U.S. Physical Therapy, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise stated. The company operates outpatient physical therapy clinics and managed facilities. At quarter-end, it operated 472 clinics in 43 states and managed 17 third-party facilities. It sold the remainder of its physician-services business in September 2013; that business is reported as discontinued operations.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net revenues | $69.8 million | $62.8 million; up 11.2% |
| Net patient revenues | $68.4 million | $61.4 million; up 11.3% |
| Gross margin | $16.6 million; 23.9% of revenue | $14.8 million; 23.7% |
| Operating income from continuing operations | $9.5 million; 13.6% of revenue | $8.4 million; 13.4% |
| Net income attributable to common shareholders | $4.2 million | $3.7 million, including a $0.1 million discontinued-operations loss |
| Diluted EPS from continuing operations | $0.35 | $0.32 |
| Operating cash flow | $3.7 million | $4.9 million |
| Cash and cash equivalents | $16.8 million | $12.9 million at Dec. 31, 2013 |
| Debt: revolver and notes | $46.7 million | $41.5 million at Dec. 31, 2013 |
| Revolver availability | $79.5 million | $125.0 million facility; maturity Nov. 30, 2018 |
| Current assets / current liabilities | $54.3 million / $19.3 million | $49.7 million / $23.2 million at Dec. 31, 2013 |
Capital expenditures were $0.8 million, so operating cash flow less fixed-asset purchases was approximately $2.8 million. The company declared dividends of $0.12 per common share, versus $0.10 a year earlier; $1.5 million was payable at quarter-end. Cash dividends paid in the quarter were zero, versus $1.2 million in Q1 2013.
Material changes and operating drivers
- Total patient visits rose about 11.5% to 643,869; clinics increased to 472 from 441, and average visits per clinic per working day rose to 21.6 from 21.1. Net patient revenue per visit edged down to $106.23 from $106.36.
- New clinics added $7.9 million of patient revenue; mature-clinic patient revenue decreased $0.9 million. Clinic operating costs rose to $53.1 million, but declined slightly as a share of revenue to 76.1% from 76.3%.
- Corporate costs increased to $7.1 million from $6.4 million, mainly due to more employees and incentives. Interest expense increased to $253,000 from $135,000, reflecting higher average revolver borrowings. The effective tax rate cited by management rose to 41.0% from 38.4%.
- Operating cash flow fell year over year, principally amid larger decreases in accounts payable and accrued expenses. Investing cash use was $3.8 million, including $2.8 million to acquire non-controlling interests and $0.1 million for two clinic practices. The revolver balance increased $5.5 million from year-end.
- A $1.6 million revaluation of redeemable non-controlling interests was charged to additional paid-in capital, not net income, but reduced the EPS presentation by $0.08. The filing reports $0.35 EPS from continuing operations and also shows $0.27 after this revaluation adjustment; investors should distinguish these figures.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects cash and unused revolver capacity to cover working capital, dividends, clinic development and other anticipated needs through at least March 2015, excluding the financing needs of future acquisitions. It plans continued clinic development and acquisitions.
- The company reported compliance with its credit-facility covenants. The unsecured $125 million revolving facility bears variable interest; management estimated that a 1 percentage-point rate change would alter annual interest expense by about $455,000 at the quarter-end balance.
- Medicare reimbursement remains a significant exposure. The filing describes the 2% Medicare payment reduction, therapy caps and related billing requirements. Legislation enacted in April 2014 temporarily prevented the scheduled SGR reduction through March 31, 2015; the filing describes a 0.5% payment increase through 2014 and no update for the first quarter of 2015. Further legislative changes could affect reimbursement.
- Other risks cited include dependence on third-party payors and physician referrals, recruiting and retaining therapists, regulation and compliance, competition, seasonal weather, clinic closures, acquisition integration and decentralized billing and collection controls. Days sales outstanding increased to 42 from 39 at year-end; patient-receivable allowance rose to 4.6% from 4.4% of gross patient receivables.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether patient-visit growth and mature-clinic trends persist, given the small decline in revenue per visit and lower mature-clinic revenue.
- Whether cash collections and receivables quality remain sound as days sales outstanding and the allowance ratio increased.
- How acquisition spending, minority-interest purchases, dividends and buybacks affect borrowing needs, covenant headroom and net debt.
- The effect of Medicare and other payor-rate changes, therapy-cap rules and compliance requirements on reimbursement and operating costs.
- The EPS treatment of the redeemable non-controlling-interest revaluation: $0.35 continuing-operations EPS versus the separately presented $0.08 adjustment and $0.27 adjusted figure.