybe just starting out, we're confident in the underlying fundamentals driving the business and as Labeed talked, the referral growth is strong.
So that's solid.
Joseph Jordan
As it relates to the goodwill impairment charge itself, just maybe a little bit of background there. The goodwill that was established in our business is legacy goodwill was established back in 2016.
And from an accounting perspective, not to get into the weeds here, but ultimately, anytime there's a lowering of forecast, that typically constitutes a triggering event and requires us to test goodwill for impairment as well as our intangible trade names. So we're currently assessing whether there's an impairment that exists.
And if there is, it's a Q3 event when we finalize the forecast, and we will update the markets on that impairment charge, if there is one. Again, the analysis is still underway.
And as a reminder, that would be noncash accounting charge.
Labeed Diab
Larry, it's Labeed. Just to reiterate, we absolutely have confidence in our years out.
I want to read a few things.
Labeed Diab
Number one, the demand for ATI services is extremely strong and increasing. Number two is we've identified the steps that we need to take to address this attrition.
And it's important for me to continue to reiterate that because we have great plans in place, and we're seeing them take hold.
Labeed Diab
Number three is aggressive actions are all underway to support our people and restore the staffing levels from adjustments to compensation to the benefits, the additional support, the hiring campaigns that I alluded to.
Labeed Diab
Number four is we've been successfully hiring at an all-time high throughout the year. So I am confident in our ability to hire.
Labeed Diab
Number five is the attrition will take time to overcome, but we absolutely have the right plans in place.
Labeed Diab
And then lastly, as Joe mentioned, and I'll reiterate, we are extremely confident in the underlying fundamentals that are driving our business and our ability to deliver growth and value over time.
Joseph Jordan
And then, Larry, maybe one more thing, just to specifically address your question on margins and margins on me out year. I said this in the prepared remarks, but important to reiterate, as we wrap up 2021, which is our primary focus right now, we'll have more to say as it relates to 2022 and beyond.
Lawrence Solow
Okay. Fair enough.
Just a couple of follow-ups. On the attrition itself, it seems like it certainly caught you guys -- or the pace caught you guys and everybody else been surprised there.
Are these employees, it sounds like they're being poached from other physical therapists clinics and whatnot. Are these I assume higher wages or maybe sign-on bonuses and whatnot?
Are some of these things sort of even can you characterize as unsustainable irrational type things? Or is it something that can continue, if that question makes sense?
Labeed Diab
Yes, Larry, it's Labeed. So look, I really don't want kind of to talk about what the dynamics are for those that are offering jobs.
I really want to stay focused on what we're doing at ATI Physical Therapy. We have historically been known as the employer of choice.
Our people love working for ATI Physical Therapy. We've talked about our EMR that's been collecting data for years and years and years.
It keeps our clinicians out billing and compliance risk. We talked about our ability to attract and retain.
I've talked about being certified as a Great Place to Work. So I want to focus on the headwinds that created the attrition for our company and get those off the table because again, we have been and will continue to be the employer of choice, and this is a short-term speed bump that I'm confident that we're going to get through.
Lawrence Solow
Fair enough. How about just on the revenue, just a question on the revenue, the reduced revenue.
Obviously, it's -- a couple of drivers there. Would you rate the inability to meet the demand is the highest one?
Or is it more of that mix issue or perhaps a slower-than-expected recovery from COVID in some of these regions? I imagine it's a mix of all 3, but any way to sort of bucket those in order?
Joseph Jordan
Larry. Yes, I think as characterized in our prepared remarks, the largest factor certainly is the inability to meet demand, and that basically falls directly on revenue, and we talked about that being roughly 2/3 of our overall change in our adjusted EBITDA forecast with the revenue rate being the other approximately 1/3.
And again, that's driven by the slower return of the high reimbursement payor classes, which are typically workers' comp and auto personal injury for us versus the lower reimbursing payor classes, which is driving our overall blended rate down.
Lawrence Solow
Right. Just last, can you just remind us of any debt maturities or debt covenants because obviously, you're net debt is going to be -- it looks like you're about 6x lever based on the midpoint or a little bit above 6x based on the midpoint of this year's guidance.
Joseph Jordan
So our -- we have first lien debt that expires in or comes due in May of 2023. What was the second part of the question?
You were asking...
Lawrence Solow
Jus in terms of is there any covenants that we should be concerned with?
Joseph Jordan
Not that you should be concerned with. We have a leverage ratio covenant, but there's some add backs.
So it's not the typical adjusted EBITDA that you would see when you're just doing kind of a straight GAAP calculation. And we're not near those covenants or expect to be on those covenants.
Operator
[Operator Instructions] Your next question comes from Bill Sutherland from The Benchmark Company.
William Sutherland
Well, you covered most of it on the call. The thing I'm puzzling over still is the change in the rate picture, the mix, I mean, and whether that was -- was there an assumption made about the rate mix as volumes recovered?
Or has there been directionally at least, that's been an issue coming out of COVID?
Joseph Jordan
Bill, it's Joe. The expectation was that, that mix would shift and recover.
If you think about workers' comp and auto personal injury and the nature of those claims and the dynamics of COVID as vaccinations rolled out, and I'm kind of taking you back in time to when the original plan was still when 3+9 forecasts were built. As vaccinations rolled out, the expectation was people are on the road driving more, people are back at work, more injuries occur for both of those 2 payor classes and our mix would shift back.
Joseph Jordan
What we saw in the second quarter is that the mix stayed relatively consistent, slightly worse than the first quarter. Rates stayed pretty consistent overall.
And because of that continuation, we've updated our expectations now for the second half of the year to assume that, that mix improves only slightly, and there's an offset as we continue to diversify states from a state mix perspective, leading our rate overall, about flat on the year.
William Sutherland
So the states you're moving into are having a slight dampening effect, too.
Joseph Jordan
Yes. That's right, but the payor mix is the primary driver.
William Sutherland
It's interesting. It's kind of think of a theory for why it's not coming back with more activity.
Anyway, the other question I have for you guys is just -- maybe an update on the M&A pipeline.
Labeed Diab
Bill, it's Labeed. As we've chatted and we continue to talk about our strategy, it's 3-pronged.
I'll reiterate, it's focusing on our same-store clinic growth, our de novos/acqui novos and then the M&A. We continue to look at M&A, both at the small and then at the large.
The small, Joe talked about the acqui novos. We've closed several of those deals in Q1.
We have several in the pipeline that we'll be talking about and continue to see those as accretive. And then we're also continuing to have conversations with the middle-market PE-backed players.
Labeed Diab
I want to be very clear that we are extremely disciplined about the M&A that we will look at. It is not about just doing M&A now that we've delevered and have the ability to do so.
It is ensuring that it is M&A that is accretive and puts us in geographies where we want to be. There's good cultural fits.
There's good labor dynamics, and that would be accretive to ATI Physical Therapy.
Labeed Diab
So to answer your question, we continue to look. We continue to do our due diligence, but we're being very, very methodical and very disciplined about what we bring to the table.
Operator
There is no further question at this time. Mr.
Diab. I'll turn the call over back to you.
Labeed Diab
Great. Well, thank you, guys, for joining us this morning.
As I stated at the onset, we remain confident in the underlying fundamentals driving our business and the team that we have in place and our ability to leverage our strong position in the market to drive growth and value over time.
Labeed Diab
We are taking the necessary steps to address the headwinds that we face, and we are committed to continuing to execute our strategy to capitalize on the significant market opportunity ahead. Have a great day, and we'll talk to you soon.
Operator
This concludes today's conference call. You may now disconnect.