U.S. Physical Therapy, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results. Financial amounts below are in millions unless noted.
Business context and reporting period
The company operates outpatient physical therapy clinics serving orthopedic, sports, neurological and work-related rehabilitation needs. At year-end it operated 431 clinics in 43 states and managed 15 practices for third parties. Growth is driven by clinic development, acquisitions and patient referrals; most clinics operate through partnerships with therapist owners.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net revenue | $252.1 | $237.0 |
| Net patient revenue | $244.4 | $226.6 |
| Gross margin | $62.6 (24.8%) | $60.6 (25.6%) |
| Operating income | $37.8 (15.0%) | $35.9 (15.2%) |
| Net income attributable to common shareholders | $17.9 | $21.0 |
| Diluted EPS | $1.51 | $1.75 |
| Cash from operating activities | $39.2 | $32.7 |
| Cash and cash equivalents, year-end | $11.7 | $10.0 |
| Working capital / current ratio | $29.0 / 2.80 | $29.3 / 2.80 |
| Revolving credit balance, year-end | $17.4 | $23.5 |
FY 2012 patient visits rose to 2.315 million from 2.164 million; average visits per clinic per day increased to 21.7 from 20.9. Net patient revenue per visit was $105.57, versus $104.72. The company reported net income including noncontrolling interests of $26.2 million, compared with $29.8 million.
In Q4 2012, revenue was $62.7 million and net income attributable to common shareholders was $4.0 million, versus $60.7 million and $8.2 million in Q4 2011. Diluted EPS was $0.34 versus $0.69.
Material changes versus the prior comparable period
- Revenue increased 6.4%, principally on higher patient visits and contributions from acquired clinics. Net patient revenue increased 7.9%; other revenue fell from $10.4 million to $7.6 million, mainly because physician-services revenue declined.
- Reported common net income fell 14.5% and diluted EPS declined from $1.75 to $1.51. FY 2011 included a $5.4 million pretax purchase-price settlement gain. Excluding its after-tax effect, the company reported adjusted 2011 diluted EPS of $1.35; 2012 diluted EPS of $1.51 was 11.9% higher on that adjusted comparison.
- Clinic operating costs rose to 75.2% of net revenue from 74.4%. Salaries were 52.7% of net revenue versus 52.8%; rent, supplies and other costs increased to 20.5% from 20.0%. Physical therapy gross margin increased $4.6 million, while physician-services gross margin declined to a loss of $0.4 million from income of $2.3 million.
- Accounts receivable days outstanding improved to 42 from 48. Net patient receivables declined to $26.0 million from $28.3 million.
- Cash from operations increased by $6.6 million. Cash used in investing was $14.1 million, including $7.9 million for businesses and $4.2 million for fixed assets. Dividends paid rose to $9.0 million, including a special dividend; the annual declared dividend was $0.76 per share versus $0.32.
- The clinic network expanded from 416 to 431. 2012 acquisitions included a 70% interest in seven clinics and seven additional small-practice transactions.
Outlook, risks, contingencies and unusual items
- Management said it expected to continue developing new and satellite clinics, pursuing acquisitions, and growing patient volume through marketing and new programs. It said cash, operating cash generation and credit availability were expected to support working capital, development and smaller acquisitions through at least December 2013; significant acquisitions could require additional borrowing. No specific earnings or revenue guidance was provided.
- Medicare policy is a key risk. The filing estimates that the scheduled increase in the multiple-procedure payment reduction to 50% from April 1, 2013 could reduce reimbursement for Medicare services by 8% to 10%. Medicare represented approximately 22.5% of net patient revenue, while the payor table reports Medicare/Medicaid together at 24.1%.
- Other Medicare changes included a possible 2% sequestration reduction from April 2013, therapy documentation requirements beginning July 2013, and potential SGR rate reductions and expiration of therapy-cap exceptions after 2013 absent further legislation. Manual medical review applies to therapy expenditures above $3,700; CMS had ended the related pre-approval process.
- Other principal risks include insurer reimbursement pressure, healthcare regulation and billing compliance, physician referrals, recruiting and retaining licensed therapists, severe weather, competition, clinic closures, acquisition integration and decentralized billing and collections controls.
- At year-end, $17.4 million was drawn on a $75 million unsecured revolving facility, with $57.6 million available; the facility matures in 2015 and is subject to leverage and fixed-charge-coverage covenants. The company reported covenant compliance. A 1% interest-rate change was estimated to affect annual interest expense by $174,000.
- Contractual obligations totaled $89.0 million, including $47.6 million of operating leases and $23.3 million of employment agreements. The company reported ordinary-course litigation that it did not expect to have a material effect. No goodwill impairment was recorded in 2012.
- The financial statements received an unqualified audit opinion, and the auditor and management concluded internal control over financial reporting was effective as of December 31, 2012.
Most important facts for investors to verify
- Whether patient-volume growth and acquired-clinic contributions translate into sustained earnings and margin improvement.
- The actual impact of Medicare payment reductions, sequestration, therapy caps, documentation rules and manual reviews on reimbursement and collections.
- Whether physician-services revenue and margins recover after the 2012 decline.
- Acquisition performance, goodwill and intangible-asset valuations, and the company’s ability to integrate new clinics without excessive leverage.
- Cash conversion, receivable quality, credit-facility covenant headroom and dividend capacity under the credit agreement.