Business context and reporting period
U.S. Physical Therapy, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. It operates outpatient physical and occupational therapy clinics and manages facilities for third parties. At quarter-end, it operated 506 clinics in 42 states and managed 20 third-party facilities.
Financial performance and position
Amounts below are in millions, except per-share and operating data.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenues | $84.0 | $77.7 | $244.6 | $225.7 |
| Operating income | $11.9 | $11.3 | $34.7 | $35.0 |
| Net income attributable to common shareholders | $5.8 | $5.2 | $16.3 | $15.9 |
| Diluted EPS | $0.47 | $0.43 | $1.29 | $1.21 |
- Revenue increased 8.1% in Q3 and 8.4% year to date. Patient visits rose 8.7% in Q3 and 9.1% year to date; net patient revenue per visit fell to $105.04 from $105.92 in Q3 and to $105.38 from $106.18 year to date.
- Clinic operating costs increased to 77.5% of net revenue in Q3 from 75.9%, and to 76.8% year to date from 74.6%. Gross margin was $18.9 million in Q3 and $56.9 million year to date; operating income was $11.9 million and $34.7 million, respectively.
- Cash from operations was $28.9 million for the first nine months, compared with $28.8 million. Investing used $21.9 million, mainly for acquisitions and capital expenditures. Cash increased to $20.6 million from $14.3 million at year-end 2014.
- At September 30, total debt was $49.1 million, including $46.0 million drawn on the revolving facility. The $125 million facility had $79.0 million available; the company reported covenant compliance. Current assets were $63.7 million and current liabilities $21.4 million.
- Quarterly and year-to-date dividends declared were $0.15 and $0.45 per share, versus $0.12 and $0.36 in the prior-year periods.
Material changes versus prior periods
Growth was supported by higher patient volume, new clinics and acquisitions, while lower revenue per visit and higher clinic costs weighed on margins. Q3 common-shareholder income and diluted EPS improved; year-to-date operating income declined slightly while common-shareholder income and EPS increased. The company acquired interests in 17 clinics through four 2015 acquisitions, and acquired additional interests in eight partnerships. Goodwill rose to $170.8 million from $147.9 million, largely reflecting acquisitions.
Outlook, commentary, risks and unusual items
- Management expects operating cash flow and available credit to fund working capital, clinic development and acquisitions through at least September 2016, and plans to continue opening clinics and pursuing acquisitions. No earnings or revenue guidance was provided.
- Q3 and year-to-date salaries included $230,000 of compensation and severance costs tied to a previously announced cost-cutting plan. The company reported no goodwill impairment in its 2015 testing.
- A Justice Department review concerns Medicare billings at one clinic from 2007–2009. The partnership tentatively agreed to a $710,000 settlement, already accrued in 2012; a Corporate Integrity Agreement is anticipated.
- Key risks include Medicare and other payor reimbursement changes, regulatory audits and compliance, therapist availability and productivity, acquisition integration, clinic closures, capital availability and variable-rate debt. A 1 percentage-point interest-rate change on the revolver balance would change annual interest expense by approximately $460,000.
- Medicare payment policy remains relevant: the filing describes a 0.3% fee-schedule decrease for 2016 and therapy caps and exceptions extended through 2017. The company also cited the transition to ICD-10 as a risk.
Important facts for investors to verify
- Whether visit growth can continue to offset declining net patient revenue per visit and rising clinic-cost ratios.
- Acquisition performance, integration, and the final purchase-price allocation for 2015 acquisitions, which remained preliminary.
- Cash generation, revolver usage, covenant headroom and exposure to variable interest rates as acquisitions and dividends continue.
- Status and final terms of the Medicare investigation settlement and anticipated Corporate Integrity Agreement.
- Future reimbursement, regulatory and collection trends, including whether receivables and days sales outstanding remain controlled.