Business context and reporting period
U.S. Physical Therapy, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015. It operates outpatient physical and occupational therapy clinics and manages clinics for third parties. At quarter-end, it operated 494 clinics in 42 states and managed 17 third-party facilities.
Financial and operating performance
Amounts below are in millions, except per-share data and operating statistics.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net revenues | $77.24 | $69.77 |
| Operating income | $9.19 | $9.51 |
| Net income including non-controlling interests | $6.15 | $6.32 |
| Net income attributable to common shareholders | $4.17 | $4.23 |
| Diluted EPS | $0.34 | $0.27 reported; $0.35 before redeemable-interest revaluation charge |
| Operating cash flow | $3.02 | $3.69 |
| Capital expenditures | $1.42 | $0.85 |
| Cash and equivalents, quarter-end | $14.56 | $14.27 at Dec. 31, 2014 |
| Revolving credit outstanding, quarter-end | $41.50 | $34.50 at Dec. 31, 2014 |
Revenue rose 10.7%. Gross margin was 21.8% of revenue, versus 23.9% a year earlier; operating margin was 11.9%, versus 13.6%. Clinic operating costs increased to 78.2% of revenue from 76.1%. Salaries and related costs were 55.7% of revenue, up from 54.4%.
Total visits increased to 712,855 from 643,869; average visits per clinic per day rose to 22.9 from 21.6. Net patient revenue per visit was $106.34 versus $106.23. The company declared dividends of $0.15 per common share, up from $0.12.
Material changes versus the prior comparable period
- Net patient revenue increased 10.8%, driven mainly by 58,900 visits from new clinics and 10,100 additional visits at mature clinics; revenue per visit increased slightly.
- New clinics contributed $6.2 million of patient revenue and $5.5 million of clinic operating costs. Mature-clinic operating costs also increased.
- Operating income declined 3.5%, and net income attributable to common shareholders declined about 1.5%. The filing attributes the pressure primarily to higher clinic operating costs.
- Operating cash flow decreased to $3.02 million. Investing used $8.22 million, including $6.45 million for businesses, while financing provided $5.48 million. Cash increased by $0.29 million during the quarter.
- Debt under the revolving facility increased by $7.0 million from year-end. Total notes payable and revolver borrowings were $42.9 million at quarter-end. The $125 million facility had $83.5 million available; the company reported compliance with its covenants.
Outlook, commentary, risks and unusual items
Management said operating cash flow, cash, and unused revolving-credit availability should support working capital, clinic development, and acquisitions through at least March 2016. The company intends to continue opening clinics and pursuing acquisitions; it provided no quantified earnings or revenue guidance. Management noted that first-quarter results are not necessarily indicative of full-year results.
On January 31, 2015, the company acquired a 60% interest in a nine-clinic practice for $6.7 million in cash plus a $0.5 million seller note. The preliminary allocation recorded $10.9 million of goodwill and a $4.8 million fair value for the non-controlling interest; valuation work was incomplete. Goodwill also rose due to the acquisition and adjustments to prior acquisitions. The company reported a $34,000 goodwill write-off related to a closed clinic.
After quarter-end, the Medicare Access and CHIP Reauthorization Act was signed on April 16, 2015. The filing says it eliminated the SGR formula, set a 0% Medicare fee-schedule update for the first half of 2015 and 0.5% for the second half, and extended therapy-cap exceptions through 2017. Medicare reimbursement changes, payor audits, regulatory compliance, therapist availability and labor costs, clinic productivity, acquisition integration, and access to capital are identified risks. Variable-rate debt exposes the company to interest-rate changes: a 1% rate move would change annual interest expense by approximately $415,000.
Management concluded disclosure controls were effective and reported no materially affecting changes in internal control over financial reporting. The filing states the company was not aware of pending or threatened investigations expected to materially affect its financial statements.
Important facts for investors to verify
- Whether visit growth and new-clinic contributions can continue while clinic costs and margins remain under pressure.
- The final purchase-price allocation and subsequent operating contribution of the January 2015 acquisition.
- Future cash generation, acquisition spending, and revolving-credit usage, including covenant headroom.
- Effects of Medicare reimbursement rules, therapy-cap administration, and other payor or regulatory changes.
- Receivable collections and estimates: days sales outstanding were 40 at March 31, 2015 versus 39 at year-end; management estimated contractual allowance reserves were unlikely to differ by more than 1%.