U S Physical Therapy Inc /Nv Q4 FY2020 Earnings Call

Thank you for joining us. Welcome to the U.S. Physical Therapy Q4 2020 Year-End Earnings Conference Call. This call is being recorded. I will now turn it over to Mr. Chris Reading. Please proceed.

Thank you. Good morning and welcome, everyone, to U.S. Physical Therapy's fourth quarter and year-end 2020 earnings call. With me on the line today include Carey Hendrickson, our Chief Financial Officer; Graham Reeve and Glenn McDowell, our COOs; Jon Bates, our Vice President and Controller; and Rick Binstein, our General Counsel. Before we begin our discussion this morning, we need to cover a brief disclosure statement. Jon, if you would, please?

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. And these forward-looking statements are based on the company's current views and assumptions and the company's actual results can vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information.

Thanks, Jon. Okay. I'm going to start this morning with some prepared comments and some color around select aspects of our year and our final quarter before turning it over to Carey to review the financials in a little bit more detail. First, let's talk about our finish to this crazy 2020 year. I am very proud of our team for the way that they led through this whole year. As we all know, we needed to make a lot of adjustments in the business early on. Those adjustments impacted people, and those were hard decisions as a result. Our goal always is to help, and we felt the best way to do that was to ensure that the company could get through this pandemic in one piece and in good shape, if that was possible. Our decisions were made. We gradually worked our way through the year, steadily picking up volume and maintaining very tight controls on the cost side of the business. As we entered the final quarter of this year, we continued to see a nice progression in volume recapture. October's visits per clinic per day increased to 27.7%. That further progressed in November at 28.2%, which was essentially the point at which we were back to pre-COVID levels. In early November, our country experienced a strong resurgence of the COVID-19 virus. As a result, created largely out of work exposures, we ended up with over 300 people in quarantine just for the month of November, more in that month than in the cumulative prior 6.5 months leading up to that. Those high quarantine numbers continued into December, which was in part why costs increased slightly for the quarter. In spite of this impact, we had a strong operating finish to the year. Visits finished in December within 0.25 of a visit per clinic in spite of the bump in virus numbers and quarantines. All in, our gross profit for the fourth quarter, excluding closure costs, was $29.1 million, an increase of more than $2 million compared to the 2019 fourth quarter. Gross profit percentage for Physical Therapy, excluding closures, was 24.9%, a 230 basis point improvement over the prior year. Our management contracts business, which included a recent acquisition completed in the third quarter, also improved significantly to 22.2%, up 780 basis points compared to Q4 2019. And finally, our injury prevention business, which performed really nicely all year, finished the quarter at 24.6%, an improvement of 660 basis points over our year-end 2019 finish. Operating income for the quarter of 2020 also improved by $2.9 million or 19.1%, and our operating income as a percent of net revenue increased by 300 basis points from 12.5% in 2019 to 15.5% in 2020 despite the challenges brought by COVID. Other highlights to this year's finish was the completion of our second acquisition. As you know, we put deals on hold at the beginning of the pandemic and then started back up in the third quarter. This is a partnership with a great guy and a great team, and they have navigated this pandemic very, very well. That deal, which we previously announced, produced approximately 54,000 patient visits, and they have a great plan for future growth and expansion. As a result of all the great work and sacrifice across the entirety of the company, we finished the year with approximately $11 million of net debt as well as a revised, updated, and extended credit agreement with Bank of America with very favorable terms. We are pleased to announce the reinstatement of our quarterly dividend of $0.35 per share, which is an increase of 9.4% from the previous dividend paid back in April of 2020. Dates surrounding the net dividend payment are included in our press release. In closing, and I don't always do this, but I'm going to do it today. I know that with respect to our guidance, there's a little disappointment out there. And I want to address a couple of things. Number one, and I can't state this enough, the team that we have here, starting with our partners, their staff, our executive leadership team, operations team, and all our support teams, they're literally the finest people I've ever worked with. They've made a lot of sacrifices to get us through this year, a very uncertain year, a year where we demonstrated a lot of grit, a lot of resolve, tenacity to work through the environment, which we had never been through before. I think we did that not perfectly by any stretch, but we made really good progress, and I think we laid down a great year, in my view at least. This coming year, we're not done with the pandemic, although I think we can see the light at the end of the tunnel. We have the Medicare cut to deal with, less than what was potentially earlier prescribed, but still a meaningful cut. Our goal as a management team is to always be transparent with our shareholders. I feel personally that with this team, while we have a bit of a hill to climb this year and we always have our challenges, we have the group in place that is ready to deal with what comes. We've had some extraordinary weather this first quarter. We had last week, including at home, no power, no water for a week. We had the entire State of Texas and a lot of the State of Tennessee shut down for a whole week. And so we have some challenges we're going to have to overcome this year. But there isn't a group of people that I would rather go to battle with than the team that we have right now. And we're going to do everything in our power to put down another good year. And so we're working hard to do that. I hope you can hang in there with us. And so that concludes my prepared and my off-the-cuff comments. With that, I'd like to turn it over to Carey to cover the financials in a little bit more detail. Carey?

