U.S. Physical Therapy, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Dollar figures below are in millions unless otherwise noted.
Business context
The company operates outpatient physical therapy clinics and also manages clinics for third parties. At September 30, 2013, it operated 447 clinics in 43 states and managed 19 third-party facilities. It acquired three clinic groups and three individual clinics during the first nine months. The physician services business was sold on September 30 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenues | $65.8 | $62.1 | $195.5 | $187.3 |
| Operating income, continuing operations | $9.9 | $9.5 | $29.4 | $30.1 |
| Income attributable to common shareholders, continuing operations | $4.7 | $4.6 | $13.6 | $14.0 |
| Net income attributable to common shareholders, including discontinued operations | $0.2 | $4.6 | $8.9 | $13.9 |
| Diluted EPS, continuing operations | $0.38 | $0.38 | $1.12 | $1.18 |
| Diluted EPS, including discontinued operations | $0.02 | $0.38 | $0.73 | $1.17 |
Q3 revenue rose 6.0%, mainly on higher visits, while nine-month revenue rose 4.4%. Q3 visits increased to 611,448 from 574,567; average patient revenue per visit slipped to $105.27 from $105.68. Nine-month visits increased to 1,802,870 from 1,739,564 and revenue per visit rose to $105.96 from $105.23. Mature-clinic visits declined year over year in both periods, while new clinics contributed growth.
Gross margin was approximately 24.5% in Q3 versus 24.9% a year earlier, and 24.9% for the nine months versus 25.9%. Clinic operating costs were 75.5% of revenue in Q3 and 75.2% for the nine months, up from 75.1% and 74.1%, respectively. Salaries and related costs grew faster than revenue. Operating margin was approximately 15.0% for Q3 (versus 15.4%) and 15.0% for the nine months (versus 16.1%).
Continuing-operations earnings attributable to common shareholders were relatively stable in Q3, but declined for the nine-month period. Reported total earnings were substantially lower because discontinued operations recorded losses of $4.5 million for Q3 and $5.0 million for the nine months, including the loss on sale and asset write-offs.
Cash flow, liquidity and debt
- Cash from operations was $28.9 million for the first nine months, compared with $29.4 million in 2012. Investing used $14.8 million, including $10.1 million for businesses and $3.5 million for fixed assets. Financing used $13.6 million, including $6.6 million in distributions to non-controlling partners and $3.6 million in shareholder dividends. Cash increased $0.5 million to $12.1 million.
- At September 30, cash was $12.1 million and total debt was $15.1 million: $14.2 million drawn on the revolving credit facility and $1.0 million in notes payable. The revolver had $60.9 million of availability under its $75 million commitment and matures August 2015. The company reported compliance with its covenants.
- Management said operating cash flow was sufficient for expected needs and that cash plus revolver availability should fund operations, development, dividends and other stated needs through at least September 2014; significant acquisitions could require additional financing.
- Current assets were $45.2 million and current liabilities $16.7 million. Days sales outstanding improved to 39 days from 42 at year-end 2012.
Material changes, outlook and risks
- The physician services business had generated negative gross margins. Its sale yielded $0.4 million cash and a $0.5 million note receivable; the transaction and related write-offs and accruals produced a $4.4 million after-tax loss. The filing reports a $6.3 million write-off of goodwill and other intangible assets associated with discontinued operations.
- Medicare reimbursement remains a significant exposure. A 2% Medicare payment reduction took effect April 1, 2013; the company estimated the separate increase in the therapy multiple-procedure payment reduction would lower reimbursement for its Medicare services by 8%–10% versus the prior applicable rates. The filing described a potential 24.4% MPFS reduction for 2014 absent congressional action; the company noted that, if averted, the proposed rule could raise outpatient physical therapy reimbursement by about 1% in aggregate.
- The company gave no specific earnings or revenue guidance. It intends to continue opening clinics and pursuing acquisitions. Management cautioned that interim results are not necessarily indicative of full-year results.
- Other stated risks include payor-rate and healthcare-policy changes, therapist recruitment and retention, physician relationships, regulation and compliance, competition, seasonality and weather, clinic closures, acquisition integration and decentralized billing and collection controls. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mature-clinic visit weakness and higher salary costs continue to pressure margins as the clinic base expands.
- The realized effect of Medicare payment reductions and any subsequent legislative or regulatory changes.
- Final purchase-price allocations for 2013 acquisitions, which were preliminary, and the performance of acquired clinics.
- Collection trends, including receivables and days sales outstanding, and the collectability of the $0.5 million physician-services sale note.
- The continuing-operations versus discontinued-operations earnings reconciliation: Q3 common-shareholder income from continuing operations was $4.7 million, but the reported total after discontinued operations was $0.2 million.