U.S. Physical Therapy, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited; amounts below are in millions of dollars unless otherwise noted. The company operates outpatient physical therapy and occupational therapy clinics and an industrial injury prevention business. At quarter-end, it operated 575 clinics in 39 states and managed 39 third-party facilities.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $126.9 | $83.9 | $239.3 | $196.6 |
| Operating income | $22.2 | $10.3 | $37.3 | $14.3 |
| Net income attributable to USPH shareholders | $12.4 | $10.2 | $20.6 | $11.2 |
| Reported diluted EPS | $0.82 | $0.99 | $1.03 | $1.19 |
- Q2 revenue rose 51.4%; six-month revenue rose 21.7%. Management attributed the improvement chiefly to recovery from pandemic-related volume declines in 2020, with clinic additions also contributing.
- Q2 gross margin was 27.0%, up from 23.1%; operating margin was 17.5%, up from 12.2%. For the six months, gross margin was 25.2% versus 19.7%, and operating margin was 15.6% versus 7.3%.
- Q2 patient visits increased 60.4% to 1.08 million, while average net patient revenue per visit fell to $104.46 from $106.97. For the six months, visits increased 23.4% to 2.03 million; average revenue per visit was nearly unchanged at $104.58.
- Physical therapy operations drove most of the revenue increase. Industrial injury prevention revenue grew 3.9% in Q2 and 2.6% for the six months; its Q2 gross margin declined to 25.3% from 32.9%.
- Reported diluted EPS declined despite higher shareholder net income, reflecting a charge from revaluation of redeemable non-controlling interests, which is recorded directly in retained earnings but included in EPS. The company’s non-GAAP “Operating Results” diluted EPS was $0.96 for Q2 versus $0.74, and $1.60 for the six months versus $1.04; 2020 figures included Provider Relief Funds.
Cash flow, debt and liquidity
- Six-month operating cash flow was $35.6, down from $48.4. Investing used $33.4, including $20.4 for business acquisitions and $9.5 to purchase redeemable non-controlling interests. Financing used $14.7. Cash declined $12.5 to $20.4.
- At June 30, 2021, $38.0 was drawn on the $125 million revolving facility, leaving $87.0 available; total notes payable were $1.8. The facility matures November 30, 2025, and the company reported compliance with its covenants.
- Operating lease liabilities totaled $94.7. Current assets were $79.7 and current liabilities $75.4. Management said cash and available revolver capacity should fund operating-subsidiary working capital through at least June 30, 2022.
- The company repaid $14.1 of Medicare Accelerated and Advance Payment funds during Q1 2021. It also paid $9.0 in shareholder dividends during the six months; dividends declared were $0.70 per share.
Material changes, outlook and risks
- During the first half, the company acquired controlling interests in two physical therapy practices for approximately $22.3 in total consideration, with preliminary purchase accounting including $27.8 of goodwill. Acquisitions were funded partly through the revolver. Goodwill increased to $373.9 from $345.6.
- No formal full-year financial guidance is provided in the supplied filing text. Management expects to pursue acquisitions and organic growth and expects to add personnel. It cautions that interim results are not necessarily indicative of full-year results.
- Management said 2021 results were recovering toward pre-pandemic levels. It continued COVID-19 safety and continuity measures. The company received no Provider Relief Funds in the first half of 2021; approximately $13.5 had been received in 2020, and compliance with grant conditions remains subject to evolving guidance.
- Reimbursement and regulation remain key risks. The 2021 Medicare fee schedule changes were estimated to reduce aggregate reimbursement for applicable therapy services by 3.5%; the filing also describes a 2% Medicare payment reduction waiver through the end of 2021. Therapy assistant services may be paid at 85% of the otherwise applicable amount beginning in 2022.
- The company disclosed a pending federal False Claims Act qui tam case alleging upcoding at a Florida partnership. The government declined to intervene; motions to dismiss were denied. The company disputes the allegations and intends to defend the case, but says outcome and timing cannot be predicted. It also notes ordinary-course litigation, audits and investigations.
- Other risks include COVID-19 effects, staffing and retention, payer collections and reimbursement changes, acquisition integration, clinic closures and potential impairment, cybersecurity, and variable-rate borrowing. A 1% interest-rate change on the revolver balance would change annual interest expense by approximately $0.38.
Important facts for investors to verify
- How much of revenue and margin recovery reflects sustained mature-clinic growth versus pandemic comparisons and acquired clinics.
- Why average patient revenue per visit declined in Q2 and whether labor-cost pressures persist; salaries were 54.3% of revenue versus 51.8% a year earlier.
- The effect of redeemable non-controlling-interest revaluations on reported EPS and the assumptions underlying the company’s non-GAAP Operating Results measure.
- Acquisition integration, final purchase-price allocations, goodwill concentration, and potential cash requirements to repurchase minority interests.
- Cash conversion, the higher revolver balance, covenant headroom, lease obligations, and remaining repayment obligations for deferred payroll taxes.
- Developments in Medicare and other payer reimbursement, Provider Relief Fund compliance, and the Florida qui tam litigation.