U.S. Physical Therapy, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; figures are unaudited and in U.S. dollars. The company operates outpatient physical and occupational therapy clinics and an industrial injury prevention services business. At quarter-end it operated 550 clinics in 39 states and managed 38 third-party facilities.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $108.9 million | $117.3 million | $305.5 million | $359.9 million |
| Operating income | $19.9 million | $16.8 million | $34.2 million | $52.1 million |
| Net income attributable to USPH shareholders | $10.9 million | $9.0 million | $22.2 million | $32.1 million |
| GAAP diluted EPS | $0.61 | $0.66 | $1.80 | $1.90 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $74.6 million | $46.5 million |
Q3 revenue declined about 7% year over year, while operating income rose about 19%. Operating margin increased to 18.3% from 14.3%; gross profit was $30.4 million, or 27.9% of revenue, compared with $27.4 million, or 23.3%. For the first nine months, revenue fell about 15%, operating income about 34%, and operating margin was 11.2% versus 14.5%. Nine-month gross profit was $65.3 million, including $3.9 million of clinic closure costs; excluding those costs, gross profit was $69.3 million, or 22.7% of revenue.
Q3 net income attributable to shareholders increased, but GAAP EPS decreased partly because the required revaluation of redeemable non-controlling interests is included in EPS while excluded from net income. Management’s non-GAAP Operating Results were $11.1 million, or $0.86 per share, for Q3 including relief funds ($10.9 million, or $0.85, excluding them). For nine months, the measure was $24.6 million, or $1.92 per share, including relief funds, and $19.7 million, or $1.54, excluding them. These are non-GAAP measures, not substitutes for GAAP results.
Physical therapy operations revenue was $98.9 million in Q3, down from $107.3 million; industrial injury prevention revenue was $10.0 million, approximately flat year over year. Q3 patient visits were 910,200 versus 996,100, while net patient revenue per visit rose to $105.91 from $104.80. Nine-month patient visits fell to 2.56 million from 3.06 million. Industrial injury prevention revenue increased 8.9% for the nine months, partly reflecting the 2019 acquisition.
Cash, debt and liquidity
- Cash and cash equivalents were $30.1 million at September 30, 2020, up from $23.5 million at year-end 2019. Cash from operations of $74.6 million included working-capital effects; cash flow also included $12.9 million of Medicare advance payments.
- Borrowings were $12.5 million: $7.0 million on the revolving facility and $5.5 million of notes payable. The $125 million unsecured revolver had $118 million available; it matures November 30, 2021. The company reported covenant compliance and said it was negotiating renewal with its lender.
- Operating lease liabilities totaled $87.0 million, including $26.9 million current. These are lease obligations, not included in the borrowings above.
- Management said available cash should fund operating subsidiaries’ working-capital needs through at least September 30, 2021. That cash includes $12.9 million of Medicare advance payments, which the company intended to repay before repayment offsets begin in August 2021. Accrued expenses also included $4.9 million of deferred employer payroll taxes under the CARES Act.
- Cash dividends paid during the nine months were $4.1 million; dividends declared were $0.32 per share, compared with $0.84 in the prior-year period. No Q3 dividend was declared, versus $0.30 per share in Q3 2019.
Changes, outlook and risks
- Management reported a substantial recovery in physical therapy volumes from Q2: average daily patient visits per clinic were 18.9 in Q2 and 25.8 in Q3, compared with 26.2 in Q1. Volumes remained somewhat below pre-pandemic levels. About 40% of the 5,500-person workforce was furloughed or terminated in March; approximately 1,200 furloughed employees had returned by the filing.
- COVID-19 remained the principal operating uncertainty. Renewed restrictions could again reduce appointments, visits and revenue. The industrial injury prevention business was less affected and was operating slightly below pre-pandemic levels.
- Provider Relief Fund receipts totaled approximately $8.3 million through September 30 and were recognized as other income; $0.4 million was recognized in Q3. Funds are subject to compliance and attestation requirements, and the company said evolving guidance could require adjustments.
- CMS’s proposed 2021 physician-fee-schedule changes could reduce payment for physical and occupational therapy services by an estimated 9%, subject to finalization. Temporary Medicare telehealth reimbursement waivers were extended during the public health emergency. Other reimbursement risks include Medicare payment rules and future therapy-assistant payment reductions.
- The company acquired interests in a four-clinic practice and, on September 30, a 70% interest in an entity holding six management contracts. It also sold interests in 12 previously closed clinics and closed 31 clinics during the nine months. Closure costs were $3.9 million, including a $1.9 million goodwill write-off. Management found no additional goodwill impairment trigger at quarter-end but said it would continue monitoring conditions.
- Redeemable non-controlling interests were $139.8 million. Contractual put rights may require cash repurchases of partners’ interests, with timing and amounts potentially affecting liquidity and capital structure.
- A False Claims Act qui tam case alleges improper Medicare billing by a subsidiary. The government declined to intervene; dismissal motions remained pending. The company said it believes the allegations lack merit and intends to defend the case; outcome is uncertain. The filing also describes other ordinary-course legal and regulatory matters whose outcomes cannot be predicted.
- No formal earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether patient volumes and revenue recovered further after Q3, and whether pandemic restrictions or appointment cancellations returned.
- Final CMS reimbursement decisions for 2021 and the continuation of telehealth coverage and payment terms.
- Compliance with Provider Relief Fund conditions and the timing and source of repayment of the $12.9 million Medicare advance.
- Renewal terms for the revolving credit facility before its November 2021 maturity, covenant headroom, and any cash demands from partner put rights.
- Developments in the False Claims Act litigation and any subsequent regulatory audits, settlements or contingencies.
- Whether acquisition valuations, clinic closures and ongoing COVID-19 impacts lead to additional goodwill or intangible-asset charges.