Great. Thank you, Chris, and good morning, everyone. Today, we reported full year 2020 operating results of $38.4 million or $2.99 per share as compared to $36 million or $2.82 per share for the full year of 2019. Our 2020 operating results included $13.5 million of relief funds related to the CARES Act, which contributed $7.8 million to our operating results on a net basis or $0.60 per share. If you exclude those relief funds, our operating results per share for 2020 was $2.39. As Chris noted, our operations finished the year strong. For the fourth quarter of 2020, our operating results were $13.9 million or $1.08 per share, which did include $5.2 million of relief funds that we received in the fourth quarter. The fourth quarter relief funds contributed about $3 million or $0.23 per share to our operating results. If you exclude those relief funds, our fourth quarter 2020 operating results were $10.9 million or $0.85 per share, which is $0.21 per share greater than the $0.64 that we reported in the fourth quarter of 2019. Our adjusted EBITDA, including relief funds, was $23.5 million for the fourth quarter of 2020 and $70 million for the full year 2020. Excluding relief funds in the fourth quarter, our adjusted EBITDA was $18.3 million, which is up $3 million or 19.4% from the adjusted EBITDA of $15.3 million that we reported in the fourth quarter of 2019. Our full year 2020 revenues were $423 million compared to $482 million for the full year of 2019, which was a decrease of 12.2%. Our revenues in the fourth quarter of 2020 were $117.5 million, a decrease of 3.8% from $122.1 million in the fourth quarter of 2019. Our Physical Therapy patient volumes per day per clinic dropped at the onset of COVID-19, but then they continually improved from May through December. Our patient volumes per day per clinic were 26.2 in the first quarter of 2020. They decreased to 18.9 in the second quarter. That was the trough. And then they increased to 25.8% in the third quarter and 27.7 in the fourth quarter of 2020. That fourth quarter 2020 volume of 27.7 was really back to pre-COVID levels, only slightly less than the volume per day per clinic of 28.0 in the fourth quarter of 2019. Our net rate for our Physical Therapy operations was $105.60 for the full year, which is down slightly from $105.90 for the full year 2019. Our net rate in the fourth quarter was $107.05, which compares to $105.90 in the fourth quarter of 2019. The fourth quarter of 2020 included a slight adjustment to net rate for earlier 2020 periods. Physical Therapy revenues were $373.3 million for the full year of 2020, which was a decrease of 13.8% from the full year 2019. Our Physical Therapy revenues in the fourth quarter of 2020 were $104.5 million, which was down 4% from $108 million in the fourth quarter of 2019. The fourth quarter decrease in our Physical Therapy revenue was primarily related to having 28 less clinics on average in the fourth quarter of '20 than we had in the fourth quarter of 2019 due to the sales and closures that we made earlier in the year at the onset of the pandemic. Our industrial injury prevention business was less affected by the pandemic in 2020, with full year 2020 revenues higher than 2019 by $1.7 million or 4.6%, including an acquisition we made in April of 2019. While our Physical Therapy volumes declined about 55% in April, our industrial injury prevention business declined only about 20% to 25% initially before returning to levels slightly less than normal pretty quickly as some of our largest clients, most notably Costco, increased their business with us during the pandemic, which helped to partially offset declines that we had from other clients that pulled back due to their challenges related to COVID. Revenues from the industrial injury prevention business were $9.7 million in the fourth quarter of 2020 as compared to $10.3 million in the fourth quarter of 2019. We took significant measures to reduce our costs in 2020 to mitigate the impact of lower volumes in the revenues due to COVID, including furloughs, a reduction in force, and tight expense management across virtually all of our cost categories. As a result, our operating costs, excluding closure costs, declined to $324.6 million in 2020, a decrease of 12.2% from 2019, and our costs remained at 76.7% of net revenues in both years. For the fourth quarter of 2020, our operating costs, excluding closure costs, were $88.3 million, down 7.2% from $95.1 million in the fourth quarter of 2019. Our costs as a percentage of net revenues were lower in the fourth quarter of 2020 than in the fourth quarter of 2019. They were 75.2% in the fourth quarter of 2020 and down from 77.9% in the fourth quarter of '19. So, while our revenues were $4.6 million lower in the fourth quarter of 2020 than the fourth quarter of 2019, our operating costs were $6.8 million lower. So, our gross profit increased $2.2 million in the fourth quarter of 2020 when compared to the fourth quarter of the previous