U.S. Physical Therapy, Inc. — Q2 2011 Form 10-Q
Business and period: The company operates outpatient physical and occupational therapy clinics and manages clinics for third parties. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the same periods in 2010. At quarter-end it had 398 clinics, versus 369 a year earlier.
Financial results
Dollar amounts are in millions, except per-share data. Figures may not sum due to rounding.
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Net revenues | $59.9 | $54.1 | $116.7 | $104.5 |
| Operating income | $10.9 | $10.0 | $19.6 | $16.7 |
| Net income attributable to common shareholders | $4.9 | $4.5 | $8.6 | $7.6 |
| Diluted EPS | $0.41 | $0.38 | $0.72 | $0.64 |
| Operating margin | 18.2% | 18.5% | 16.8% | 15.9% |
- Revenue and activity: Q2 net patient revenue rose 8.4% to $56.7 million, primarily on 541,000 visits versus 497,000. Patient revenue per visit edged down to $104.77 from $105.12. Other revenue grew to $3.2 million, mainly from physician services. For H1, visits increased to 1.056 million from 966,000 and net patient revenue rose 9.4% to $110.6 million.
- Costs and margins: Q2 clinic costs were 71.8% of net revenue, compared with 71.3%; salaries were 51.9% versus 51.1%. H1 clinic costs improved to 72.5% from 73.2%. Operating income increased in both periods; the filing attributes growth largely to new clinics, while mature-clinic visits declined by 8,000 in each comparison period.
- Cash flow: H1 operating cash flow was $12.8 million, versus $12.5 million. Investing used $17.4 million, including $15.9 million to acquire noncontrolling interests; financing provided $4.3 million. Cash ended at $9.0 million, down from $9.2 million at year-end 2010.
- Liquidity and debt: At June 30, current assets were $44.3 million and current liabilities $14.7 million. Revolver borrowings were $15.8 million; notes payable totaled $0.8 million, for total reported borrowings of about $16.6 million. The company reported $34.2 million available under its then-$50 million credit facility and compliance with covenants. On July 14, the facility commitment was increased to $75 million, with maturity August 31, 2015.
- Shareholder returns: The company declared dividends of $0.08 per share for Q2 and $0.16 per share for H1; H1 cash dividends were $1.9 million.
Material changes and notable items
- Revenue growth was driven principally by acquired and newer clinics, including the 25 clinics acquired in 2010, and higher physician-services revenue. New clinics contributed 52,000 additional Q2 visits; mature clinics recorded fewer visits.
- During H1, the company bought additional interests in STAR Physical Therapy and other partnerships, including the full remaining 35% interest in one Texas partnership. These purchases reduced additional paid-in capital and increased cash use; the company owned 87.6% of STAR after the disclosed purchases.
- A July 25, 2011 subsequent event was the acquisition of a 51% interest in a 20-clinic group for $8.426 million, mostly cash.
- H1 2010 interest and other income included a $578,000 pretax gain on the sale of a 51% interest in a five-clinic joint venture; no comparable gain is reported for H1 2011.
Outlook, risks, and contingencies
- The filing gives no specific earnings or revenue guidance. Management said operating cash generation, cash, and unused credit were expected to cover operating needs, dividends, clinic development, and other stated requirements through at least June 2012; significant acquisitions could require additional borrowing. Results for the first half are not necessarily indicative of full-year results.
- Management plans to continue developing new and satellite clinics and evaluating acquisitions. It reported opening eight clinics and closing two in H1 2011.
- Medicare’s multiple-procedure payment reduction took effect in 2011. The company estimated a 5%–7% reduction in reimbursement for its Medicare therapy services. Risks also include broader payor-rate changes, healthcare regulation and reform, economic conditions, therapist recruitment and retention, physician relationships, competition, weather, clinic closures, acquisitions, and decentralized billing and collections controls.
- Receivables increased: patient accounts receivable, net, was $27.5 million versus $24.8 million at year-end; days sales outstanding rose to 48 from 45. The allowance for doubtful accounts was 8.6% of patient receivables, up from 8.1%.
- The company disclosed contingent acquisition-related obligations, including possible consideration of up to $3.781 million tied to results of a 2008 physician-services acquisition. A separate contingent payment arrangement for a 2008 clinic acquisition earned no additional consideration over its three-year period. Management reported no material pending or threatened investigations known to it, while noting regulatory compliance remains subject to review.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new-clinic growth can offset the reported decline in mature-clinic visits and the slight Q2 decrease in patient revenue per visit.
- The effect of Medicare reimbursement reductions and any subsequent changes in government or commercial payor terms.
- Receivables collectability and the continued rise in days sales outstanding and allowance rates.
- Post-quarter acquisition financing, integration, and covenant capacity following the 20-clinic acquisition and credit-facility increase.
- The filing’s stated liquidity outlook, including whether acquisition spending or further purchases of noncontrolling interests changes cash needs.