Business context and reporting period
U.S. Physical Therapy, Inc. operates outpatient physical and occupational therapy clinics. At June 30, 2015, it operated 501 clinics in 42 states and managed 19 facilities for third parties. This Form 10-Q covers the quarter and six months ended June 30, 2015; amounts below are in millions except per-share data and operating statistics.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenues | $83.3 | $78.2 | $160.5 | $148.0 |
| Operating income | $13.5 | $14.2 | $22.7 | $23.7 |
| Net income attributable to common shareholders | $6.3 | $6.4 | $10.5 | $10.7 |
| Reported diluted EPS | $0.48 | $0.52 | $0.82 | $0.78 |
| Operating-results diluted EPS, before redeemable-interest revaluation | $0.51 | $0.53 | $0.85 | $0.87 |
Revenue increased 6.5% in Q2 and 8.5% for the first half. Operating income declined about 4.7% and 4.2%, respectively. Gross margin was 25.4% in Q2 and 23.7% in the first half, versus 27.9% and 26.0% in the comparable periods; operating margin was 16.3% and 14.2%, versus 18.2% and 16.0%. These margins are calculated from the reported statements.
Growth was driven by higher patient visits: Q2 visits rose to 776,867 from 718,767, and first-half visits to 1,489,722 from 1,362,636. Average net patient revenue per visit fell to $104.85 from $106.39 in Q2 and to $105.56 from $106.31 in the first half. Management cited a modest shift in payer mix, including slightly more Medicare/Medicaid and less workers’ compensation business in Q2. Higher clinic costs, particularly salaries and related costs, outpaced revenue growth.
For the six months, operating cash flow was $19.2, compared with $21.1 in 2014; investing cash use was $18.2, including $14.5 for acquisitions and $2.9 for fixed assets. Cash declined to $13.0 from $14.3 at year-end. At June 30, total notes and revolving borrowings were $42.9, including $41.0 drawn on a $125.0 revolving facility, leaving $84.0 available. The company reported compliance with credit covenants. Total liabilities were $75.7. Dividends paid were $3.7; declared dividends per common share were $0.15 in Q2 and $0.30 for the first half.
Material changes, outlook, and risks
Three 2015 acquisitions added 16 clinics; the company acquired controlling interests of 60% to 70%, for total consideration of $15.8, including $1.35 in seller notes. Goodwill rose to $170.9 from $147.9, primarily due to acquisitions. Management intends to continue acquisitions, clinic development, and satellite openings. It said cash and available revolver capacity were sufficient for working capital, development, and acquisitions through at least March 2016; significant acquisitions may require additional revolver borrowing. No specific earnings or revenue guidance was provided.
Operating costs rose to 74.6% of revenue in Q2 from 72.1%, and to 76.3% for the first half from 74.0%. Salaries and related costs increased as a share of revenue in both periods. Reported EPS also reflects charges for revaluation of redeemable non-controlling interests: $0.03 per share in Q2 2015 and $0.03 for the first half, versus $0.01 and $0.09, respectively, in 2014. These charges reduced additional paid-in capital rather than net income.
A limited partnership is resolving a Department of Justice review of Medicare billings at one clinic for services provided in 2007–2009. It tentatively agreed to a $710,000 settlement, accrued in 2012; a Corporate Integrity Agreement is anticipated. The filing also identifies reimbursement and regulatory changes, payer audits, therapist availability and cost, clinic performance, acquisition integration, and variable interest rates as risks. MACRA eliminated the Medicare SGR formula and extended therapy-cap exceptions through 2017; Medicare payments remained subject to a 2% sequestration reduction. The company reported no subsequent events and effective disclosure controls.
Most important facts for investors to verify
- Whether visit growth and acquired-clinic contributions can offset lower revenue per visit and rising clinic labor costs.
- Acquisition integration, preliminary purchase-price allocations, and the growth in goodwill.
- Cash generation, continued acquisition spending, revolver usage, covenant compliance, and debt maturity/refinancing needs.
- Final resolution and compliance obligations relating to the DOJ Medicare matter and anticipated Corporate Integrity Agreement.
- Impact of Medicare and other payer reimbursement rules, audits, and changes in payer mix on collections and margins.