Business context and reporting period
U.S. Physical Therapy, Inc. operates outpatient physical and occupational therapy clinics and manages facilities for third parties. This Form 10-Q covers the quarter and six months ended June 30, 2016. At quarter-end, the company operated 516 clinics in 42 states and managed 22 third-party facilities.
Financial performance
Amounts are in millions, except per-share data and operating statistics.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenues | $90.4 | $83.3 | $177.3 | $160.5 |
| Operating income | $15.0 | $13.5 | $26.5 | $22.7 |
| Net income attributable to common shareholders | $7.1 | $6.3 | $12.4 | $10.5 |
| Diluted EPS | $0.57 | $0.48 | $0.99 | $0.82 |
- Revenue grew 8.6% in Q2 and 10.5% in the first half. Patient visits increased 8.1% and 10.6%, respectively; net patient revenue per visit was $105.27 in Q2 versus $104.85, and $105.25 for the first half versus $105.56.
- Operating margin improved to 16.6% from 16.3% in Q2 and to 15.0% from 14.2% for the first half. Clinic operating costs declined as a share of revenue to 74.5% from 74.6% in Q2 and to 75.4% from 76.3% for the first half. Salaries and related costs were 54.0% of revenue in Q2 versus 53.3%; first-half share was unchanged at 54.5%.
- First-half operating cash flow was $33.4 million versus $19.2 million. Investing used $17.8 million, primarily for acquisitions and capital expenditures; financing used $10.9 million, including dividends and distributions to non-controlling partners. Cash increased to $20.5 million from $15.8 million at year-end.
- At June 30, debt was $48.1 million: $42.5 million drawn on the revolving facility and $5.6 million in notes payable. The facility had $82.5 million available under its $125 million commitment, matures November 2018, and was in covenant compliance. A 1 percentage-point rate change would alter annual interest expense by approximately $425,000.
- Total current assets were $70.4 million and current liabilities $29.0 million. Patient accounts receivable were $39.4 million; days sales outstanding rose to 38 from 36 at year-end. The doubtful-account allowance was 4.1% of patient receivables versus 3.8% at year-end.
Material changes and unusual items
Growth reflected both acquired/new clinics and mature-clinic activity. Q2 net patient revenue from new clinics was $5.4 million; mature-clinic revenue increased $1.5 million. For the first half, the respective figures were $8.7 million and $7.5 million. The company acquired a 55% interest in an eight-clinic practice in February and a single clinic in June; first-half cash paid for businesses, net of cash acquired, was $13.0 million. Acquisition purchase-price allocations were preliminary, including $19.2 million of goodwill from 2016 acquisitions.
Q2 diluted EPS in 2015 included a $0.03 charge related to revaluation of redeemable non-controlling interests; there was no such charge in 2016. First-half 2015 EPS likewise included that $0.03 charge. These adjustments affected EPS, not reported net income. The filing reports no material impact from recently adopted acquisition-accounting guidance.
Outlook, commentary and risks
Management gave no numerical earnings or revenue guidance. It said operating cash flow and available revolver capacity were expected to fund operating needs, clinic development and acquisitions through at least June 2017, excluding future acquisition requirements; significant acquisitions would likely require additional financing. Management intends to continue developing clinics and pursuing acquisitions.
Key risks include changes to Medicare and other payor reimbursement, regulatory reviews and audits, therapist availability and retention, clinic productivity, acquisition integration, litigation, privacy compliance, and interest-rate and capital-market exposure. Medicare revenue was approximately $41.1 million for the first half. The filing describes a 0.3% Medicare fee-schedule decrease for 2016 and the 2% Medicare payment reduction extended through fiscal 2025. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether visit growth and mature-clinic performance continue, and how much reported growth depends on acquisitions.
- Whether receivables collection trends, including DSO and the doubtful-account allowance, remain manageable.
- Revolver utilization, variable-rate exposure, covenant compliance and debt maturities, particularly the facility maturity in November 2018.
- Final purchase accounting and the performance and impairment risk of acquired goodwill and intangible assets.
- Future Medicare and commercial-payor reimbursement changes, and their impact on revenue per visit and margins.