U.S. Physical Therapy, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company operates outpatient physical therapy clinics and an industrial injury prevention business. At quarter-end it operated 588 clinics in 42 states and managed 26 facilities for third parties.
Key financial and operating metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $113.1 million | $103.0 million | $336.6 million | $304.8 million |
| Operating income | $15.4 million | $12.9 million | $45.5 million | $40.8 million |
| Net income attributable to USPH shareholders | $8.1 million | $5.2 million | $24.5 million | $14.9 million |
| GAAP diluted EPS | $0.13 | $0.41 | $0.88 | $1.19 |
| Operating Results, company-defined non-GAAP | $8.1 million; $0.64 per diluted share | $6.0 million; $0.48 per diluted share | $24.5 million; $1.93 per diluted share | $20.0 million; $1.59 per diluted share |
| Cash from operations | Not presented for quarter | Not presented for quarter | $54.0 million | $40.8 million |
Q3 net revenue grew 9.8%; operating income rose 19.7%. Gross profit was $26.1 million, or 23.1% of revenue, versus $21.2 million, or 20.6%. Nine-month gross profit was $76.4 million, or 22.7% of revenue, versus $66.5 million, or 21.8%.
- Q3 physical therapy patient visits increased 7.1% to 979,875; revenue per visit was $105.48 versus $105.26. For nine months, visits rose 7.5% to 2,934,515.
- Q3 revenue from industrial injury prevention rose 66.8% to $7.3 million, reflecting internal growth and the April acquisition. Nine-month revenue in that business was $18.4 million versus $10.3 million.
- Cash and cash equivalents were $32.2 million at September 30, 2018, up from $21.9 million at December 31, 2017. Current assets were $90.7 million and current liabilities $47.0 million.
- Total debt was approximately $59.4 million: $54.0 million drawn on the revolving facility and $5.4 million of notes payable. The facility had $71.0 million available and matures November 30, 2021. The company reported compliance with its covenants.
- Nine-month investing cash use was $21.9 million, including $16.3 million for businesses and $5.3 million for fixed assets. Financing cash use was $21.8 million, including $8.7 million of shareholder dividends and $10.5 million of distributions to non-controlling interests.
Material changes versus the prior comparable period
- Nine-month revenue increased 10.4%, supported by clinic growth and acquisitions; patient revenue rose 7.8%. Q3 revenue growth was 9.8%.
- Operating costs declined as a share of revenue: 76.9% versus 79.4% in Q3 and 77.3% versus 78.2% for nine months. Salaries and related costs also declined as a share of revenue.
- GAAP EPS fell to $0.13 in Q3 and $0.88 for nine months, despite higher shareholder net income. The principal accounting distinction is a noncash revaluation of redeemable non-controlling interests, charged to retained earnings but included in the GAAP EPS calculation: $8.7 million in Q3 and $18.1 million for nine months, net of tax treatment as presented. The company’s non-GAAP Operating Results excludes this effect; its calculation differs between 2018 and 2017.
- Redeemable non-controlling interests increased to $128.9 million from $102.6 million at year-end 2017, including acquisition additions and fair-value remeasurement. They are temporary equity, not reported as debt.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said operating cash flow, cash and unused revolver capacity should fund working capital, clinic development, acquisitions and investments through at least September 2019; significant acquisitions may require additional financing. The company intends to continue acquisitions, open new and satellite clinics, and grow patient volume.
- Medicare reimbursement and regulatory requirements remain material risks. Medicare represented approximately $76.6 million of net patient revenue in the first nine months of 2018. The filing discusses payment reductions, future therapist-assistant payment adjustments, audits and potential retroactive reimbursement changes.
- Receivables warrant attention: days sales outstanding rose to 38 from 36 at year-end, and the doubtful-account allowance as a percentage of patient receivables rose to 5.8% from 4.9%.
- The company leases nearly all clinic facilities and expected adoption of the new lease standard in 2019 to add significant lease assets and liabilities to the balance sheet; management expected the opening retained-earnings adjustment to be immaterial.
- Variable-rate exposure: a 1 percentage-point rate change on the $54.0 million revolver balance would change annual interest expense by about $540,000.
- A putative shareholder class action concerning prior accounting for redeemable non-controlling interests was dismissed with prejudice on July 23, 2018. The company said ordinary-course litigation is not expected to have a material effect.
Important facts for investors to verify
- Reconcile GAAP diluted EPS with the non-GAAP Operating Results measure, especially the treatment of redeemable-interest revaluation and the differing period-to-period calculation.
- Assess whether clinic visit growth, mature-clinic performance and acquired-business contributions support continued margin improvement.
- Monitor collection trends, days sales outstanding, contractual allowances and the higher doubtful-account allowance ratio.
- Review acquisition performance, integration, goodwill and the substantial redeemable non-controlling interest balance and potential repurchase obligations.
- Check revolver covenant headroom, variable-rate borrowing costs, acquisition funding needs and the balance-sheet effect of lease-standard adoption.