U S PHYSICAL THERAPY INC quarterly report, Q3 FY2020

U.S. Physical Therapy, Inc. — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020; figures are unaudited and in U.S. dollars. The company operates outpatient physical and occupational therapy clinics and an industrial injury prevention services business. At quarter-end it operated 550 clinics in 39 states and managed 38 third-party facilities.

Financial performance

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Net revenue	$108.9 million	$117.3 million	$305.5 million	$359.9 million
Operating income	$19.9 million	$16.8 million	$34.2 million	$52.1 million
Net income attributable to USPH shareholders	$10.9 million	$9.0 million	$22.2 million	$32.1 million
GAAP diluted EPS	$0.61	$0.66	$1.80	$1.90
Cash from operations	Not stated for quarter	Not stated for quarter	$74.6 million	$46.5 million

Q3 revenue declined about 7% year over year, while operating income rose about 19%. Operating margin increased to 18.3% from 14.3%; gross profit was $30.4 million, or 27.9% of revenue, compared with $27.4 million, or 23.3%. For the first nine months, revenue fell about 15%, operating income about 34%, and operating margin was 11.2% versus 14.5%. Nine-month gross profit was $65.3 million, including $3.9 million of clinic closure costs; excluding those costs, gross profit was $69.3 million, or 22.7% of revenue.

Q3 net income attributable to shareholders increased, but GAAP EPS decreased partly because the required revaluation of redeemable non-controlling interests is included in EPS while excluded from net income. Management’s non-GAAP Operating Results were $11.1 million, or $0.86 per share, for Q3 including relief funds ($10.9 million, or $0.85, excluding them). For nine months, the measure was $24.6 million, or $1.92 per share, including relief funds, and $19.7 million, or $1.54, excluding them. These are non-GAAP measures, not substitutes for GAAP results.

Physical therapy operations revenue was $98.9 million in Q3, down from $107.3 million; industrial injury prevention revenue was $10.0 million, approximately flat year over year. Q3 patient visits were 910,200 versus 996,100, while net patient revenue per visit rose to $105.91 from $104.80. Nine-month patient visits fell to 2.56 million from 3.06 million. Industrial injury prevention revenue increased 8.9% for the nine months, partly reflecting the 2019 acquisition.

Cash, debt and liquidity

Cash and cash equivalents were $30.1 million at September 30, 2020, up from $23.5 million at year-end 2019. Cash from operations of $74.6 million included working-capital effects; cash flow also included $12.9 million of Medicare advance payments.
Borrowings were $12.5 million: $7.0 million on the revolving facility and $5.5 million of notes payable. The $125 million unsecured revolver had $118 million available; it matures November 30, 2021. The company reported covenant compliance and said it was negotiating renewal with its lender.
Operating lease liabilities totaled $87.0 million, including $26.9 million current. These are lease obligations, not included in the borrowings above.
Management said available cash should fund operating subsidiaries’ working-capital needs through at least September 30, 2021. That cash includes $12.9 million of Medicare advance payments, which the company intended to repay before repayment offsets begin in August 2021. Accrued expenses also included $4.9 million of deferred employer payroll taxes under the CARES Act.
Cash dividends paid during the nine months were $4.1 million; dividends declared were $0.32 per share, compared with $0.84 in the prior-year period. No Q3 dividend was declared, versus $0.30 per share in Q3 2019.

Changes, outlook and risks

Management reported a substantial recovery in physical therapy volumes from Q2: average daily patient visits per clinic were 18.9 in Q2 and 25.8 in Q3, compared with 26.2 in Q1. Volumes remained somewhat below pre-pandemic levels. About 40% of the 5,500-person workforce was furloughed or terminated in March; approximately 1,200 furloughed employees had returned by the filing.
COVID-19 remained the principal operating uncertainty. Renewed restrictions could again reduce appointments, visits and revenue. The industrial injury prevention business was less affected and was operating slightly below pre-pandemic levels.
Provider Relief Fund receipts totaled approximately $8.3 million through September 30 and were recognized as other income; $0.4 million was recognized in Q3. Funds are subject to compliance and attestation requirements, and the company said evolving guidance could require adjustments.
CMS’s proposed 2021 physician-fee-schedule changes could reduce payment for physical and occupational therapy services by an estimated 9%, subject to finalization. Temporary Medicare telehealth reimbursement waivers were extended during the public health emergency. Other reimbursement risks include Medicare payment rules and future therapy-assistant payment reductions.
The company acquired interests in a four-clinic practice and, on September 30, a 70% interest in an entity holding six management contracts. It also sold interests in 12 previously closed clinics and closed 31 clinics during the nine months. Closure costs were $3.9 million, including a $1.9 million goodwill write-off. Management found no additional goodwill impairment trigger at quarter-end but said it would continue monitoring conditions.
Redeemable non-controlling interests were $139.8 million. Contractual put rights may require cash repurchases of partners’ interests, with timing and amounts potentially affecting liquidity and capital structure.
A False Claims Act qui tam case alleges improper Medicare billing by a subsidiary. The government declined to intervene; dismissal motions remained pending. The company said it believes the allegations lack merit and intends to defend the case; outcome is uncertain. The filing also describes other ordinary-course legal and regulatory matters whose outcomes cannot be predicted.
No formal earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.

Key facts for investors to verify

Whether patient volumes and revenue recovered further after Q3, and whether pandemic restrictions or appointment cancellations returned.
Final CMS reimbursement decisions for 2021 and the continuation of telehealth coverage and payment terms.
Compliance with Provider Relief Fund conditions and the timing and source of repayment of the $12.9 million Medicare advance.
Renewal terms for the revolving credit facility before its November 2021 maturity, covenant headroom, and any cash demands from partner put rights.
Developments in the False Claims Act litigation and any subsequent regulatory audits, settlements or contingencies.
Whether acquisition valuations, clinic closures and ongoing COVID-19 impacts lead to additional goodwill or intangible-asset charges.