U.S. Physical Therapy, Inc. — Q1 2018 Form 10-Q
Business context and period. The unaudited filing covers the three months ended March 31, 2018, compared with Q1 2017. The company operates outpatient physical therapy clinics, an industrial injury prevention business and third-party managed clinics. At quarter-end it operated 580 clinics in 42 states and managed 28 third-party facilities.
Financial and operating results
- Revenue: Net revenue rose 11.0% to $108.3 million. Net patient revenue increased 7.4% to $100.6 million; patient visits rose 7.2% to 956,237, while revenue per visit was nearly flat at $105.15 versus $105.04. Industrial injury prevention revenue was $4.9 million, versus $1.5 million in Q1 2017, which included only one month of operations.
- Profit and margins: Gross profit increased to $23.2 million from $20.7 million; gross margin was 21.4% versus 21.3%. Operating income was $13.1 million versus $12.2 million. Net income was $10.1 million versus $6.0 million, and net income attributable to USPH shareholders was $7.1 million versus $4.8 million.
- Per-share results: GAAP diluted EPS was $0.27 versus $0.38. The 2018 calculation includes a $5.081 million after-tax-related revaluation charge to retained earnings for redeemable non-controlling interests. Management’s non-GAAP “Operating Results” were $7.1 million, or $0.56 per diluted share, versus $6.4 million, or $0.51, in Q1 2017; the company notes that the measure’s calculation differs between periods.
- Costs: Operating costs were $85.1 million, or 78.6% of revenue, versus $76.8 million, or 78.7%. Salaries and related costs increased to $62.3 million and 57.5% of revenue from $55.8 million and 57.2%. Corporate office costs rose to $10.2 million, or 9.4% of revenue, from $8.5 million, or 8.8%.
- Cash flow: Operating cash flow was $15.5 million, compared with $14.2 million. Investing used $2.4 million, including $1.4 million for fixed assets and $0.8 million for acquisitions. Financing used $15.2 million, primarily reflecting a $12.0 million net repayment on the revolving facility and $2.2 million in distributions to non-controlling interests. Cash declined $2.1 million to $19.8 million.
- Debt and liquidity: Total notes payable and revolver borrowings were $48.1 million at March 31, including $42.0 million drawn on the $125 million unsecured revolver; $83.0 million remained available. The revolver matures November 30, 2021. The company reported covenant compliance and said cash and available credit should cover operating needs, clinic development and acquisitions through at least March 2019; significant acquisitions may require additional financing. A 1% rate change on the revolver balance would change annual interest expense by approximately $420,000.
- Other metrics: Patient accounts receivable, net, was $46.2 million, versus $44.7 million at year-end. Days sales outstanding increased to 40 from 36. The quarterly dividend declared was $0.23 per share, versus $0.20.
Material changes and notable items
- Revenue growth reflected clinic openings and acquisitions, higher patient volume, management contracts, and a full quarter of industrial injury prevention operations. Of the $6.9 million increase in physical therapy patient revenue, $5.9 million came from newer clinics and $1.0 million from mature clinics.
- At year-end 2017, partnership agreements were amended to remove mandatory redemption features. Related interests are now classified as redeemable non-controlling interests in temporary equity rather than liabilities. Their $5.081 million Q1 fair-value increase was recorded directly against retained earnings, but affects the EPS calculation; the change also makes the GAAP EPS comparison with 2017 less directly comparable.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no material change to revenue, bad debt expense or income presentation.
- On February 28, 2018, the company acquired two clinic practices for $760,000 cash and a $150,000 seller note. Goodwill recorded for the acquisition was $856,000. On April 30, 2018, it acquired a 65% interest in an industrial injury prevention provider for $9.0 million.
Outlook, risks and contingencies
Management said it intends to continue acquiring clinic practices, developing new clinics and satellite locations, and increasing patient volume through marketing and new programs. No quantitative earnings or revenue guidance is provided, and the filing cautions that Q1 results are not necessarily indicative of full-year results. The company leases all but one clinic facility and expects to recognize significant right-of-use assets and lease liabilities when it adopts the new lease standard in 2019.
Risks discussed include Medicare and other payor reimbursement changes, regulatory compliance and audits, therapist recruitment and retention, clinic productivity, acquisitions and integration, litigation, cyber security, access to capital, and weather and seasonality. Medicare represented approximately $24.6 million of Q1 patient revenue. The filing describes a putative shareholder class action relating to prior accounting for redeemable non-controlling interests; the company’s motion to dismiss was pending. Management did not believe existing litigation would materially affect the company. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Investor verification points
- Reconcile GAAP EPS of $0.27 with management’s non-GAAP Operating Results EPS of $0.56, including the redeemable-interest revaluation and differing year-over-year definitions.
- Assess whether higher patient visits and clinic expansion can offset rising labor costs and corporate office expenses; monitor receivables, collections and DSO.
- Review the redemption rights and valuation assumptions for the $108.1 million of redeemable non-controlling interests, as well as their effects on equity and EPS.
- Track acquisition spending, the April 2018 transaction, remaining revolver capacity, covenant headroom and variable-rate exposure.
- Monitor reimbursement policy changes, including Medicare payment adjustments, and the pending shareholder lawsuit and related costs or outcomes.