U.S. Physical Therapy, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with the three months ended March 31, 2022 unless noted. The company operates outpatient physical therapy clinics and an industrial injury prevention services (IIP) business. At quarter-end it operated 647 clinics in 40 states and managed 35 facilities for third parties.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $148.5 million | $131.7 million | +12.8% |
| Operating income | $17.0 million | $15.0 million | +13.1% |
| Net income | $11.4 million | $12.0 million | Down $0.6 million |
| Net income attributable to USPH shareholders | $7.4 million | $8.8 million | Down $1.4 million |
| Diluted EPS | $0.58 | $0.67 | Down $0.09 |
| Adjusted EBITDA (non-GAAP) | $18.5 million | $17.5 million | +5.6% |
| Operating cash flow | $11.3 million | $11.6 million | Down $0.3 million |
- Growth and margins: Physical therapy operations revenue increased 15.4% to $127.4 million; patient visits rose 15.4% to 1.23 million, while net patient revenue per visit was essentially flat at $103.12 versus $103.00. IIP revenue increased 1.5% to $19.4 million. Gross profit rose 16.1% to $30.9 million, and gross margin improved to 20.8% from 20.2%. Operating margin was 11.4% in both periods.
- Costs: Salaries and related costs increased to 57.9% of revenue from 57.1%, while rent, supplies, contract labor and other costs declined to 20.3% from 21.8%. IIP gross profit fell to $3.8 million from $4.2 million, with segment gross margin down to 19.5% from 21.8%.
- Cash and investment: Cash was $32.6 million at March 31, 2023, versus $31.6 million at year-end 2022. Investing activities used $12.7 million, including $5.8 million for the quarter’s acquisition, $5.2 million to purchase redeemable non-controlling interests and $2.1 million for fixed assets. Financing activities provided $2.3 million.
- Debt and liquidity: Total debt principal was $192.2 million ($190.4 million net of debt issuance costs), versus $185.6 million at year-end. This included $147.2 million of term debt, $38.0 million drawn on the revolver and $7.0 million of other debt. The $175 million revolving facility had $137.0 million available; the credit agreement matures June 2027. The company reported covenant compliance and said cash and available credit should cover operating working-capital needs through at least March 31, 2024.
- Other balance-sheet items: Total assets were $868.1 million; redeemable non-controlling interest was $164.3 million. Operating lease liabilities totaled $109.1 million. The company declared a $0.43-per-share quarterly dividend.
Material changes and management commentary
- Revenue growth was largely driven by higher clinic visit volume and the contribution from acquired practices; mature-clinic revenue increased 5.8%. The company acquired an 80% interest in a one-clinic practice in February for approximately $6.2 million.
- Operating income improved, but higher interest expense largely offset the operating gains: interest and other debt expense increased to $2.6 million from $0.5 million, reflecting higher borrowing and rates. Management attributed the decline in shareholder net income principally to this increase.
- Management cited Q1 Adjusted EBITDA of $18.5 million as an all-time first-quarter high. This is a non-GAAP measure and should be considered alongside GAAP results, not as a substitute for them.
- There was no specific full-year earnings or revenue guidance in the provided filing text. Management said it plans to continue developing clinics and pursuing acquisitions, potentially using cash and financing.
Unusual items, risks and contingencies
- Q1 included $0.5 million of Relief Funds received in prior years; management said it expects no further Relief Funds. The company also recorded a $0.7 million increase in contingent earn-out liability and a $0.1 million increase in a put-right liability.
- The $150 million interest-rate swap had a fair value of $3.6 million at quarter-end and generated $0.6 million of interest savings during the quarter. Its fair-value movement produced an after-tax unrealized loss of $1.4 million in other comprehensive income, not net income.
- Acquisition-related contingent consideration remains subject to fair-value remeasurement; one 2022 acquisition has contingent consideration valued at approximately $9 million, with no stated maximum payout. Acquisition purchase-price allocations were still preliminary for certain deals.
- Key risks include changes in Medicare and other payer reimbursement, labor availability and costs, acquisition integration, clinic performance, variable interest rates, and the ability to retain IIP clients. The filing notes ordinary-course legal, regulatory and governmental audit matters whose outcomes cannot be predicted, and adds risks from banking-system volatility and possible exposure of cash balances above FDIC limits.
- Medicare net patient revenue was approximately $41.9 million, versus $35.6 million in Q1 2022. The filing discusses potential reimbursement reductions and states that regulatory interpretation or enforcement could result in penalties or other adverse effects.
Important facts for investors to verify
- Whether visit growth and the contribution from acquired clinics continue, and whether revenue per visit improves.
- Whether labor-cost pressure and weaker IIP margins persist or reverse.
- How higher interest rates, acquisition funding and future minority-interest purchases affect earnings, cash flow and debt.
- The eventual amount and timing of contingent acquisition payments and put/call redemptions, including the acquisition obligation with no stated maximum payout.
- Medicare and commercial payer rate changes, collection trends, and the outcome of any legal, regulatory or audit matters.
- Whether cash availability and revolver capacity remain adequate as the company pursues acquisitions and pays dividends.