year. Our gross profit margin was 24.8% in the fourth quarter of 2020, which is up 270 basis points from our gross profit margin of 22.1% in the fourth quarter of 2019. For the full year of 2020, our gross profit, excluding closure costs, was $98.4 million compared to $112.5 million in 2019, with a gross profit margin of 23.3% in 2020, which is the same as it was in 2019. Our corporate costs were $42 million in 2020, which is down $3 million from $45 million in 2019, with the same cost reduction and measures in place at our corporate office as we had at our operations. In the fourth quarter of 2020, our corporate costs were $800,000 lower than the fourth quarter of 2019, even with $1.1 million in CFO transition costs related to the accelerated vesting of stock for our former CFO. Excluding those CFO transition costs, our fourth quarter 2020 corporate costs were down $1.9 million or 16.2% from the fourth quarter of 2019. Other income net of other expenses was $13.1 million for the full year of 2020, which does include that $13.5 million in relief funds. It also is net of $1.6 million in interest expense, which is down from $2.1 million in 2019 due to the reduced borrowings we had under our credit line in 2020 and then also a lower weighted average interest rate due to the decrease in LIBOR that happened in 2020. Our weighted average interest rate in 2020 was 2.6%, down 130 basis points from the 2019 rate of 3.9%. Our noncontrolling interests were 16% of our gross profit, including CARES funds, for the full year of 2020, and 16.3% for the fourth quarter of 2020. If you exclude CARES funds, which had a higher profit percentage related to the noncontrolling interest, the percentage of gross profit attributable to noncontrolling interest was 15.3% for both the full year of 2020 and the fourth quarter of 2020. Our balance sheet is in a strong position as we begin 2021. At December 31, 2020, we had only $16 million drawn on our $125 million revolving credit facility, and we had almost $33 million in cash. Our cash includes $14 million in Medicare advance payments that we intend to pay back in 2021. We also deferred in total in 2020 about $8.3 million in payroll taxes under the CARES Act. We'll repay half of that balance by the end of 2021 and then the other half is due by the end of 2022. Speaking of our revolving credit facility, we're pleased to have amended and extended our facility for an additional four years through November 30, 2025. We were able to maintain our favorable rate structure with just a slight increase in the undrawn fee at the lowest debt coverage level, despite the fact that the base of our agreement, LIBOR, as I mentioned, has decreased significantly from the time of the previous extension. We were also able to expand the accordion feature of the facility so that we now have access to $150 million under the line if we need it. We also raised the limit on dividends among a few other favorable modifications. In our release this morning, Chris alluded to the range that we provided of $2.40 to $2.50 for operating earnings per share for 2021. There are several things that impacted our thinking on that range. First, the Medicare rate reduction of 3.5% that went into effect on January one of this year, which we estimate will reduce our 2021 revenue by about $4.5 million. On a net basis, that equates to about $0.21 per share. Also, the 2% sequestration relief on all Medicare payments we've had since May one, 2020, that will end on March 31st this year. And we estimate that will reduce our revenue beginning in the second quarter by about $2 million, which is about $0.10 per share on a net basis. And while we always have some weather-related impacts in the first quarter of each year, the weather-related events we had in our two largest states, Texas and Tennessee, over the last couple of weeks were unusually significant. We estimate that we lost about $2.8 million of revenue from those events, which equates to $0.13 per share. And then as Chris noted, there's still uncertainty related to COVID and its potential impacts on our operations in 2021, particularly in this first part of the year. While we're confident in our ability to respond to whatever may come our way, we continue to have a high number of employees out due to quarantine, and we don't know what impact, if any, that the new more contagious variants of COVID might have on our business. As usual, that range does not include any potential acquisitions that we might make in 2021. One of the things that's been strongly confirmed through the pandemic is the strength and resiliency of our employees and our operations. Our team has managed well through the pandemic, and we've successfully managed through rate changes in the past, and we expect to do so this time as well. All things considered, we're pleased with our results in 2020 and with our strong finish to the year, and we look forward to a successful 2021. Now, Chris, I'll turn the call back to you.

