U.S. Physical Therapy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The company operates outpatient physical therapy clinics and manages facilities for third parties. At quarter-end it operated 512 clinics in 42 states and managed 22 third-party facilities.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net revenue | $86.9 million | $77.2 million; up 12.5% |
| Net patient revenue | $85.0 million | $75.8 million; up 12.2% |
| Operating income | $11.5 million | $9.2 million |
| Net income, including non-controlling interests | $7.7 million | $6.2 million |
| Net income attributable to common shareholders | $5.3 million | $4.2 million |
| Diluted EPS | $0.43 | $0.34 |
| Gross margin | 23.6% | 21.8% |
| Operating margin | 13.2% | 11.9% |
| Operating cash flow | $14.7 million | $3.0 million |
Patient visits increased 13.4% to 808,281, with average visits per clinic per working day rising to 24.7 from 22.9. Net patient revenue per visit declined to $105.22 from $106.34. Net patient revenue growth reflected both newer clinics and mature-clinic visit growth. Clinic operating costs were 76.4% of revenue versus 78.2%; corporate office costs increased to $9.0 million from $7.7 million and were 10.4% of revenue versus 9.9%. The effective tax rate was 39.8%, compared with 40.0%.
Financial position and liquidity
- Cash was $19.2 million at March 31, 2016, up from $15.8 million at year-end. Current assets were $68.1 million and current liabilities $24.2 million.
- Total debt was $58.4 million, including $52.5 million drawn on the revolving facility and $5.9 million of notes payable. Revolver availability was $72.5 million under the $125 million facility, which matures November 30, 2018. The company reported compliance with all covenants.
- Cash from operations of $14.7 million was more than offset by $16.1 million of investing outflows, including $12.9 million for business acquisitions. Financing provided $4.8 million; cash increased by $3.4 million overall. Capital expenditures were $1.7 million.
- The revolver carries variable rates; the company estimated a 1 percentage-point rate change would alter annual interest expense by about $525,000. No derivative or hedging instruments were reported.
Material changes, outlook, and risks
- In February 2016, the company acquired a 55% interest in an eight-clinic practice for $13.2 million in cash and a $0.5 million seller note. The preliminary allocation included $19.1 million of goodwill; purchase accounting remains subject to valuation adjustments. Acquisition activity increased goodwill to $191.1 million from $171.5 million at year-end.
- Management said operating cash generation, cash on hand, and revolver availability were expected to fund working capital, clinic development, and acquisitions through at least March 2017. It intends to continue opening clinics and pursuing acquisitions; significant acquisitions would likely require credit-facility financing. Results for the quarter are not necessarily indicative of full-year results. No specific earnings or revenue guidance was provided.
- Medicare represented approximately $19.9 million of Q1 revenue. The filing describes reimbursement and compliance risks, including a 0.3% Medicare fee-schedule decrease for 2016, the 2% Medicare payment reduction extended through fiscal 2025, and therapy-cap rules and exceptions currently extended through 2017.
- Other identified risks include changes in government or commercial reimbursement, payor audits and regulatory action, therapist recruitment and retention, competition, acquisition integration, collection delays, and potential clinic closures or impairment of goodwill and intangible assets. Management reported no known pending or threatened investigations expected to materially affect the financial statements.
- The company declared dividends of $0.17 per common share, versus $0.15 a year earlier. Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and earnings growth came from acquired/new clinics versus mature-clinic activity, and whether visits can continue to offset lower revenue per visit.
- Whether the improved operating cash flow is sustainable, given working-capital movements, and how acquisition spending and dividends affect cash and debt.
- Final purchase-price allocations and the performance and integration of acquired clinics, particularly given the increase in goodwill and other intangible assets.
- Exposure to Medicare and other payor reimbursement changes, audits, therapy-cap rules, and collection risk; patient-receivable days sales outstanding rose to 38 from 36 at year-end.
- Compliance with credit covenants, remaining borrowing capacity, and sensitivity to variable interest rates.