U.S. Physical Therapy, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context
The company operates outpatient physical and occupational therapy clinics and manages clinics for third parties. At September 30, 2014, it operated 489 clinics in 42 states and managed 18 third-party facilities. It acquired a 13-clinic group in April, a three-clinic group in August, and three individual clinics during the first nine months. The physician services business was sold in September 2013 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenues | $77.7m | $65.8m | $225.7m | $195.5m |
| Net patient revenues | $76.2m | $64.4m | $221.1m | $191.0m |
| Operating income | $11.3m | $9.9m | $35.0m | $29.4m |
| Net income attributable to common shareholders, continuing operations | $5.2m | $4.7m | $15.9m | $13.6m |
| Diluted EPS, continuing operations | $0.43 | $0.38 | $1.30 | $1.12 |
| Cash provided by operating activities | Not stated | Not stated | $28.8m | $28.9m |
Revenue grew 18.1% in Q3 and 15.5% for the nine-month period. Management attributed growth primarily to higher patient visits, including visits at new and acquired clinics; average net patient revenue per visit increased modestly. Q3 gross margin was $18.7m, or about 24.1% of revenue, versus $16.1m, or about 24.5%, a year earlier. For nine months, gross margin was $57.2m, or about 25.4%, versus $48.6m, or about 24.9%. Operating income increased in both comparisons.
Q3 common-shareholder net income from all operations was $5.2m versus $0.2m in 2013; the prior-year total included a $4.5m after-tax loss from discontinued operations. For the nine-month periods, total common-shareholder net income was $15.9m versus $8.9m, with the 2013 comparison including a $4.7m discontinued-operations loss. The 2014 nine-month EPS total was $1.21 diluted, including a $0.09 per-share charge from revaluation of redeemable non-controlling interests; continuing-operations diluted EPS was $1.30.
Cash, debt and liquidity
- Cash was $15.8m at September 30, 2014, up from $12.9m at December 31, 2013.
- Operating cash flow was $28.8m for the first nine months. Investing used $21.1m, including $12.2m for business acquisitions, $5.0m for purchases of non-controlling interests and $3.9m for fixed assets. Financing used $4.8m, including $4.4m in shareholder dividends and $7.1m in distributions to non-controlling partners.
- Revolving-credit borrowings were $46.5m; notes payable totaled $1.3m. The company had $78.5m available under its $125m unsecured revolver, which matures November 30, 2018, and reported compliance with its covenants.
- Management stated that cash and available credit were expected to fund operating needs, dividends, capital expenditures, clinic development and investments through at least March 2015. Significant acquisitions would likely require revolver financing.
- The revolver has variable interest rates. The company estimated that a 1 percentage-point rate change would change annual interest expense by approximately $465,000.
Changes, outlook and risks
- Patient visits increased to 719,271 in Q3 from 611,448 and to 2,081,907 for nine months from 1,802,870. Clinics numbered 489, compared with 447 a year earlier.
- Clinic operating costs were 75.9% of revenue in Q3 versus 75.5% a year earlier, reflecting higher rent, supplies, contract labor and other costs as a share of revenue. For nine months, the ratio improved to 74.6% from 75.2%. Corporate costs increased, partly due to more employees and accrued incentive compensation.
- Days sales outstanding increased to 41 days from 39 at year-end 2013; the allowance for doubtful patient accounts rose to 5.1% of receivables from 4.4%.
- No formal earnings guidance was provided. Management intends to continue developing clinics and pursuing acquisitions. It cautioned that interim results are not necessarily indicative of full-year results.
- Medicare reimbursement remains a material risk. The filing described a temporary 0.5% payment increase through 2014 and a 1% increase for physical therapy in the 2015 fee schedule, while noting that SGR-related reductions could begin April 1, 2015 absent further congressional action. The 2% Medicare sequestration reduction was in effect; therapy-cap exceptions and manual-review provisions were extended through March 31, 2015.
- Other stated risks include changes to healthcare laws and reimbursement, regulatory compliance, therapist recruitment and retention, physician relationships, competition, seasonality, clinic closures, acquisition integration and decentralized billing and collection controls. The company reported no goodwill impairment in its 2014 third-quarter test.
Important facts for investors to verify
- How much revenue and earnings growth came from acquired/new clinics versus mature clinics, and whether mature-clinic visit growth continues.
- Whether receivable days and the doubtful-account allowance increase further, and how collections compare with reported revenue.
- Revolver utilization, covenant headroom, variable-rate exposure and the financing needed for planned acquisitions or minority-interest purchases.
- Congressional and CMS actions affecting Medicare rates, therapy caps and claims review after March 31, 2015.
- Final purchase-price allocations for recent acquisitions; the filing states those valuations were preliminary and could change.