Okay. Thanks, Carey. Good job. Operator, let's go ahead and open the line for questions or comments.

The first question will come from the line of Brian Tanquilut with Jefferies.

Hey. Good morning, guys.

Hey, Brian.

Thanks for addressing the guidance right off the bat. As we think about what goes into that, I mean, we get the fact that you're facing Medicare headwinds and obviously, the weather has been tough in Texas and here in Tennessee as well. But how should we be thinking about cost offsets and the underlying organic growth assumption that you're expecting, obviously COVID in the background maybe drives some conservatism there? Just some thoughts on how we should be thinking about the moving parts.

Yes. So, as we dissect it, and Brian, I appreciate the question. When we look at our budget for 2021, we get back to actually a little bit ahead for the full year on a visits per clinic per day basis, ahead of where we were in '19. And we have a few less clinics, obviously. We expect to have a good clinic opening year in terms of de novos. We also expect to have a good development year, frankly. We have a number of things that we're working on that we expect to get done. When we look at the underlying fundamentals of visits per clinic per day, we expect to be back and a little bit ahead of where we were pre-pandemic. I can tell you, we started the year, January, a little slow, but January picked up sequentially. And while it wasn't fully back to pre-pandemic levels, it was low single digits within on a visit per clinic per day basis. And so the challenge for us is we took out so much cost in 2020, and not all of that was sustainable. Some of that we've had to bring back. Quite honestly, we have people running on less than fumes. And so we'll see I expect that we'll see some of that margin pickup as we go forward into this year. We know that 2021, it sounds like a little thing, has one less business day. So, that's $0.06 or $0.07 of volume we expect to get back. And that is even considering the slow start that we've had in January; January and February we're going to have to crawl out of that hole. But the Medicare impact is real. And we're going to do our best to work our way through it and to come up with some offsets. But this is our best guess right now on a look-forward basis.

And Chris, I know you've mentioned before that with the Medicare rate cuts, you were considering increasing M&A this year as a way to counteract those effects. Where do you currently stand on that, especially now that the Medicare cuts have been reduced somewhat? Also, while I understand you prefer not to discuss pipelines, how are the discussions progressing with potential targets?

It's good. I'm pleased that we are always seeking out the best people. We have made deals with exceptional individuals, and the upcoming deals also involve great people. The discussions we are having present really good opportunities. I expect this to be a busy year. We continuously have projects in development; sometimes they don't work out, but most of the time they do. I believe this year will be particularly active for us, and you'll see us making progress soon.

Okay. And then Chris, last question for me. I know you kind of slowed down the de novo strategy a few years back, but you just mentioned de novos again. So, how should we be thinking about your commitment to de novos and the pace of development on that front?

Yes. We've always been committed to de novos. Most of the de novos that we open are within our top-20 or top-30 partnerships, and we'll get back to kind of what our average pace has been more recently, excluding the 2020 year where we just pressed pause on just about everything. The de novo opportunity, though, I guess I'm a little different than some of the other companies out there. When we got here 18 years ago, we were throwing open de novos, picking a target city and just blitzing that city with openings. And quite honestly, it didn't work, and it's hard to work. And so we're selective with what we'll open, but I expect somewhere in the mid-20s this year in terms of de novo openings, which kind of gets us back to where we were before. Maybe we'll be a little better than that, maybe a little lighter, but that's what I expect at this point.

