U.S. Physical Therapy, Inc. — Q3 2011 Form 10-Q
Business and period: The company operates outpatient physical and occupational therapy clinics, primarily through partnerships. This unaudited filing covers the three and nine months ended September 30, 2011, compared with the same periods in 2010. At quarter-end, it operated 420 clinics in 42 states and managed 16 third-party facilities.
Financial performance
Amounts below are in millions except per-share data; figures may not sum due to rounding.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $59.7 | $53.4 | $176.3 | $157.9 |
| Operating income | $8.7 | $8.7 | $28.2 | $25.4 |
| Net income attributable to common shareholders | $4.1 | $3.9 | $12.7 | $11.5 |
| Diluted EPS | $0.34 | $0.33 | $1.06 | $0.97 |
| Operating cash flow | — | — | $20.6 | $23.8 |
- Revenue and activity: Q3 revenue rose 11.8%; nine-month revenue rose 11.7%. Patient visits increased 13.6% in Q3 and 10.8% for the nine months. Growth was principally from acquired and newer clinics; mature-clinic visits declined. Patient revenue per visit decreased to $104.43 from $107.11 in Q3 and to $104.59 from $105.45 for the nine months.
- Profitability: Q3 operating income was nearly flat despite revenue growth; operating margin fell to about 14.5% from 16.4%. Nine-month operating margin was about 16.0% versus 16.1%. Common-shareholder net income increased 5.8% in Q3 and 10.8% year to date.
- Cash flow and investment: Nine-month operating cash flow declined to $20.6 million from $23.8 million. Investing used $29.5 million, including $18.9 million for noncontrolling-interest purchases and $8.1 million for business acquisitions. Financing provided $9.2 million, including net revolving-credit borrowings of $20.9 million; dividends paid were $2.8 million.
- Liquidity and debt: September 30 cash was $9.5 million. Revolver borrowings were $26.4 million, versus $5.5 million at December 31, 2010; total notes payable, including the revolver, were $27.4 million. The $75 million unsecured facility had $48.6 million available, matures August 2015, and the company reported compliance with its covenants. Current assets were $45.8 million and current liabilities $13.7 million.
- Dividends and shares: The company declared $0.24 per share for the first nine months, compared with none in the 2010 period, and repurchased approximately 125,000 shares for $2.3 million.
Material changes and notable items
- The July 2011 acquisition added a 51% interest in a 20-clinic group; preliminary purchase accounting recorded $14.6 million of goodwill. Valuations remained in process.
- The company purchased interests in existing partnerships, including 20.2% of STAR during the nine months, increasing its ownership to 90.2%; a subsequent October purchase raised it to 92.2%.
- A physician-services franchisee defaulted. The company recognized none of $446,000 contractually due in Q3 and reserved the franchisee’s $750,000 outstanding receivable. The filing attributes most of Q3 clinic-cost margin contraction to this lost revenue and reserve. The doubtful-account allowance for other receivables was $916,000 at quarter-end.
- Medicare’s multiple-procedure payment reduction was expected to lower reimbursement for the company’s Medicare therapy services by an estimated 5%–7% in 2011. The filing also notes the 2011 Medicare therapy cap of $1,870.
- The company’s annual goodwill impairment review found no impairment in 2011. It reported no material changes in internal control over financial reporting and concluded disclosure controls were effective.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management plans to continue developing clinics and evaluating acquisitions, and believes cash and revolver availability can fund operating needs, dividends, repurchases, and clinic development through at least September 2012; significant acquisitions may require additional use of the facility.
- Key risks include reimbursement and healthcare-policy changes, dependence on Medicare and other payors and physician relationships, therapist recruitment and retention, competition, economic conditions, weather, regulation, decentralized billing and collections, and acquisition integration or related liabilities.
- The revolver carries variable interest rates: management estimated a 1 percentage-point rate change would alter annual interest expense by approximately $264,000 at the quarter-end balance. The company reported no derivative or hedging instruments.
- Acquisition agreements include potential obligations to repurchase certain minority interests at predetermined earnings multiples after specified periods. The filing also describes contingent consideration provisions related to prior acquisitions; one prior clinic acquisition earned no contingent consideration over its three-year period.
- Management cautions that interim results are not necessarily indicative of full-year results. Actual contractual reimbursements and collections may differ from estimates; management estimated a change in the contractual allowance reserve would likely not exceed 1% at September 30, 2011.
Investor facts to verify
- Whether acquired and newer clinics can sustain growth as mature-clinic visits declined and revenue per visit fell.
- Collections and recovery prospects for the defaulting physician-services franchisee, including the $750,000 reserve and missed payments.
- Effects of Medicare and other payor reimbursement changes on revenue per visit and margins.
- Cash generation, acquisition and minority-interest purchase spending, and revolver utilization against the $75 million commitment and covenants.
- Final purchase-price allocation for the July acquisition and any resulting goodwill or intangible-asset adjustments.