Business context and reporting period
U.S. Physical Therapy, Inc. (USPH) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It operates outpatient physical therapy clinics and an industrial injury prevention business, and manages clinics for third parties. At quarter-end, USPH operated 564 clinics in 41 states and managed 26 third-party facilities.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and operating statistics.
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|---|---|---|---|
| Net revenues | $126.4 | $115.1 | $242.6 | $223.4 |
| Operating income | $19.9 | $17.0 | $35.3 | $30.1 |
| Net income attributable to USPH shareholders | $14.6 | $9.2 | $23.1 | $16.4 |
| Diluted EPS | $0.85 | $0.48 | $1.24 | $0.74 |
| Management-defined Operating Results, non-GAAP | $10.3 | $9.2 | $18.8 | $16.4 |
| Operating Results per diluted share, non-GAAP | $0.81 | $0.73 | $1.47 | $1.29 |
- Revenue and activity: Q2 revenue increased 9.8%; first-half revenue increased 8.6%. Q2 patient visits rose 6.0% to about 1.058 million, while net patient revenue per visit increased to $107.16 from $106.16. For the first half, visits rose 5.4% and revenue per visit increased to $106.83 from $105.67.
- Margins: Gross margin was 24.9% in Q2 versus 23.6% a year earlier, and 24.0% for the first half versus 22.5%. Operating costs were 75.1% of revenue in Q2 and 76.0% for the first half, both lower year over year.
- Cash flow: First-half operating cash flow was $28.6 million, versus $30.6 million. Investing used $25.2 million, including $18.2 million for acquisitions and $4.9 million for fixed assets. Financing provided $8.1 million. Cash increased $11.5 million to $34.9 million.
- Debt and liquidity: At June 30, total borrowings were $67.0 million, including $62.0 million drawn on the $125 million revolving facility and $5.0 million of notes payable. The facility had $63.0 million available and matures November 30, 2021. USPH reported compliance with its credit covenants. Management believed cash and unused facility capacity could fund operations, clinic development and acquisitions through at least June 2020; significant acquisitions could require additional financing.
- Leases: Adoption of ASC 842 on January 1, 2019 added operating lease right-of-use assets and liabilities; June 30 lease liabilities were $79.3 million. The filing says adoption did not materially affect income or cash flow.
Material changes versus the prior comparable period
- Growth reflected higher physical therapy activity, new and acquired clinics, and expansion in industrial injury prevention. Industrial injury prevention revenue rose 64.0% in Q2 and 54.5% in the first half, with both internal growth and acquisitions contributing.
- USPH acquired an industrial injury prevention services provider in April 2019 for stated consideration of $23.6 million, including $19.6 million cash and a $4.0 million seller note. The acquisition increased USPH’s ownership of Briotix Health to approximately 76%.
- Q2 and first-half GAAP earnings included a $5.8 million pre-tax gain from selling a 50% interest in a physical therapy partnership. USPH’s management-defined non-GAAP Operating Results exclude this gain and the redeemable non-controlling interest revaluation. The $11.6 million sale proceeds were recorded as a receivable at June 30 and, net of an offsetting payable, were collected July 1.
- Quarter-end clinic count was 564, compared with 581 a year earlier, despite acquisitions and new clinic activity.
- Borrowings under the revolver rose to $62.0 million from $38.0 million at December 31, 2018. First-half cash from operations was lower year over year, while acquisition and capital spending increased.
Outlook, commentary, risks and unusual items
- USPH stated its intention to continue acquiring clinic practices, developing new clinics and opening satellite clinics. The filing provides no numerical earnings or revenue guidance, and cautions that first-half results are not necessarily indicative of full-year results.
- Management cited reimbursement and regulatory changes, Medicare and other payor audits or reductions, therapist recruitment and retention, competition, acquisition integration, litigation, cybersecurity, capital availability and seasonality among factors that could affect results.
- Medicare accounted for approximately $59.4 million of net patient revenue in the first half of 2019, compared with $51.0 million in the prior-year period. The filing discusses scheduled Medicare payment policies, including a 2% payment reduction extended through fiscal 2027 and payment reductions for certain therapy-assistant services starting in 2022.
- The revolving facility bears variable interest. USPH estimated that a 1 percentage-point rate change on the June 30 balance would change annual interest expense by approximately $620,000. It had no interest-rate hedges.
- Redeemable non-controlling interests totaled $133.4 million. Their redemption amounts are based on contractual earnings multiples and can change; revaluations affect earnings per share through a direct retained-earnings charge rather than net income.
- USPH reported ordinary-course litigation and said it did not believe existing matters would materially affect its business, financial condition or results. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and earnings growth came from mature-clinic performance versus acquisitions, new clinics and the industrial injury prevention business.
- The sustainability of improved gross margins and patient-visit growth, alongside the lower year-over-year operating cash flow.
- The final purchase-price allocation and ongoing performance of the April 2019 acquisition, and the effects of the partnership-interest sale on future reported results.
- Revolver utilization, variable-rate exposure, covenant compliance and future cash needs for acquisitions, clinic growth, dividends and redeemable partner interests.
- The effect of Medicare and other payor reimbursement rules, collection trends and regulatory compliance on revenue and receivables.