Awesome sounds good, thanks for that. And congrats, thanks.

Thanks, Brian.

The next question will come from the line of Larry Solow with CGS Securities.

Carey, welcome to U.S. Physical's first public call. I understand that you don’t provide guidance on quarterly seats, and given the current weather conditions and the increase in COVID cases, I anticipate we will begin with lower volumes. I'm trying to better understand the expected volumes. You mentioned the aim to recover pre-pandemic levels by the end of the year, but I sense there may be a decline in the first half. Could you clarify if you expect volumes to exceed pre-pandemic levels in the latter half of the year? Additionally, looking ahead over the next few years, how do you see the high unemployment rates impacting your same-store sales, which have performed well over the past five years? Do you think this will pose a challenge in a post-COVID landscape?

Yes. So, good questions. Appreciate that. So, I personally expect us to be back or a little ahead of pre-COVID levels sometime in Q2. We're not that far off. Had the last week's apocalypse not happened here in Texas and a few other places, sub-0 temperatures with literally everything shut down, we would have had a decent February, but knowing where we are right now, first quarter is certainly going to be light. I think second quarter and usually beginning in March, we begin to pick up steam. I expect that to happen this year. The team's very, very focused. We've got to know we have some ground to make up for the weather and for the rate, and they're working very hard. So, we'll be a little bit back-end loaded. I won't say that we'll be fully back-end loaded. I think Q2 and forward should, while we'll still have the pandemic, I think things should be steadier. In terms of the workforce, look, we have put up really good same-store numbers the last few years. I expect to get back to same-store positive once we get on the other side of this pandemic. I think we can move market share. This period of time we've been through has been hard on everybody, and we've come through it really in good shape. So, again, I think it's about moving market share. Certainly, a full workforce and a robust economy helps everybody. But we've been through recession periods before, and we've been able to grow. And I don't expect us to be in a recession. I expect us to be able to move market share and grow same-store like we have been, to be honest.

How are costs looking? I know you've reintroduced some of your costs but not all of them. It seems like you're feeling some pressure and may need to increase staffing. I anticipate we'll see a rise in costs at least in the first half of the year. Additionally, how does this relate to your current workforce, which you mentioned is around 300 employees? It seems there might be some inefficiencies causing you to hire more temporary staff, which could be contributing to higher costs.

Yes, we are seeing some early signs of improvement. As the year goes on, we anticipate that those in quarantine will decrease, particularly as we continue to get our employees vaccinated. We have coverage in 39 states, which results in varying levels of vaccination efficiency across different areas. However, the early outcomes look promising, and vaccination rates are increasing. With more individuals vaccinated, we expect our quarantine numbers to drop. From a corporate perspective, our team is now in place to effectively operate the business. As we grow and enter into new partnerships, there may be slight adjustments to our staffing. Currently, our field team is adequately staffed, aside from some redundancy issues caused by employees in quarantine. Once that situation improves, we believe operations will stabilize and our overall condition will improve.

And then just lastly, the industrial injury prevention business held up relatively well in 2020, I think it was actually flat or peaked out a small even revenue gain. What's your outlook as we head to '21 for that business?

Yes, I believe we have a positive outlook. We expect a good year ahead. Our rate of change may slow a bit this year, and we will need to rebuild our opportunities pipeline, which the team has been addressing. Many potential clients were on pause throughout much of 2020. Our sales cycle for the industrial injury prevention business can be quite lengthy, lasting up to a year in discussions with certain companies. However, we are seeing a rebound and have made significant progress recently. I have strong confidence in that team. They started the year off well for us in 2021 and are currently our largest single partnership in terms of total contribution. I anticipate they will deliver a solid performance this year. Although we may be a bit more cautious than in the past due to COVID, I am confident they will ramp up effectively.

Got it, okay, great. I appreciate that. Thanks, guys.

Thanks, Larry.

