U.S. Physical Therapy, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Dollar amounts are in millions unless otherwise noted. The company operates outpatient physical and occupational therapy clinics and manages facilities for third parties.
Business context and reporting period
- At quarter-end, the company operated 414 clinics in 42 states and managed 15 third-party facilities.
- During the quarter it acquired interests in two clinics, opened two clinics and closed six. It also bought additional interests in three existing partnerships.
Financial and operating performance
- Revenue: Net revenue was $62.6 million, up 10.3% from $56.7 million. Net patient revenue rose 12.3% to $60.5 million; other revenue declined to $2.1 million from $2.9 million.
- Activity and pricing: Patient visits increased 12.3% to 578,670 from 515,161. Average net patient revenue per visit was essentially unchanged at $104.55 versus $104.57. Mature-clinic visits rose by 20,000; new clinics contributed 44,000 visits.
- Profit: Operating income was $9.9 million, up from $8.7 million. Net income attributable to common shareholders was $4.5 million versus $3.7 million; diluted EPS was $0.38 versus $0.31. Operating margin was approximately 15.8%, compared with 15.3%.
- Costs and tax: Clinic operating costs increased to $46.4 million and were 74.2% of net revenue, versus 73.3%. The doubtful-account provision rose to $1.1 million from $0.6 million. Corporate costs declined to $6.3 million from $6.5 million. The company reported a 39.3% effective tax rate.
- Cash flow: Operating activities provided $5.2 million, versus $5.7 million. Capital spending was $0.9 million; cash used for acquisitions was $1.1 million and for purchases of noncontrolling interests was $0.6 million. Cash increased $0.5 million to $10.4 million.
- Liquidity and debt: Current assets were $47.1 million and current liabilities $12.5 million. Revolver borrowings were $24.2 million, leaving $50.8 million available under the $75 million facility; total notes payable, including the revolver, were $25.0 million. The company reported compliance with credit covenants.
- Other: The quarterly dividend declared was $0.09 per common share, up from $0.08. Days sales outstanding remained 48 days.
Material changes versus the prior-year quarter
- Revenue and patient visits grew, while average revenue per visit was flat. Management attributed most visit growth to clinics opened or acquired in the prior 12 months, with additional growth at mature clinics.
- Net income attributable to common shareholders and diluted EPS increased. Noncontrolling-interest income declined to $2.3 million from $2.4 million, which management attributed to increased company ownership in certain partnerships.
- Other revenue fell by $0.8 million, primarily because of lower physician-services revenue. Interest expense increased to $0.2 million from $0.1 million, reflecting higher average revolver borrowings.
- Operating cash flow was lower, in part alongside a $3.7 million decrease in accounts payable and accrued expenses, compared with an increase in the prior-year quarter.
Outlook, risks and unusual items
- Management said operating cash flow, cash and unused revolver capacity were expected to support operating needs, dividends, development and investments through at least March 2013. Significant acquisitions could require additional borrowing. No quantified earnings or revenue guidance was provided.
- The company planned to continue developing clinics, opening appropriate satellites and evaluating acquisitions. It stated that first-quarter results are not necessarily indicative of full-year results.
- Medicare payment policy remains a key exposure. Legislation froze current Medicare Physician Fee Schedule rates through December 31, 2012 and extended therapy-cap exceptions through that date. The filing cited an expected 4% aggregate increase in 2012 outpatient therapy payments from other fee-schedule changes; reimbursement rules and rates remain subject to change.
- Other stated risks include dependence on third-party payors and physician relationships, therapist recruitment and retention, healthcare regulation and reform, competition, economic conditions, weather, clinic closures, acquisitions and decentralized billing and collection controls.
- The revolver has a variable interest rate. The company estimated that a 1 percentage-point rate change would alter annual interest expense by approximately $242,000 at the quarter-end balance. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
- Acquisition purchase-price allocations were preliminary and could change as valuations and reviews of possible pre-acquisition contingencies are completed. No material acquisition pro forma information was presented.
Important facts for investors to verify
- Whether patient-visit growth and mature-clinic performance continue, and whether revenue per visit remains stable.
- Whether higher doubtful-account expense and clinic operating costs affect margins or collections.
- Medicare and other payor reimbursement developments, including therapy caps and payment rules.
- Acquisition performance, final purchase-price allocations, and the cash and debt required for further expansion.
- Revolver utilization, covenant compliance and exposure to variable interest rates.