U S PHYSICAL THERAPY INC quarterly report, Q1 FY2024

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U.S. Physical Therapy, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; comparisons are to Q1 2023 unless otherwise noted. USPH operates outpatient physical and occupational therapy clinics and an industrial injury prevention services (IIP) business. At quarter-end, it operated 679 clinics in 42 states and managed 41 practices for third parties.

Financial results and key metrics

  • Revenue: $155.7 million, up 4.8%; patient revenue was $131.1 million (+3.6%) and other revenue was $24.6 million (+12.2%).
  • Profit and margins: Gross profit was $28.4 million, down 8.0%, and gross margin fell to 18.2% from 20.8%. Operating income declined 15.8% to $14.3 million; operating margin was 9.2% versus 11.4%. Net income was $11.6 million versus $11.4 million. Net income attributable to USPH shareholders rose 8.6% to $8.0 million.
  • Per-share results: GAAP diluted EPS was $0.46, down from $0.58. The EPS calculation includes the after-tax revaluation of redeemable non-controlling interests, which reduced Q1 2024 EPS. Non-GAAP Operating Results were $7.7 million, or $0.51 per share, versus $7.7 million, or $0.59 per share. Adjusted EBITDA was $16.7 million versus $18.5 million.
  • Segment performance: Physical therapy revenue rose 4.1% to $134.4 million, but gross profit fell 11.2% to $24.1 million and gross margin declined to 17.9% from 21.0%. IIP revenue increased 9.8% to $21.3 million; gross profit grew 15.1% to $4.3 million and gross margin improved to 20.4% from 19.5%.
  • Cash flow and liquidity: Operating cash flow was $4.4 million, down from $11.3 million. Investing cash outflow was $20.5 million, including business and non-controlling-interest purchases; financing cash outflow was $4.5 million. Cash declined $20.5 million to $132.3 million. Management says cash and available facilities should fund operating needs through at least March 31, 2025.
  • Debt and obligations: Term-loan principal was $143.4 million, with no revolver borrowings and $175.0 million of revolver availability. Total debt was $147.3 million principal ($146.0 million net of debt costs). The company reported compliance with credit-agreement covenants. Operating lease liabilities were $110.4 million; redeemable non-controlling interests were $190.7 million.
  • Dividend: Q1 dividend declared was $0.44 per share. The board declared another $0.44 per share on May 7, payable June 14, 2024.

Material changes and management commentary

  • Revenue growth was supported by clinic additions and higher IIP revenue, while operating costs grew faster than revenue: 8.2% versus 4.8%. Salaries and related costs rose 8.9% and reached 60.2% of revenue.
  • USPH added 14 clinics and closed or sold six during Q1; year-over-year clinic additions contributed to higher visits. Patient visits increased 3.3%, but average daily visits per clinic declined 1.0% to 29.5. Net rate per patient visit increased 0.2% to $103.37.
  • Management attributed lower Adjusted EBITDA in part to Medicare rate reductions (approximately $1.7 million adverse impact) and January weather (approximately $1.3 million adverse impact). January clinic traffic was weaker; February and March volumes were higher than the prior-year months and were company records for those months.
  • Medicare therapy reimbursement was reduced approximately 3.5% from January 1 through March 8, 2024. Legislation effective March 9 reduced the expected 2024 cut to approximately 1.8% for the balance of the year. Management estimated the Q1 rate reductions lowered patient revenue by approximately $1.9 million.
  • Q1 cash flow from operations was lower mainly because of the timing of payroll payments. USPH spent $16.0 million net of acquired cash on business purchases and also purchased interests in non-controlling owners.

Outlook, risks, contingencies and unusual items

  • The filing gives no specific numerical earnings or revenue guidance. Management describes continued clinic development and acquisitions as strategic priorities and states that available cash and credit are sufficient for near-term operating needs.
  • On March 29, USPH acquired a 50% interest in a nine-clinic practice for approximately $16.4 million, including a $0.5 million seller note. Additional contingent consideration has no stated maximum; its recorded fair value was $0.5 million at quarter-end. Purchase-price allocations remain subject to finalization.
  • After quarter-end, on April 30, an IIP subsidiary acquired an IIP business for $24.0 million, with potential additional purchase price based on performance. This is a subsequent event, not a Q1 transaction.
  • Contingent acquisition consideration was valued at $10.8 million at March 31, compared with $12.5 million at year-end; its Q1 fair-value change produced a $0.6 million gain. Interest income from investments was $1.5 million, compared with $0.1 million a year earlier.
  • No impairment indicators were identified in Q1. In 2023, USPH recorded $15.8 million of goodwill impairment and $1.7 million of tradename impairment, both relating to an IIP reporting unit.
  • Key risks include Medicare and other payer reimbursement changes, therapist hiring and retention, weather and seasonal effects, competition and client contract renewals in IIP, acquisition integration and contingent payments, collection estimates, legal and regulatory reviews, cybersecurity, and the potential effect of restrictions on employee non-compete agreements. The company added a risk factor concerning the FTC rule on non-competes, which was being challenged and was not effective as described in the filing.
  • USPH is party to ordinary-course legal matters, audits and investigations; the filing says outcomes cannot be predicted and does not provide a clear quantified exposure. The interest-rate swap had a $5.5 million fair value and generated approximately $0.9 million in Q1 interest savings.

Important facts for investors to verify

  • Whether patient-visit growth, clinic productivity and reimbursement rates sustain improvement after the January weather disruption and Medicare changes.
  • Whether labor and other clinic costs moderate enough to recover physical therapy gross margin.
  • Cash conversion and working-capital trends, given Q1 operating cash flow of $4.4 million and the decline in cash.
  • Acquisition returns, final purchase-price allocations, contingent consideration and future purchases of redeemable non-controlling interests.
  • Debt, lease and redemption-related obligations, and any developments in reimbursement rules, non-compete litigation, or regulatory and legal matters.