The next question will come from the line of Matt Larew with William Blair.

This is Dan Lawler on for Matt Larew this morning. But just wanted to ask with the PT cut reduced to around 3.5% for '21, are you seeing anything that maybe has the remainder of the cuts come back in '22? And then quickly on the 15% cuts for PTAs and OTAs in '22, what levers are you guys pulling in your staffing model? And how should we be thinking about maybe the net impact to rate in '22?

Yes. So, the first part of your question is, do we see the remaining part of that cut coming in '21? I'm not sure. I'd be giving a total wild guess at this point, which I'm not inclined to do. So, I hope not. I think they've gotten their pound of flesh. But we're going to be working hard within our APTQI alliance, as we did throughout the entirety of last year, to keep that at bay. On the 15% PTA reduction, we made a number of changes in staffing. It's been a couple of years ago, pre-COVID, where we actually shed in a lot of our facilities some of our PTAS. I don't want that to sound bad. Those are good folks. But we rebalanced our staffing somewhat. And I think the key for us is just going to be scheduling and making sure that our PTAs are connecting with other non-federal patients. And I think we're at a level where we can do that pretty effectively. We may have pockets where we have to be a little bit more creative, and we'll certainly work on that as the year progresses. But I think right now, we should be, generally speaking, okay, with respect to federal patients.

Great. Thanks a lot.

The next question will come from the line of Mitra Ramgopal with Sidoti.

First, Chris, you talked about being able to grow market share organically. And I was just curious if you could give us some color in terms of, as a result of the pandemic, what you saw this past year in terms of a lot of maybe your mom-and-pop competitors?

It's a good question, Mitra, and it's great to hear from you. The situation is mixed. On the small business side, we have some strong competitors. I believe the PPP funds helped many of them who applied successfully, acting as a bridge through the challenges. However, we’ve also noticed a significant rise in small practices that may struggle to survive or need a change, as they didn't cope well and want to avoid repeating the difficulties of 2020. The larger companies, however, have better resources to capture market share compared to the smallest players. That doesn't mean there aren't capable small groups; many of them are potential partners we connect with about future deals. Additionally, I think the pandemic affected hospitals, which are also our competitors. Physical therapy has likely been a low priority for hospitals over the past year. As a result, we've been able to gain some business from hospitals, and we plan to maintain that momentum. We're actively seeking creative opportunities to collaborate with hospitals. It's still early, but I expect this strategy to develop positively throughout the year as we explore more innovative ways to work with them, given that physical therapy isn’t a primary focus for them at this time.

And kind of a related question, I guess, as it relates to de novos. Do you think the pandemic has maybe accelerated or changed the mindset of some of the potential partners who are now more interested in joining with you maybe pre-pandemic?

Well, I'm not exactly sure if I'm hearing your question right. But I think when you look at the partners that we've acquired, the partners we're talking to about creating a partnership together, they're very bullish on the future and they're very bullish on growth, and they're very bullish on development. That's organic development as well as tuck-in opportunities and full-on further acquisitions within their partner groups. And so we have a lot of people working on those things locally along with our development team. But yes, our strong partners are not afraid and they see a lot of opportunity out there and so do we. So, we just need to make it happen.

That's very good. I was just also curious if, say, you're seeing in terms of your de novos pipeline, more interested parties as a result of realizing how difficult it is to deal with the environment solo as opposed to partnering with you?

Yes. I got you. So, our de novos are solely and exclusively satellites now of existing partnerships. We're not doing and haven't, for many, many years any one-off, stand-alone, single site partnerships. And so when we have somebody that comes to us like that and is interested, most typically they're being referred into or tucked into an existing partnership somewhere. We're not doing any sole single site one-off partnerships from the ground up. All the things that we're doing, de novos, are all satellites at this point.

That's great. And then I know in terms of the Medicare reduction, I was just curious in terms of, if you might have the peer mix handy, Carey, as it relates to maybe what percentage of the business is Medicare exiting 2020?

