U.S. Physical Therapy, Inc. — Q3 2012 Form 10-Q
Business context and period. The company operates outpatient physical and occupational therapy clinics, physician-services facilities, and third-party-managed facilities. This unaudited report covers the quarter and nine months ended September 30, 2012, compared with the same 2011 periods. At quarter-end it operated 423 clinics in 42 states and managed 15 third-party facilities.
Financial performance
Amounts below are in millions of dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenues | $62.9 | $59.7 | $189.4 | $176.3 |
| Operating income | $9.4 | $8.7 | $29.9 | $28.2 |
| Net income attributable to common shareholders | $4.6 | $4.1 | $13.9 | $12.7 |
| Diluted EPS | $0.38 | $0.34 | $1.17 | $1.06 |
| Gross margin | 24.5% | 23.1% | 25.6% | 26.0% |
| Operating margin | 14.9% | 14.5% | 15.8% | 16.0% |
- Revenue drivers: Q3 net patient revenue rose 6.0% to $60.8 million; total revenue increased 5.3%. Nine-month patient revenue rose 9.2% to $183.3 million; total revenue increased 7.4%. Growth reflected increased visits and modestly higher revenue per visit, partly offset by lower physician-services revenue.
- Operating trends: Q3 visits increased to 574,893 from 548,991, while average visits per clinic per day rose to 21.7 from 20.8. Nine-month visits increased to 1,740,887 from 1,605,134. Patient revenue per visit was $105.73 in Q3 and $105.31 year to date. Clinic costs were 75.5% of revenue in Q3 versus 76.9%, but 74.4% year to date versus 74.0%. Corporate costs rose to $6.0 million in Q3 from $5.1 million; nine-month corporate costs were $18.6 million versus $17.6 million.
- Cash flow: Nine-month operating cash flow was $29.4 million, versus $20.6 million. Capital expenditures were $2.9 million, implying operating cash flow less capital expenditures of about $26.4 million. Investing used $11.4 million, including $7.4 million for business acquisitions; financing used $17.3 million. Cash increased $0.7 million to $10.7 million.
- Liquidity and debt: Current assets were $44.1 million and current liabilities $14.9 million. Total debt was $16.9 million at September 30, including $16.1 million drawn on the $75 million revolving facility; available capacity was $58.9 million. Debt was $24.2 million at December 31, 2011. The company reported compliance with its credit covenants. It stated cash and unused facility capacity should meet anticipated needs through at least September 2013.
- Other: The company declared dividends of $0.09 per share in Q3 and $0.27 per share for the nine months. Days sales outstanding improved to 42 from 48 at year-end 2011. The patient-receivable doubtful-account allowance was 5.9% of receivables, down from 7.1% at year-end; however, the nine-month doubtful-account provision increased to $3.7 million from $2.6 million.
Material changes and notable items
- Net income attributable to common shareholders increased 11.3% in Q3 and 9.0% for the nine months; diluted EPS increased to $0.38 from $0.34 and $1.17 from $1.06, respectively.
- Q3 gross margin improved year over year, while nine-month gross margin declined slightly. Physician-services revenue fell by approximately $0.3 million in Q3 and $2.3 million year to date.
- The company acquired 10 clinics during the first nine months of 2012, including a seven-clinic practice in May, and completed additional acquisitions and purchases of partnership interests. Acquisition accounting remained preliminary for 2012 purchases; goodwill increased to $99.7 million from $92.8 million. The third-quarter goodwill impairment test resulted in no charge.
- On October 24, 2012, after quarter-end, the credit agreement was amended to permit up to $15 million of share repurchases subject to covenants. No shares were repurchased in the first nine months of 2012.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it planned to continue developing clinics and evaluating acquisitions and believed operating cash flow and available credit could support operations and planned investments.
- Medicare reimbursement is a significant uncertainty. CMS’s November 1, 2012 final rule projected a 26.5% outpatient therapy rate reduction effective January 1, 2013 under the SGR formula unless Congress acted; a separate 2% Medicare spending reduction was also cited. If those cuts were avoided, the company expected other rule changes to produce an aggregate payment increase of about 4% in 2013. Therapy-cap exceptions were extended only through December 31, 2012, and new functional-data reporting requirements were scheduled to begin July 1, 2013.
- Other cited risks include dependence on third-party payors and physician referrals, therapist recruitment and retention, regulation and healthcare reform, competition, economic conditions, weather, clinic closures, acquisitions and integration, and decentralized billing and collection controls. The company reported no material pending or threatened investigations known to it, while noting that reimbursement and regulatory interpretations may be reviewed and could result in penalties.
- The revolving credit facility carries variable-rate interest; the company estimated a 1 percentage-point rate change would alter annual interest expense by approximately $161,000 based on quarter-end borrowings. No derivatives or hedges were maintained.
Important facts for investors to verify
- Whether Congress prevented the projected Medicare rate reduction and spending cuts, and the resulting effect on reimbursement and clinic economics.
- Whether patient-visit and mature-clinic growth continues, and whether revenue per visit and clinic-cost trends sustain margins.
- Collection quality, including the higher year-to-date doubtful-account provision despite improved days sales outstanding and a lower allowance percentage.
- Final acquisition purchase-price allocations, goodwill and intangible-asset values, and the performance and integration of acquired clinics.
- Credit-facility covenant headroom, variable-rate exposure, acquisition funding needs, and any subsequent share repurchases or dividend decisions.