U.S. Physical Therapy, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial amounts below are in millions unless otherwise stated. The company operates outpatient physical and occupational therapy clinics and an industrial injury prevention (IIP) business; it had 672 clinics in 42 states and managed 42 third-party facilities at quarter-end.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $150.0 | $139.6 | $450.0 | $412.0 |
| Gross profit / margin | $27.9 / 18.6% | $26.8 / 19.2% | $91.0 / 20.2% | $84.2 / 20.4% |
| Operating income / margin | $15.9 / 10.6% | $14.9 / 10.7% | $52.9 / 11.8% | $50.0 / 12.1% |
| Net income attributable to USPH shareholders | $9.3 | $9.6 | $27.6 | $29.6 |
| Basic and diluted EPS | $0.51 | $0.72 | $1.72 | $2.27 |
| Adjusted EBITDA (non-GAAP) | $18.6 | $17.0 | $58.7 | $55.8 |
Revenue rose 7.5% in Q3 and 9.2% for the nine-month period. Physical therapy operations drove the increase; IIP revenue declined 3.3% in Q3 and 1.0% year to date. Nine-month patient visits increased 12.2%, including 3.2% growth at mature clinics. The Q3 average was a record 29.7 visits per clinic per day. Net rate per patient visit fell to $102.37 from $104.01 in Q3 and to $102.50 from $103.40 year to date, primarily reflecting Medicare reimbursement reductions.
Despite revenue growth, gross and operating margins were slightly lower. Salaries and related costs increased to 59.9% of revenue in Q3 and 58.4% year to date. Corporate office costs rose 11.3% year to date, primarily due to merit increases, additional staff supporting clinic growth, and inflationary impacts. Nine-month interest expense increased to $7.3 million from $3.5 million, reflecting higher rates and borrowing earlier in the period.
Cash flow, debt and liquidity
- Cash and cash equivalents were $147.7 million at September 30, up from $31.6 million at year-end 2022. Nine-month operating cash flow was $55.1 million, investing cash outflow was $36.6 million, and financing cash inflow was $97.5 million.
- Financing included $163.6 million net proceeds from a May share offering; uses included $33.8 million of net credit-facility repayments, $17.7 million of shareholder dividends, and $11.8 million of distributions to non-controlling interests.
- Debt principal was $150.6 million, including $145.3 million under the term facility and $5.3 million of other notes; the reported net carrying amount was $149.1 million. The $175 million revolving facility was undrawn, leaving $175 million available. The company reported compliance with credit-agreement covenants.
- The company stated that cash and available credit were sufficient for working capital needs through at least September 30, 2024. Operating lease liabilities totaled $111.3 million.
- Cash dividends declared were $0.43 per share for Q3; the board declared another $0.43 per share dividend payable December 8, 2023.
Material changes, outlook and risks
USPH issued 1,916,667 shares in the May offering, increasing weighted-average shares for Q3 to 14.987 million from 13.001 million. This share-count increase, together with a $2.2 million Q3 revaluation charge to retained earnings for redeemable non-controlling interests (which affects EPS but not reported net income), contributed to the decline in EPS. For the nine months, non-GAAP Operating Results were $27.4 million, or $1.97 per share, versus $27.5 million, or $2.12 per share; the per-share decline also reflects the higher share count.
Management gave no specific earnings or revenue guidance. It expects to continue developing clinics and pursuing acquisitions, with much of the offering proceeds intended for acquisitions. The company completed several physical therapy practice acquisitions during the period. On October 31, 2023, it acquired an IIP services and ergonomics software business for approximately $4.0 million.
Management highlighted reimbursement uncertainty, especially Medicare. The 2024 Medicare Physician Fee Schedule final rule was expected to reduce reimbursement for relevant therapy codes by approximately 3.5% versus 2023, unless mitigated by Congress. Other cited risks include therapist hiring and retention, inflation and economic conditions, acquisition integration, regulatory reviews and audits, litigation, and cyber and privacy incidents. The company reported no material changes to previously disclosed risk factors, and no goodwill impairment indicators for the period. A 2022 goodwill impairment charge of $9.1 million related to an IIP reporting unit was noted. Relief Funds income of $0.5 million was recognized in the first quarter of 2023; management does not expect further such income.
The company also has contingent acquisition consideration, including an earn-out valued at $8.1 million with no maximum payout, and redeemable non-controlling interests valued at $174.7 million. These arrangements may require future payments. It had a $150 million interest-rate swap, with a reported fair value of $7.7 million, to hedge variable-rate borrowing exposure.
Investor verification priorities
- Assess whether patient-visit growth and clinic additions can offset lower reimbursement rates and the recent margin compression.
- Review dilution from the May offering and the effect of redeemable non-controlling-interest revaluations on reported EPS.
- Monitor acquisition integration, contingent consideration, and potential cash requirements to purchase non-controlling interests.
- Check future interest costs, Medicare rate developments, and the company’s continued compliance with credit covenants and liquidity expectations.