Sure, you bet, yes. So, in 2020, our Medicare was 27.2%. There are some contracts that are also kind of tied to that Medicare rate. So, we estimate about 31% of our business is tied to the Medicare rate in some way. Overall, there wasn't a whole lot of change in 2019 to 2020 in the payer mix. Commercial insurance was 47.6% in 2020. Medicare, like I said, was 27.2%. Medicaid was 4.4%. Our workers' comp was 13%, and then our personal injury and self-pay combined was 7.8%.

Okay. That's great. Thanks again for taking the questions.

Thanks, Mitra.

The next question will come from the line of Mark Juvenile with Copeland.

I guess my question is around the dividend. Great to see it reinstated, and I noted at a higher level than you had before, even though earnings, the payout ratio looks significantly higher than you probably had, given the earnings at a lower level than would have been expected last time you had the div. I'm curious if that says anything about the recommitment or long-term commitment to dividend growth? What the flexibility you've got in your credit agreement means that maybe you wouldn't have to cut outside of maybe a pandemic coming again, right? Can you speak to a little bit to the payout ratio or goals for dividend growth?

Carey, you want to take a run at that first?

Sure, we have a solid balance sheet, and we feel confident as we head into 2021. We're optimistic about the business's health and our direction. We will address challenges like the Medicare reduction and work to lessen their impact. We are firmly committed to the dividend and aimed to increase it in the usual manner. The previous payout was $0.32, and we typically raise it by 9% to 10% annually, which is reflected in the increase to $0.35 this time. Since initiating the dividend in 2011, we have raised it each year, except for a suspension in the first quarter of 2020, from which we have since resumed at a higher rate.

You did mention a number of headwinds to cash flow in 2021 as well as the earnings. What type of cash flow kind of call was that do you see based on your projections? What percentage of free cash?

Yes. I don't want to elaborate too much on the cash due to uncertainty. We have a range of $240 million to $252 million. It is a higher percentage than it was in 2020 or 2019, but we feel very comfortable with it.

Okay. Thank you.

The next question will come from the line of Mike Petusky with Barrington Research.

Hi, Mike.

I wanted to ask about salaries and similar expenses. In the fourth quarter, they made up 55.9% of overall revenues. Given the quarantine and the impact on employees, have you evaluated what that percentage would have looked like in a non-COVID environment? I know that at times, you've needed two therapists to care for one patient due to the quarantine measures.

Right. I haven't, Mike, and we probably need to, and we can probably offline pull that together. I don't know that I have that at my fingertips at this point. I'm not sure Carey does either. Most of those 300, they weren't all clinical folks, but a high percentage were. And you're right, there's a redundancy that gets created there with having replacement staff in a lot of cases. But it's going to be an estimate if we do it because I don't have the ability on a pieces parts basis to tell exactly who we brought in and replaced or whether somebody just worked more or what the iteration was in each and every example of that, but we can probably do a back of the envelope estimate offline.

Okay. So, you said that there were 300 people, employees, quarantined in November and then I think you characterized as that issue continued into December. Do you have any sense like currently or in January, what the upper end of quarantined employees was?

Yes. It's less than it was. It's going down. I wouldn't characterize it as low yet, but it's better. It's certainly better than November. December was better than November by a margin. Decent margin in January and forward have gradually gotten better, but it's still a high number right now. I don't remember. I just don't have it with me, and we're coming off of a few days with the Board meetings and budget and a lot of numbers. I just don't remember what that number is. But I can get to it. So, if you want to check afterwards, I know where it is, I just don't have it at the tip of my tongue.

And Mike, I have the quarantine numbers in front of me for January. And Chris noted they were highest in November. They came down in December, and they're at a pretty similar level in January, slightly higher in January than they were in December.

Can you give us a number?

Yes, it's in the mid-200s.

Okay, that's still pretty high.

It's still pretty high. Yes, no doubt, it's definitely high.

And I'm assuming the majority of those folks are clinical?

Yes. I don't think we have a breakout exactly by position, but I think the majority of those folks are clinical, yes.

We show no further audio questions at this time.

Listen, thank you, everyone. I appreciate your time and attention. We appreciate your questions and your interest. Carey and I are available after the call if you have further follow-up. And again, thank you. Stay safe and stay well. Take care. Bye now.

This concludes today's conference call. We thank you for your participation. And I ask that you please disconnect your lines.