U.S. Physical Therapy, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results. Amounts below are in U.S. dollars.
Business context and reporting period
The company operates outpatient physical therapy clinics, generally through partnerships with local therapists. At year-end it operated 489 clinics in 42 states, managed 16 third-party clinics, and had 3,151 employees. Growth strategy centers on acquisitions, new clinic development, satellite locations, and patient-volume growth.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net revenue | $305.1 million | $264.1 million |
| Net patient revenue | $299.0 million | $258.3 million |
| Operating income from continuing operations | $45.8 million | $38.8 million |
| Gross margin | $76.2 million; 25.0% of net revenue | $64.7 million; 24.5% |
| Net income from continuing operations, including non-controlling interests | $30.4 million | $26.0 million |
| Net income attributable to common shareholders from continuing operations, before 2014 NCI revaluation charge | $20.9 million; $1.71 diluted EPS | $17.5 million; $1.45 diluted EPS |
| Net cash provided by operating activities | $45.2 million | $44.8 million |
| Cash and cash equivalents at year-end | $14.3 million | $12.9 million |
| Credit Agreement borrowings at year-end | $34.5 million | $40.0 million |
2014 patient visits rose to 2.82 million from 2.44 million; average revenue per visit increased to $106.08 from $105.83. Clinic operating costs were 75.0% of net revenue, versus 75.5% in 2013. Corporate office costs rose to $30.4 million from $25.9 million. Interest expense increased to $1.1 million from $0.5 million, primarily due to acquisition-related borrowing. The effective tax rate was 40.6%.
Liquidity included $29.3 million of working capital and a 2.15 current ratio. The $125 million unsecured revolving facility had $90.5 million available at year-end; the company reported compliance with its covenants. Cash from operations funded acquisitions, capital spending, dividends, non-controlling-interest distributions, and debt reduction. Capital expenditures were $5.2 million and business acquisitions used $12.3 million of cash.
The 2014 quarterly table reports fourth-quarter net revenue of $79.4 million and operating income of $10.8 million, compared with $68.6 million and $9.4 million, respectively, in Q4 2013. Common-shareholder net income was $5.0 million in Q4 2014 versus $3.9 million in Q4 2013.
Material changes versus the prior comparable period
- Annual net revenue increased 15.5%; net patient revenue increased 15.8%. Management attributed much of the growth to acquired clinics, including the contribution of the two clinic groups acquired in late 2013, as well as 2014 acquisitions.
- Gross margin improved by 0.5 percentage point, while salaries and related costs remained broadly stable at 53.6% of net revenue versus 53.7%.
- Cash from operations was nearly flat year over year, while year-end revolving-credit borrowings declined by $5.5 million.
- Net income attributable to common shareholders was $20.9 million in 2014. The 2013 reported figure was $12.7 million after a $5.0 million after-tax loss from discontinued physician-services operations; 2013 continuing-operations income attributable to common shareholders was $17.5 million.
Outlook, risks, contingencies, and unusual items
- Management said it intended in 2015 to pursue acquisitions, develop clinics and satellites, and increase patient volume. The filing provides no numerical 2015 revenue or earnings guidance.
- Medicare reimbursement policy was a key uncertainty. The filing described a 1% 2015 payment increase for physical therapy, an existing 2% Medicare sequestration reduction, and the possibility of SGR-related cuts beginning April 1, 2015 absent further congressional action. Therapy caps and the related exceptions and review processes were extended only through March 31, 2015 under then-current law.
- Other key risks include changes in private and government reimbursement, payor audits and potential repayment or penalties, healthcare regulatory compliance, therapist recruitment and retention, physician referrals, acquisition integration, competition, weather, cybersecurity and privacy, and debt covenants and interest-rate exposure. A 1% change in the credit facility interest rate was estimated to change annual interest expense by $345,000.
- 2014 included a $1.086 million charge to additional paid-in capital for revaluation of redeemable non-controlling interests, reducing reported EPS by $0.09; it was not an income-statement expense. The 2014 acquisitions’ purchase-price allocations were preliminary and included $13.0 million of goodwill.
- The physician-services business was sold in 2013 and reported as discontinued operations. Its after-tax loss was $5.0 million in 2013, including a substantial goodwill and intangible-asset write-off. No goodwill impairment was recorded for the continuing business in 2014.
- The company accrued $1.8 million for patient and payor credit balances and overpayments, expected to be paid in 2015. It reported ordinary-course litigation but did not expect existing matters to have a material impact. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate reported EPS from continuing-operations EPS and from the 2014 NCI revaluation adjustment; likewise account for the 2013 discontinued-operations loss when comparing earnings.
- Assess how much 2014 revenue and visit growth came from acquired clinics versus organic growth, particularly the late-2013 acquisitions.
- Track Medicare and other payor reimbursement changes, therapy-cap rules, audit activity, and any repayment or compliance developments.
- Review acquisition integration, preliminary purchase-price allocations, goodwill and intangible-asset balances, and future commitments to repurchase minority interests.
- Monitor cash generation, the $34.5 million revolving balance, covenant headroom, variable-rate exposure, lease and employment commitments, and dividend restrictions under the credit agreement.