U S PHYSICAL THERAPY INC quarterly report, Q2 FY2020

U.S. Physical Therapy, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. The company operates outpatient physical therapy clinics and an industrial injury prevention services business; it reported these as two segments beginning in Q2 2020, with prior-period segment data reclassified.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Net revenue	$83.9 million	$126.4 million	$196.6 million	$242.6 million
Operating income	$10.3 million	$19.9 million	$14.3 million	$35.3 million
Net income attributable to USPH shareholders	$10.2 million	$14.6 million	$11.2 million	$23.1 million
Reported diluted EPS	$0.99	$0.85	$1.19	$1.24
Operating cash flow	Not provided for quarter	Not provided for quarter	$48.4 million	$28.6 million

Q2 gross profit was $19.3 million (23.0% of revenue), versus $31.4 million (24.9%) a year earlier. Operating margin was 12.2%, compared with 15.7%.
Q2 net patient revenue fell to $72.3 million from $113.4 million; patient visits declined to 675,700 from 1,058,000. Average net patient revenue per visit was approximately unchanged at $106.97 versus $107.16.
Q2 industrial injury prevention revenue was $9.7 million, down 6.1%; six-month revenue increased 13.6% to $19.5 million, partly reflecting the 2019 acquisition.
Six-month cash from operations increased year over year. Cash and equivalents were $43.6 million at June 30, up from $23.5 million at year-end 2019. Cash generation included working-capital movements and should be viewed alongside the government advance payment liability.

Balance sheet, debt and liquidity

At June 30, 2020, total assets were $585.0 million and total liabilities were $191.6 million. Borrowings totaled $38.3 million: $33.0 million on the revolving credit facility and $5.3 million of notes payable.
The $125 million unsecured revolving facility had $92 million available; it matures November 30, 2021. The company reported covenant compliance at quarter-end, while noting continued monitoring amid COVID-19 uncertainty. The facility carries variable interest rates; a one-percentage-point rate change would affect annual interest expense by approximately $330,000 at the period-end balance.
Current assets were $92.1 million and current liabilities $87.4 million. Operating lease liabilities totaled $90.8 million, including $29.6 million current.
Operating cash flow was $48.4 million; investing cash use was $18.1 million and financing cash use was $10.3 million for the six months. The company paid $4.1 million in shareholder dividends during the period.

Material changes, unusual items and management commentary

COVID-19 materially reduced clinic activity and revenue. Physical therapy daily visits per clinic averaged 16.4 in April, 18.6 in May and 21.8 in June; management estimated July visits reached 80%–85% of pre-pandemic volume. Industrial injury prevention was operating at slightly over 90% of normal at the time of filing.
The company furloughed or terminated approximately 40% of its 5,500 full- and part-time workforce beginning in March; more than 750 furloughed employees had returned by early August. Cost reductions included staffing and compensation actions.
Q2 included $7.9 million of non-repayable CARES Act Provider Relief Funds, recognized in revenue, and a $1.1 million gain on sales of 11 previously closed clinics. Q2 GAAP net income attributable to shareholders was $10.2 million; management’s non-GAAP Operating Results were $10.9 million including relief funds and $5.0 million excluding them. Six-month Operating Results were $14.8 million including and $8.9 million excluding relief funds. These measures are not GAAP and exclude specified items.
The company received $12.9 million under Medicare’s Accelerated and Advance Payment Program (MAAPP), recorded as a liability, not revenue. The funds were to be applied against future Medicare billings starting August 2020, with remaining amounts due by November 2020; unpaid balances would begin accruing interest then. It also deferred $2.2 million of employer Social Security taxes.
Management stated that cash was expected to fund operating subsidiaries’ working-capital needs through at least June 30, 2021. No specific earnings or revenue guidance was provided; management cautioned that interim results may not indicate full-year performance.
The company wrote off $1.9 million of goodwill associated with permanently closed clinics. It found no further goodwill or tradename impairment was more likely than not at June 30, but said it would continue monitoring pandemic-related conditions and estimates.
Risks include renewed restrictions and reduced patient visits, reimbursement changes, including a proposed 2021 Medicare fee schedule change that could reduce certain therapy payments by an estimated 9% if finalized, and potential covenant pressure. Redeemable non-controlling interests totaled $136.7 million; partner put rights could require cash repurchases and affect liquidity.
A False Claims Act qui tam lawsuit alleges upcoding of Medicare billings at a subsidiary. The government declined to intervene; motions to dismiss were pending. The company disputed the allegations and said it intended to defend the case. The filing also describes other ordinary-course legal and regulatory matters whose outcomes it could not predict.

Key facts for investors to verify

Whether patient visits and clinic revenue continued recovering after the July estimate, and whether staffing and costs adjusted as volumes returned.
Repayment or application of the $12.9 million MAAPP advance by the stated November 2020 deadline, and treatment of deferred payroll taxes.
Final CMS reimbursement policy for 2021 and whether any proposed therapy payment reductions were adopted.
Ongoing compliance with credit-facility covenants, refinancing or amendment needs ahead of the November 2021 maturity, and cash demands from partner put rights.
Subsequent developments in the False Claims Act litigation and any further clinic closures, goodwill impairments or other pandemic-related charges.