U.S. Physical Therapy, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. The company operates outpatient physical therapy clinics and industrial injury prevention services (IIP). At quarter-end it operated 656 clinics in 40 states and managed 43 third-party facilities.
Financial performance and liquidity
- Q2 revenue: $151.5 million, up 7.7% from $140.7 million. Net patient revenue was $129.3 million, up 9.4%; other revenue was $22.2 million.
- Q2 earnings: Gross profit was $32.2 million, up 4.5%, with gross margin of 21.3% versus 21.9%. Operating income was $20.1 million, essentially flat. Net income attributable to USPH shareholders was $10.9 million versus $11.2 million; diluted EPS was $0.64 versus $0.87.
- Six-month performance: Revenue was $300.0 million, up 10.1%; gross profit was $63.1 million, up 9.9%, with a 21.0% margin versus 21.1%. Operating income rose 5.5% to $37.1 million. Net income attributable to USPH shareholders fell to $18.3 million from $20.0 million; diluted EPS was $1.22 versus $1.55.
- Non-GAAP results: Adjusted EBITDA was $21.7 million for Q2 versus $21.3 million, and $40.1 million for the six months versus $38.8 million. Operating Results per share was $0.76 for Q2 versus $0.90, and $1.36 for the six months versus $1.54.
- Cash flow: Six-month operating cash flow was $38.8 million versus $27.5 million. Investing activities used $19.7 million; financing activities provided $110.0 million, principally reflecting the stock offering. Cash ended at $160.7 million, compared with $31.6 million at year-end 2022.
- Debt and liquidity: Total debt was $153.0 million principal ($151.0 million net of financing costs), including $146.3 million on the term loan; the revolving facility was undrawn, with $175.0 million available. The company reported covenant compliance and stated cash and credit availability were sufficient for operating working-capital needs through at least June 30, 2024. Operating lease liabilities totaled $110.2 million.
- Capital and distributions: In May, the company sold 1,916,667 shares at $90 per share, receiving net proceeds of approximately $163.7 million. It repaid $35.0 million of revolver borrowings; the remaining proceeds were expected to fund acquisitions. Dividends declared were $0.43 per share in Q2.
Material changes and management commentary
- Physical therapy operations drove revenue growth: Q2 patient visits rose 10.6% to 1.27 million, including 2.6% growth at mature clinics. Average visits per clinic per day increased to 30.4 from 29.5. The net rate per visit declined to $102.03 from $103.18, primarily due to Medicare reimbursement reductions.
- Q2 IIP revenue decreased slightly to $19.2 million from $19.4 million. Six-month IIP revenue was nearly unchanged at $38.6 million.
- Operating costs grew faster than Q2 revenue: $119.3 million, or 78.7% of revenue, versus $109.8 million, or 78.1%. Salaries, rent and other costs, and corporate expenses increased; management cited inflation, merit increases, additional staff supporting clinic growth, and higher bonus accruals.
- Interest expense increased to $2.6 million for Q2 and $5.2 million for the six months, mainly from higher effective rates and acquisition-related borrowing. The effective rate on credit facilities, net of the swap, was 6.0% in Q2 and 5.7% for the six months.
- The company acquired interests in two practices during the first half of 2023; a July 31 subsequent acquisition added a 70% interest in a five-clinic practice for $2.1 million. It continued to describe acquisitions and clinic development as growth priorities.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided. Management expects remaining offering proceeds to be used primarily for acquisitions and states liquidity is adequate for near-term working-capital requirements.
- Management cited a proposed 2024 Medicare Physician Fee Schedule reduction estimated to reduce applicable therapy reimbursement by approximately 3.5% versus 2023, unless modified. Medicare net rates were already affected by 2023 reductions and the end of sequestration relief.
- Other identified risks include therapist recruitment and retention, inflation and economic conditions, third-party reimbursement and regulatory changes, acquisition integration, IIP contract retention, cybersecurity, and potential legal or regulatory actions. The company reported ordinary-course litigation, audits and investigations but could not predict outcomes; it reported no material change to previously disclosed risk factors.
- Q2 included $0.7 million of income from a contingent earn-out fair-value change. The six-month period included $0.5 million of previously received Relief Funds after compliance requirements were met; management does not expect further Relief Funds. A contingent acquisition payment valued at $8.3 million had no maximum payout. Redeemable non-controlling interests were $165.5 million at quarter-end and are subject to contractual put/call arrangements.
- The company’s $150 million interest-rate swap had a $6.4 million fair value at June 30, 2023. It reduces exposure to rate changes on a substantial portion of variable-rate term debt, but does not eliminate interest-rate risk.
Important facts for investors to verify
- Whether patient-volume growth can offset lower reimbursement rates and rising labor and operating costs; monitor mature-clinic visits, net rate per visit, and margins.
- How the company deploys the offering proceeds, acquisition returns and integration, and the effect of acquisitions on share count and earnings.
- Interest-rate exposure, debt covenants, and future cash requirements, including lease liabilities and purchases of non-controlling interests.
- Potential cash and earnings effects from redeemable non-controlling interests, the uncapped contingent consideration, and other acquisition-related fair-value estimates.
- Final 2024 Medicare reimbursement rules and developments in any legal, regulatory, audit or government-review matters.