Derivative Instruments

12 Months Ended

Dec. 31, 2023

11. Derivative Instruments

The Company is exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.

Interest Rate Swap

In May 2022, the Company entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A. The swap has a $150 million notional value adjusted concurrently with scheduled principal payments made on the term loan. The swap has a maturity date of June 30, 2027. Beginning in July 2022, the Company receives a 1-month SOFR, and pays a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on the Company’s consolidated leverage ratio.

In connection with the swap, no cash was exchanged between the Company and the counterparty.

The Company designated its interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.

Savings from the interest rate swap arrangement totaled $3.3 million for the year ended December 31, 2023, and less than $0.1 million for the year ended December 31, 2022. These savings reduce the amount of interest expense, debt and other in the accompanying consolidated statements of income.

The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income are presented in the table below.

	For the Year Ended
	December 31, 2023			December 31, 2022
	(In thousands)
Net income	$	37,220		$	43,407
Other comprehensive (loss) gain
Unrealized (loss) gain on cash flow hedge		(1,642	)		5,378
Tax effect at statutory rate (federal and state)		420			(1,374	)
Comprehensive income	$	35,998		$	47,411
Comprehensive income attributable to non-controlling interest		(8,981	)		(11,249	)
Comprehensive income attributable to USPH shareholders		27,017			36,162

The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty, which is a Level 2 fair value measurement.

The carrying and fair value of the Company’s interest rate derivatives (included in other current assets and other assets) were as follows:

	As of the Year Ended
	December 31, 2023		December 31, 2022
	(In thousands)
Other current assets	$	2,663	$	2,858
Other assets	$	1,073	$	2,520
		3,736		5,378