U.S. Physical Therapy, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited. The company operates outpatient physical therapy clinics and an industrial injury prevention services (IIPS) business. At period-end it operated 608 clinics in 39 states and managed 33 facilities for third parties.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $140.7 million | $126.9 million | $272.4 million | $239.3 million |
| Gross profit | $30.8 million | $34.3 million | $57.4 million | $60.2 million |
| Operating income | $20.1 million | $22.2 million | $35.1 million | $37.3 million |
| Net income attributable to USPH shareholders | $11.2 million | $12.4 million | $20.0 million | $20.6 million |
| GAAP earnings per share | $0.87 | $0.82 | $1.55 | $1.03 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $27.5 million | $35.6 million |
- Q2 revenue rose 10.8%; six-month revenue rose 13.8%. Growth included acquisitions, particularly the November 2021 IIPS acquisition.
- Margins compressed: Q2 gross margin was 21.9% versus 27.0%, and operating margin was 14.3% versus 17.5%. For the first half, gross margin was 21.1% versus 25.2%, and operating margin was 12.9% versus 15.6%.
- Q2 USPH-attributable net income declined despite higher reported EPS. EPS includes the accounting effect of revaluations of redeemable non-controlling interests, which are charged or credited directly to retained earnings rather than net income. Management’s non-GAAP “Operating Results” were $11.7 million, or $0.90 per share, versus $12.4 million, or $0.96. For the first half, the measure was $20.0 million, or $1.54 per share, versus $20.6 million, or $1.60.
- Patient visits increased 5.7% in Q2 and 8.7% for the first half; average net patient revenue per visit declined to $103.18 from $104.46 in Q2 and to $103.09 from $104.58 for the first half. Mature-clinic Q2 visits slipped 0.2%, while mature-clinic first-half visits rose 3.0%.
- IIPS revenue grew 93.7% in Q2 and 92.1% for the first half. Excluding revenue from the acquired business, management reported growth of 25.5% and 24.0%, respectively. Management contract revenue fell 22.4% in Q2 and 17.9% for the first half, partly due to terminated contracts.
Cash, debt and liquidity
- Cash was $48.6 million at June 30, 2022, up from $28.6 million at year-end. First-half cash provided by operations was $27.5 million; investing used $23.5 million; financing provided $16.0 million. Cash increased by $20.0 million during the period.
- Debt totaled $155.7 million principal, or $153.7 million net of financing costs, including a $150 million term loan and $5.7 million of other debt. The revolving facility had no balance, with $175 million available. At year-end 2021, the revolving balance was $114 million.
- In June, the company refinanced under a new credit agreement maturing June 17, 2027, with a $175 million revolver and $150 million term facility. Borrowings bear variable SOFR-linked rates; the company reported a current all-in rate of 4.665% and compliance with covenants at quarter-end.
- A $150 million interest-rate swap became effective June 30, 2022. Beginning in July, it fixes the SOFR component at 2.815% through June 2027; the credit margin remains applicable. The swap had a fair-value liability of about $0.5 million at quarter-end.
- Operating lease liabilities totaled $109.9 million. Management said cash and available credit should cover working-capital needs through at least June 30, 2023.
Changes, outlook and risks
- Operating costs grew faster than revenue, with salaries and related costs, rent, supplies and contract labor increasing as a share of revenue. Management cited higher mature-clinic costs and the acquired IIPS business’s lower margin profile. Corporate costs declined, mainly because of lower estimated bonus expense.
- The company acquired a 70% interest in a six-clinic practice on March 31 for preliminary total consideration of $12.3 million. It closed three clinics and sold five during the first half. Goodwill increased to $442.8 million, principally reflecting acquisitions.
- No specific full-year earnings or revenue guidance was provided. Management expects to continue pursuing acquisitions, new clinics and organic growth, and expects to add personnel.
- Medicare reimbursement is a material exposure. Management estimated a 0.75% full-year 2022 Medicare rate reduction; therapist-assistant services were subject to a 15% payment reduction from January 2022. CMS proposed a 4.4% conversion-factor reduction for 2023, and the filing notes an approximately 3% reduction scheduled for 2024 absent changes. Medicare patient revenue was $74.9 million in the first half, versus $62.1 million.
- Other cited risks include labor availability and cost, inflation and economic conditions, payor-rate changes, acquisition integration, client contract retention, cybersecurity and regulatory reviews. The company noted ordinary-course litigation and audits; outcomes cannot be predicted. A legal matter was settled in January 2022 for $2.75 million, with no admission of liability or wrongdoing; $2.6 million had been expensed in 2021.
- The owners of a separate business associated with the 2021 IIPS acquisition hold a put right exercisable in approximately five years. Its reported fair value was $3.5 million at June 30; revaluation produced a $0.6 million Q2 loss.
Investor verification priorities
- Assess whether visit growth and acquisition contributions can offset lower revenue per visit and higher operating costs, and track same-clinic trends and margins.
- Review the reconciliation and assumptions behind management’s non-GAAP Operating Results and the redeemable non-controlling-interest effects on EPS.
- Verify debt pricing, covenant headroom, available revolver capacity and cash-flow performance as variable-rate borrowing and acquisition needs evolve.
- Monitor actual Medicare rule changes, including proposed 2023 rates and therapist-assistant reimbursement, as well as staffing and payor-collection trends.
- Track IIPS acquisition integration and margins, purchase-price allocation updates, minority-interest redemption obligations, and the put-right valuation.
- Review developments in legal matters, government audits and other contingencies; the filing does not quantify potential aggregate exposure.