Business context and reporting period
U.S. Physical Therapy, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. It operates outpatient physical and occupational therapy clinics and manages facilities for third parties. At quarter-end, it operated 486 clinics in 43 states and managed 17 third-party facilities. The physician services business sold in September 2013 is reported as discontinued operations.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $78.2 million | $66.9 million | $148.0 million | $129.6 million |
| Operating income | $14.2 million | $11.1 million | $23.7 million | $19.5 million |
| Net income attributable to common shareholders | $6.4 million | $4.9 million | $10.7 million | $8.6 million |
| Diluted EPS from continuing operations | $0.53 | $0.42 | $0.87 | $0.74 |
| Total diluted EPS | $0.52 | $0.41 | $0.78 | $0.72 |
Q2 net revenues rose 17.0%; six-month revenues increased 14.1%. Net patient revenue per visit was essentially flat: $106.39 in Q2 versus $106.25, and $106.31 for the six months versus $106.30. Patient visits increased 17.1% in Q2 and 14.4% for the six months. Management attributed growth to new clinics and acquisitions as well as higher visits at mature clinics.
Gross margin was $21.8 million in Q2 (27.9% of revenue), versus $17.6 million (26.3%); for six months it was $38.5 million (26.0%), versus $32.4 million (25.0%). Clinic operating costs declined as a share of revenue to 72.1% from 73.7% in Q2 and to 74.0% from 75.0% for the six-month period. Salaries also declined as a share of revenue, while rent, supplies, contract labor and other costs rose as a share. Corporate costs were $7.6 million in Q2 and $14.7 million for six months, up from $6.5 million and $12.9 million, respectively; the company cited increased staffing and accrued incentive compensation.
Operating cash flow was $21.1 million for the six months, compared with $20.7 million. Investing used $17.8 million, including $10.8 million for business acquisitions, $4.9 million for purchases of non-controlling interests and $2.1 million for fixed assets. Financing used $3.2 million, including $2.9 million of shareholder dividends and $5.0 million of distributions to non-controlling partners. Cash was $12.9 million at June 30, essentially unchanged from year-end.
At June 30, total debt was $46.3 million: $45.0 million outstanding under the revolving facility and $1.3 million in notes payable. The $125 million unsecured revolver had $80 million available, matures November 30, 2018, and carried a reported average effective rate of 2.5%. The company said it was in compliance with its covenants. Current assets were $51.8 million and current liabilities $22.8 million. Patient accounts receivable increased to $34.3 million from $30.8 million at year-end; days sales outstanding rose to 41 from 39.
Material changes and unusual items
- The April 2014 acquisition added a 70% interest in a 13-clinic practice for $10.625 million in cash plus a $0.4 million seller note; two individual clinics were also acquired. The 2014 acquisitions added $13.8 million of goodwill based on preliminary purchase-price allocations.
- Four transactions during the six months acquired interests in two partnerships for approximately $4.9 million. A $1.086 million after-tax revaluation charge to additional paid-in capital reduced reported total EPS by $0.01 for Q2 and $0.09 for the six-month period; it was not an income-statement expense.
- Q2 2013 and first-half 2013 results included losses from discontinued physician-services operations of $0.268 million and $0.468 million, respectively. The 2014 periods had no discontinued-operations loss.
- Interest expense increased to $0.332 million in Q2 from $0.130 million and to $0.585 million for six months from $0.265 million, reflecting higher average revolver borrowings associated with acquisitions.
Outlook, risks and contingencies
No numerical earnings or revenue guidance is provided. Management expects to continue opening clinics and pursuing acquisitions, and stated that cash and unused revolver capacity should fund working capital, dividends, development and other needs through at least March 2015; significant acquisitions may require additional revolver borrowing. Management cautions that first-half results are not necessarily indicative of full-year results.
Key exposures include dependence on Medicare and other third-party reimbursement, healthcare regulation, therapist recruitment and retention, physician relationships, competition, seasonality, acquisition integration and decentralized billing and collection controls. Medicare payment provisions were extended through March 31, 2015; the filing describes a 0.5% payment update through December 2014, no update for January–March 2015, and potential scheduled SGR reductions from April 1, 2015 absent further action. Medicare’s 2% provider payment reduction was in effect, and therapy caps and manual-review requirements were extended through March 31, 2015. The company reported no known pending or threatened investigations expected to materially affect its financial statements and said disclosure controls were effective.
Most important facts for investors to verify
- Whether visit growth and mature-clinic performance persist, and how much reported growth depends on acquisitions.
- Receivables quality and collections, given higher days sales outstanding and a higher doubtful-account allowance as a share of patient receivables.
- Medicare and other payor reimbursement changes, including the impact of payment reductions and therapy-cap rules after March 31, 2015.
- Acquisition integration, preliminary purchase accounting and the carrying value of goodwill and other acquired assets.
- Revolver usage, variable-rate exposure, covenant headroom and funding needs for planned acquisitions and distributions.