U.S. Physical Therapy, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; the filing also reports unaudited fourth-quarter results. Financial figures are in U.S. dollars.
Business context and reporting period
The company operates outpatient physical therapy clinics and manages facilities for third parties. At year-end it operated 578 clinics in 41 states and managed 32 additional practices. In March 2017 it acquired a 55% interest in a workforce performance solutions business. Growth strategy emphasizes acquisitions, new clinics, satellites and increased patient volume.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $414.1 million | $356.5 million |
| Operating income | $54.7 million | $49.5 million |
| Gross profit / margin | $90.6 million / 21.9% | $82.0 million / 23.0% |
| Net income attributable to USPH shareholders | $22.3 million; $1.76 per diluted share | $20.6 million; $1.64 per diluted share |
| Cash from operating activities | $56.5 million | $51.1 million |
| Cash and cash equivalents at year-end | $21.9 million | $20.0 million |
Revenue grew 16.1%, reflecting 11.7% more patient visits, acquisitions, higher management-contract revenue and the newly acquired workforce business. Patient revenue per visit was nearly flat at $105.05 versus $105.18. Operating costs rose faster than revenue, including salaries and related costs, which increased to 57.3% of net revenue from 55.7%; gross margin declined accordingly.
At December 31, 2017, the company had $54.0 million drawn on its $125 million unsecured revolving facility, leaving $71.0 million available, and $6.8 million in notes payable. The revolver matures November 30, 2021; the company reported covenant compliance. Working capital was $37.5 million and the current ratio was 1.95. The filing states cash and available credit should cover operating needs, development and acquisitions through at least December 2018, except that significant acquisitions may require financing. The company generated $56.5 million operating cash flow and used $36.7 million for business purchases, $7.1 million for fixed assets and $10.1 million for common dividends.
For Q4 2017, net revenue was $109.2 million, operating income $14.0 million, net income $8.7 million, and net income attributable to USPH shareholders $7.3 million, or $0.57 per diluted share.
Material changes versus the prior comparable period
- Net patient revenue increased 11.6%; visits rose to 3.71 million from 3.32 million. The company acquired four multi-clinic groups totaling 39 clinics, along with two single-clinic businesses.
- Other revenue increased to $24.8 million from $7.7 million, including $14.9 million from ten months of the workforce performance business and $7.4 million from management contracts.
- GAAP net income attributable to shareholders rose to $22.3 million from $20.6 million. Results included a $4.3 million tax benefit from revaluing deferred taxes following the Tax Cuts and Jobs Act.
- Total interest expense increased to $21.1 million from $11.5 million, primarily reflecting a $12.9 million increase in the redemption value of partnership interests and $6.1 million of earnings allocated to mandatorily redeemable interests.
- Effective December 31, 2017, partnership agreement amendments replaced mandatory redemption provisions with put/call rights. Consequently, most former liability-classified interests were reclassified to temporary equity: redeemable non-controlling interests were $102.6 million at year-end, while mandatorily redeemable interests were $0.3 million, versus $69.2 million of the latter in 2016.
Outlook, commentary, risks and unusual items
- Management plans to continue acquisitions and clinic development, open satellite locations where appropriate, and seek higher patient volume. The filing provides no numerical earnings or revenue guidance.
- Management’s non-GAAP “Operating Results” were $26.2 million, or $2.08 per diluted share, versus $24.3 million, or $1.94, in 2016. This measure excludes specified items, including the change in redemption value, restatement-related costs and the TCJA tax benefit; it is not a substitute for GAAP results.
- The company disclosed a prior-period restatement related to its accounting for redeemable non-controlling partnership interests. Management reported remediation of the previously identified material weakness as of year-end; Grant Thornton gave unqualified opinions on the financial statements and internal controls, and management concluded controls were effective.
- A putative shareholder class action alleges misstatements or omissions about the historical accounting for redeemable non-controlling interests. The company’s motion to dismiss was pending; management said it did not expect existing proceedings to have a material impact, while noting outcomes cannot be predicted with certainty.
- Key risks include Medicare, Medicaid and commercial-payor reimbursement changes; retroactive claim recoupments and billing audits; healthcare regulatory compliance and the Corporate Integrity Agreement; therapist recruitment and retention; acquisition integration; referral relationships; cybersecurity and privacy; and weather-related disruption. The company reported $4.2 million accrued for credit balances and overpayments, expected to be paid in 2018.
- Medicare therapy caps were eliminated effective January 1, 2018 under the Bipartisan Budget Act of 2018. The filing also describes ongoing Medicare payment reductions and future changes, including an 85% payment rate for certain therapy-assistant services beginning in 2022.
Important facts for investors to verify
- Reconcile the prior-period restatement and assess the shareholder litigation’s status and potential exposure.
- Separate underlying operating growth from acquisition contributions, margin compression and the $4.3 million tax benefit.
- Review the accounting, valuation and potential cash requirements associated with $102.6 million of redeemable non-controlling interests and related put/call rights.
- Monitor reimbursement rates, audit/recoupment exposure, and the sustainability of patient-visit growth and therapist staffing.
- Track debt covenant headroom, acquisition funding needs, lease commitments, and the company’s capacity to maintain dividends while investing for growth.