U.S. Physical Therapy, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. The company operates outpatient physical therapy clinics, primarily through partnerships, and had 472 clinics in 43 states at year-end, plus 18 third-party practices under management.
Financial and operating performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenues | $264.1 million | $249.7 million | +5.8% |
| Net patient revenues | $258.3 million | $244.1 million | +5.8% |
| Operating income, continuing operations | $38.8 million | $38.4 million | +0.9% |
| Gross margin | $64.7 million; 24.5% | $62.9 million; 25.2% | Margin down 0.7 percentage points |
| Net income attributable to common shareholders, continuing operations | $17.5 million; diluted EPS $1.45 | $18.2 million; diluted EPS $1.53 | Income down 4.0% |
| Net income attributable to common shareholders, including discontinued operations | $12.7 million; diluted EPS $1.05 | $17.9 million; diluted EPS $1.51 | Lower mainly reflecting discontinued-operation loss |
| Cash from operating activities | $44.8 million | $39.2 million | Increased |
| Cash and cash equivalents, year-end | $12.9 million | $11.7 million | Increased |
| Debt, year-end | $41.5 million | $18.0 million | Increased, primarily from acquisition financing |
| Working capital / current ratio | $26.5 million / 2.14 | $29.0 million / 2.78 | Both declined |
Patient visits rose to approximately 2.44 million from 2.31 million; average net patient revenue per visit increased to $105.83 from $105.50. Clinic count grew from 431 to 472. Acquisitions contributed $12.4 million of the $14.2 million increase in net patient revenue, while mature clinics contributed $1.8 million. Clinic operating costs rose to $199.4 million, or 75.5% of net revenues, from $186.7 million, or 74.8%. Salaries and related costs increased to 53.7% of net patient revenues from 52.7%.
Fourth quarter: Continuing-operations revenue was $68.6 million, versus $62.4 million in Q4 2012; operating income was $9.4 million, versus $8.3 million. Continuing-operations income attributable to common shareholders was $3.9 million, versus $4.2 million. Including discontinued operations, common-shareholder net income was $3.9 million, versus $4.0 million.
Net cash used in investing activities was $52.4 million, including $46.6 million for business acquisitions and $4.6 million for fixed assets. Financing activities provided $8.9 million; the company paid $4.8 million in common dividends and $9.2 million in distributions to noncontrolling interests.
Material changes and unusual items
- The company completed five multi-clinic acquisitions covering 42 clinics and acquired three individual clinics. Business purchases used $46.6 million in cash, with $1.3 million in seller financing. Goodwill increased to $144.0 million from $100.2 million, primarily reflecting acquisitions.
- On September 30, 2013, the company sold the remainder of its physician services business, which had experienced negative gross margins in 2012 and 2013. The sale and related asset write-offs resulted in a reported $5.0 million discontinued-operations loss, including a $4.4 million after-tax sale loss; discontinued operations also included prior operating results.
- Clinic operating costs included a $0.9 million pretax charge for an estimated refund to a payor relating to overpayments over several years. The company reported $2.4 million accrued for patient and payor credit balances and overpayments, expected to be paid in 2014.
- The company entered a new unsecured $125 million revolving credit agreement, maturing November 30, 2018. At year-end, $40 million was drawn and $85 million remained available; the company reported compliance with its covenants.
Outlook, risks, and contingencies
Management planned to continue acquiring and developing clinics, including satellite locations, and to pursue higher patient volume through marketing and new programs. It stated that existing cash and credit availability were expected to support operating needs, clinic development, and single-practice acquisitions through at least December 2014, excluding future significant acquisitions. No specific revenue or earnings guidance was provided. Management expected the 2014 income tax rate to be comparable to approximately 40%.
- Medicare reimbursement: The filing highlighted the risk of scheduled Sustainable Growth Rate payment reductions after March 31, 2014 absent further congressional action, the 2% Medicare sequestration reduction already in effect, therapy caps and the expiration dates of cap exceptions and related reviews. A 50% reduction in the practice-expense component for subsequent same-day therapy procedures took effect April 1, 2013.
- Other key risks: Dependence on third-party payors and physician referrals; therapist recruitment, retention and productivity; extensive healthcare, billing, fraud-and-abuse, privacy and licensing regulation; post-payment Medicare audits and possible repayments; acquisition integration and goodwill impairment; weather and competition; and debt covenants and interest-rate exposure. A 1 percentage-point increase in the rate on the revolver would increase annual interest expense by approximately $400,000.
- The company reported no material effect expected from ordinary-course litigation. It stated that its financial statements received an unqualified audit opinion and that internal control over financial reporting was effective; the auditor’s internal-control opinion excluded a recently acquired subsidiary representing 1.1% of assets and 0.2% of revenue.
Important facts for investors to verify
- Assess the sustainability of earnings growth: 2013 revenue growth was acquisition-led, while mature-clinic patient revenue increased only $1.8 million and gross margin percentage declined.
- Review acquisition performance, integration, final purchase-price allocations and the substantial goodwill balance, including the $35.5 million cash price for the December 2013 acquisition.
- Track cash conversion, receivables and collection quality: net patient receivables rose to $30.8 million from $26.0 million, while days outstanding improved to 39 from 42.
- Monitor Medicare reimbursement legislation, claim documentation requirements, audit outcomes, and the resolution and payment of accrued payor overpayments.
- Evaluate leverage and available borrowing capacity alongside acquisition plans, covenant requirements, scheduled note payments, and dividend limits under the credit agreement.
- Distinguish continuing-operations results from consolidated results: continuing diluted EPS was $1.45, whereas diluted EPS including discontinued operations was $1.05 in 2013.