U.S. Physical Therapy, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Unless otherwise noted, financial amounts are in U.S. dollars.
Business context
The company operates outpatient physical therapy clinics and related physician-services businesses, with revenue largely dependent on physician referrals and third-party payors. At year-end it operated 416 clinics in 42 states and managed 15 third-party practices. During 2011 it opened 21 clinics, acquired 20 clinics through a 51% purchase of a multi-partner group, and closed 17.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net revenue | $237.0 million | $211.2 million |
| Net patient revenue | $226.6 million | $204.1 million |
| Operating income, before interest and other income | $35.9 million | $33.2 million |
| Net income attributable to common shareholders | $21.0 million | $15.6 million |
| Diluted EPS | $1.75 | $1.32 |
| Cash from operating activities | $32.7 million | $30.5 million |
| Cash and cash equivalents at year-end | $10.0 million | $9.2 million |
| Revolving credit facility outstanding | $23.5 million | $5.5 million |
Revenue increased 12.2%; patient visits rose to 2.16 million from 1.93 million, while net patient revenue per visit decreased to $104.72 from $105.92. Operating income as a share of net revenue was approximately 15.2%, compared with 15.7% in 2010. Clinic operating costs were 74.4% of net revenue, up from 73.5%; salaries and related costs were 52.8% of revenue versus 52.5%.
Working capital was $29.3 million and the current ratio was 2.80 at year-end. The company had $51.5 million available on its $75 million revolving facility and reported compliance with its covenants. Total debt, including seller notes, was approximately $24.2 million. The filing states that operating cash flow and credit availability were expected to fund working capital, clinic development and investments through at least December 2012, excluding future significant acquisitions.
Changes and unusual items
- Reported net income attributable to common shareholders increased 34.1% and diluted EPS increased from $1.32 to $1.75. Results included a $5.4 million pretax gain from a purchase-price settlement related to a 2010 acquisition. The settlement included $1.5 million cash, $0.1 million of debt forgiveness and the exchange of a remaining noncontrolling interest.
- Management’s adjusted figures, excluding that settlement gain, a 2010 tax-provision benefit and a 2010 clinic-sale gain, show diluted EPS of $1.35 in 2011 versus $1.22 in 2010, up 10.7%.
- Cash used in investing activities rose to $31.6 million from $21.6 million, notably including $20.4 million to acquire noncontrolling interests and $9.5 million for business purchases and an earnout. The company bought back $4.7 million of stock and paid $3.8 million in dividends.
- Medicare and Medicaid represented 24.8% of net patient revenue in 2011, up from 22.6%; managed care’s share declined from 31.4% to 29.1%. The company acquired additional interests in existing partnerships, including increasing its ownership in STAR Physical Therapy to 92.2%.
Outlook, risks and contingencies
No company-specific revenue or earnings guidance is provided. Management said it intended to continue developing new and satellite clinics, increase patient volume through marketing and new programs, and evaluate acquisition opportunities. It expected the 2012 Medicare fee schedule changes, apart from the prevented SGR reduction, to result in an aggregate 4% increase in outpatient physician therapy payments; this is a stated industry estimate, not company guidance.
- Key risks include Medicare and commercial reimbursement changes, therapy caps and payment reductions, healthcare regulation and enforcement, and dependence on physician referrals and the recruitment and retention of qualified therapists.
- Economic weakness, competition, weather-related disruption, clinic closures, acquisition integration and goodwill impairment could adversely affect results. Goodwill impairment testing found no impairment in 2011.
- Healthcare laws governing billing, referrals, privacy and provider arrangements are complex; violations could result in penalties or exclusion from government programs. The company reported no known pending or threatened investigation expected to materially affect its financial statements.
- Ordinary-course litigation was not believed by management to have a material impact. The company reported $52.7 million of future minimum operating lease commitments and $24.7 million of employee-agreement obligations.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of year-end.
Important facts for investors to verify
- How much of future earnings growth is recurring, given the $5.4 million acquisition settlement gain and the difference between reported and adjusted EPS?
- Whether higher patient volume can offset lower revenue per visit and rising clinic operating-cost ratios.
- The effect of Medicare reimbursement rules, therapy caps and payment reductions on realized rates, visits and margins.
- Whether acquisition and noncontrolling-interest purchases generate returns sufficient to justify added borrowing and goodwill; confirm the final purchase-price allocation for the July 2011 acquisition.
- Credit-facility covenants, borrowing costs and capacity for further acquisitions, dividends and repurchases; the filing notes that a 1% rate change would alter annual interest expense by about $235,000 at year-end borrowings.
- Accounts-receivable collection trends: year-end days outstanding increased to 48 from 45, while net patient receivables rose to $28.3 million from $24.8 million.