Business context and reporting period
U.S. Physical Therapy, Inc. operates outpatient physical therapy clinics and manages practices for third parties. This Form 10-K reports the fiscal year ended December 31, 2016; it also provides unaudited fourth-quarter results. At year-end, the company operated 540 clinics in 42 states and managed 20 third-party practices. The filing restates certain prior-period financial information.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars.
| Metric | FY 2016 | FY 2015, restated |
|---|---|---|
| Net revenues | $356.5 | $331.3 |
| Operating income | $49.5 | $47.3 |
| Net income attributable to USPH shareholders | $20.6 | $20.6 |
| Diluted EPS | $1.64 | $1.66 |
| Operating cash flow | $51.1 | $37.5 |
| Cash and cash equivalents at year-end | $20.0 | $15.8 |
- Revenue increased 7.6%; patient visits rose to approximately 3.32 million from 3.08 million. Net patient revenue per visit edged down to $105.18 from $105.28.
- Gross margin was $82.0 million, or 23.0% of revenue, versus $78.4 million, or 23.7%. Operating margin was approximately 13.9%, compared with 14.3%.
- Management’s non-GAAP “operating results,” excluding after-tax changes in the redemption value of mandatorily redeemable non-controlling interests, were $24.3 million, or $1.94 per diluted share, versus $22.2 million, or $1.79. This measure is not a substitute for GAAP results.
- Cash flow from operations increased; investing used $32.5 million, primarily for acquisitions and fixed assets. Financing used $14.3 million, including $8.5 million of common dividends.
- Year-end current assets were $66.0 million and current liabilities $24.6 million; working capital was $41.3 million and the current ratio 2.68.
- Debt included $46.0 million drawn on the revolving facility and $5.8 million of notes payable. The $125 million facility had $79.0 million available at year-end and matures November 30, 2018. Mandatorily redeemable non-controlling interests, reported as liabilities, were $69.2 million.
Fourth-quarter snapshot
Q4 2016 revenue was $90.9 million versus $86.7 million in Q4 2015; operating income was $11.0 million versus $12.6 million. Net income attributable to USPH shareholders was $5.25 million versus $4.76 million, and diluted EPS was $0.42 versus $0.38.
Material changes versus prior periods
- Growth was supported by acquisitions and higher patient volumes, while clinic operating costs rose to 77.0% of revenue from 76.3%; salaries and related costs increased to 55.7% of revenue from 54.5%.
- GAAP shareholder net income was nearly flat year over year, and diluted EPS declined from $1.66 to $1.64. A $1.0 million tax benefit from adopting stock-compensation guidance contributed approximately $0.09 per share in 2016.
- The company acquired interests in two multi-clinic practices covering 20 clinics and two single-clinic practices in 2016. Goodwill increased to $226.8 million from $195.4 million; no goodwill impairment was recorded.
Outlook, risks, contingencies and unusual items
- Management said it planned to continue acquisitions, develop new clinics and satellite locations, and increase patient volume. It believed cash and facility availability could fund working capital, development and acquisitions through at least December 2017; significant acquisitions may require additional facility borrowing. No quantified earnings or revenue guidance was provided.
- The restatement corrected the classification and accounting for mandatorily redeemable non-controlling interests as liabilities rather than temporary equity. It materially affected prior statements, including reported income and EPS. The company disclosed a material weakness in related controls; management and the auditor concluded internal control over financial reporting was ineffective as of year-end, and the auditor issued an adverse opinion on internal controls while giving an unqualified opinion on the financial statements. Remediation steps were underway.
- The restatement temporarily caused a technical breach of credit covenants; the company obtained waivers and amendments and reported covenant compliance as of the filing. A March 2017 shareholder class action alleges securities-law violations related to the historical accounting; the company stated it intended to defend the case.
- A five-year Corporate Integrity Agreement with HHS OIG, effective December 2015, requires compliance oversight and annual independent billing and coding audits. It followed a $718,000 DOJ settlement concerning Medicare billing at one clinic for services from 2007–2009.
- Key business exposures include Medicare and Medicaid reimbursement changes, therapy limits and audits, payor contract rates, clinician recruitment and retention, referral relationships, healthcare regulation and privacy, acquisitions, and interest-rate risk. Medicare represented approximately 23.4% of net patient revenue; a 1% change in the credit-facility rate would change annual interest expense by about $460,000.
- After year-end, the company reported acquisitions of a 70% interest in a practice with 17 operated and eight managed clinics, a 55% interest in a workforce-performance solutions company, and a 70% interest in a four-clinic practice.
Important facts for investors to verify
- Review the restated comparative financial statements and the precise earnings effects of the redeemable-interest accounting correction.
- Track whether management remediates the material weakness and whether SEC reporting timeliness and internal controls improve.
- Assess operating margin trends, wage-cost growth, mature-clinic performance, and the contribution and integration of acquisitions.
- Monitor cash generation, revolving-credit availability and maturity, covenant terms, and the $69.2 million redemption liability.
- Follow the shareholder litigation, Corporate Integrity Agreement audits, and any Medicare or other payor recoupments or reimbursement changes.