U.S. Physical Therapy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The company operates outpatient physical and occupational therapy clinics, with 441 clinics in 43 states at quarter-end, and managed 17 third-party facilities.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenues | $63.1 million | $62.6 million |
| Net patient revenues | $61.5 million | $60.5 million |
| Gross margin | $14.7 million (23.2%) | $16.1 million (25.8%) |
| Operating income | $8.2 million (12.9%) | $9.9 million (15.8%) |
| Net income attributable to common shareholders | $3.7 million | $4.5 million |
| Diluted EPS | $0.31 | $0.38 |
| Net cash provided by operating activities | $4.9 million | $5.2 million |
At March 31, 2013, cash was $10.3 million, current assets $44.7 million, and current liabilities $13.9 million. Total liabilities were $37.2 million, including $20.4 million outstanding on the $75 million revolving credit facility; $54.6 million remained available. The company reported compliance with its credit covenants. The facility is variable-rate, and a 1 percentage-point rate change would alter annual interest expense by approximately $204,000.
Changes versus the prior year
- Revenue increased 0.8%; patient revenue rose 1.7%, as net patient revenue per visit increased to $106.43 from $104.55. Patient visits were nearly flat, while working days fell from 64 to 63.
- Management said severe weather and flu reduced visits, particularly in January and February. New clinics contributed $3.0 million of patient revenue, while mature-clinic patient revenue declined $2.0 million.
- Clinic costs rose to 76.8% of net revenues from 74.2%; salaries and related costs increased 4.9%. Gross margin fell $1.5 million, operating income declined 17%, and diluted EPS fell from $0.38 to $0.31.
- Other revenue declined $0.5 million, primarily due to lower physician-services revenue. Physician-services gross margin was a $193,000 loss versus $167,000 of income in Q1 2012.
- Operating cash flow decreased to $4.9 million. Investing cash outflow increased to $6.4 million, including $4.2 million for business acquisitions and $1.0 million for purchases of noncontrolling interests. Cash declined $1.4 million from year-end.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected cash and unused credit availability to fund operations, dividends, capital spending, clinic development, and investments through at least March 2014, while noting that significant acquisitions would likely require borrowing. The company plans to continue opening clinics and evaluating acquisitions.
- Medicare reimbursement risks are significant: a 2% sequestration reduction took effect April 1, 2013. Also effective April 1, the reduction for subsequent therapy procedures under the Medicare multiple procedure payment policy increased to 50%; management estimated this could reduce reimbursement for services to Medicare beneficiaries by 8%–10% overall. The filing also describes a scheduled SGR reduction risk in 2014 and new claims-data reporting requirements beginning July 1, 2013.
- In February 2013, the company acquired a 72% interest in a nine-clinic group and acquired one additional clinic. Purchase-price allocations were preliminary; the filing records $5.7 million of acquired goodwill. The company also purchased partnership interests in three partnerships, including the remaining 1.3% interest in STAR Physical Therapy.
- Other stated risks include dependence on third-party payors and physician referrals, therapist recruitment and retention, weather, regulation, competition, acquisition integration, and decentralized billing and collections controls. Certain minority partners may have contractual rights to sell their interests back to the company under specified circumstances.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. It noted that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Track mature-clinic visits and margins after the weather- and flu-related weakness, alongside staffing and salary-cost trends.
- Assess the realized effect of Medicare sequestration and the increased multiple procedure payment reduction, including the stated 8%–10% reimbursement impact estimate.
- Review collection trends, accounts receivable, and the assumptions behind contractual allowances and doubtful-account reserves.
- Monitor acquisition integration, preliminary purchase accounting and goodwill, and the use of revolving credit for acquisitions and other capital returns.
- Confirm continued compliance with credit covenants and liquidity as the company funds dividends, clinic development, and acquisitions.