U.S. Physical Therapy, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone Q4 filing. U.S. Physical Therapy operates outpatient physical therapy clinics and related services. At year-end it operated 591 clinics in 42 states, managed 28 facilities for third parties, and held a 59.45% interest in its combined industrial injury prevention business.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $453.9 million | $414.1 million |
| Operating income | $60.3 million | $54.7 million |
| Net income attributable to USPH shareholders | $34.9 million | $22.3 million |
| GAAP diluted EPS attributable to USPH shareholders | $1.31 | $1.76 |
| Operating Results, non-GAAP | $33.5 million; $2.65 per diluted share | $26.2 million; $2.08 per diluted share |
| Adjusted EBITDA, non-GAAP | $62.0 million | $57.9 million |
| Cash from operations | $73.0 million | $56.5 million |
Revenue grew 9.6%; operating income rose about 10.2%. Operating margin was approximately 13.3%, versus 13.2% in 2017. Gross profit increased 12.2% to $101.7 million, and gross margin improved to 22.4% from 21.9%. Patient visits rose 6.8% to 3.96 million; net patient revenue per visit was $105.55, up modestly from $105.05. Net patient revenue increased 7.3%; other revenue increased to $36.2 million, including $25.5 million from industrial injury prevention services.
Year-end cash was $23.4 million. Working capital was $37.3 million and the current ratio was 1.89. Debt consisted of $38.0 million drawn on the revolving facility and $1.8 million of notes payable; long-term debt, less current portion, was $38.4 million. The $125 million unsecured revolver had $87 million available and matures November 30, 2021. The company reported covenant compliance. Cash dividends paid were $11.7 million ($0.92 per share), compared with $10.1 million ($0.80 per share) in 2017.
Material changes and unusual items
- Growth reflected higher mature-clinic patient revenue and visits, acquisitions, and expansion of industrial injury prevention services. The company added nine clinics in 2018 through acquisitions and acquired an additional industrial injury prevention business.
- Net income attributable to shareholders increased, but reported diluted EPS fell to $1.31 from $1.76. A key reason is that the 2018 EPS calculation deducted a $24.8 million after-tax-related remeasurement of redeemable non-controlling interests from the earnings-per-share numerator. This remeasurement was charged directly to retained earnings, not the income statement. The company’s non-GAAP Operating Results increased; these measures are not substitutes for GAAP results.
- A $1.8 million gain on derecognition of debt increased 2018 income; management reported an after-tax benefit of $1.4 million, or $0.11 per share.
- Redeemable non-controlling interests rose to $133.9 million from $102.6 million. They are temporary equity, with put/call rights that can require or permit purchases under specified conditions and an earnings-based formula.
- Operating cash flow increased to $73.0 million. Investing used $23.9 million, including $16.4 million for business acquisitions and $7.2 million for fixed assets; financing used $47.7 million, including dividends and distributions to non-controlling partners.
Fourth-quarter results
Q4 2018 revenue was $117.3 million, versus $109.2 million in Q4 2017; operating income was $14.8 million versus $14.0 million. Net income attributable to USPH shareholders was $10.4 million versus $7.3 million. Reported diluted EPS was $0.43 versus $0.57, reflecting in part the redeemable non-controlling-interest remeasurement in the EPS calculation. The filing does not provide a directly comparable quarterly non-GAAP Operating Results reconciliation in the supplied text.
Outlook, risks, and contingencies
- Management said it intended in 2019 to continue acquisitions, develop new clinics and satellite locations, and grow patient volume through marketing and new programs. The filing provides no quantified revenue or earnings guidance.
- Key exposures include Medicare and Medicaid reimbursement changes, third-party payor contract rates, audits and potential recoupments, healthcare regulatory compliance, and dependence on physician referrals and qualified therapists. Medicare and Medicaid represented 28.1% of 2018 net patient revenue; Medicare revenue was approximately $103.6 million.
- Medicare policy includes a 2% payment reduction extended through fiscal 2027; targeted medical review thresholds and future payment adjustments also present risks. The filing notes that therapy assistant services furnished on or after 2022 may be reimbursed at 85% of the otherwise applicable amount.
- The company remains subject to a five-year Corporate Integrity Agreement effective December 21, 2015, with annual independent billing and coding audits. It arose from a settlement of $718,000 related to certain Medicare billings at one clinic in 2007–2009. Management said it was unaware of pending or threatened investigations expected to materially affect the financial statements. Ordinary-course litigation was not believed to have a material impact.
- Operating leases represented $102.6 million of future minimum commitments at year-end. Adoption of the new lease standard in 2019 was expected to add approximately $78.0 million of assets and $82.6 million of liabilities to the balance sheet, without significant income-statement or cash-flow changes.
- Other risks include acquisition integration, labor costs and retention, cyber and privacy incidents, weather, clinic closures, and variable-rate debt. A 1% rate change on the revolver would change annual interest expense by approximately $380,000.
Important facts for investors to verify
- Reconcile GAAP EPS with the large non-controlling-interest remeasurement and assess the economic implications of the $133.9 million redeemable-interest balance and potential future purchases.
- Evaluate whether mature-clinic visit growth and margins can continue, and separate organic growth from acquisition-driven growth and industrial injury prevention expansion.
- Review Medicare and commercial payor reimbursement exposure, audit history, and compliance with the Corporate Integrity Agreement.
- Assess acquisition funding, revolver covenants and 2021 maturity, lease commitments, and the company’s capacity to sustain dividends while pursuing acquisitions.
- Confirm the implications of the 2019 lease-accounting adoption and monitor receivable quality: days outstanding increased to 37 from 36, and the doubtful-account provision rose to $4.6 million from $3.7 million.