U.S. Physical Therapy, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts below are in millions of dollars unless stated otherwise. The company operates outpatient physical therapy and occupational therapy clinics and an industrial injury prevention services (IIPS) business. At quarter-end, it operated 614 clinics in 40 states and managed 40 facilities for third parties.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $139.6 | $125.9 | $412.0 | $365.2 |
| Gross profit | $26.8 | $29.8 | $84.2 | $90.0 |
| Gross margin | 19.2% | 23.7% | 20.4% | 24.6% |
| Operating income | $14.9 | $16.9 | $50.0 | $54.2 |
| Net income attributable to USPH shareholders | $9.6 | $10.0 | $29.6 | $30.6 |
| GAAP diluted EPS | $0.72 | $0.66 | $2.27 | $1.69 |
| Operating cash flow | Not presented | Not presented | $41.2 | $60.5 |
- Q3 revenue rose 10.9%; nine-month revenue rose 12.8%. Q3 patient visits increased 2.8% overall, but mature-clinic visits declined 1.5%. Mature-clinic net revenue per visit rose 1.4% to $104.01. For the nine months, visits increased 6.7%, while revenue per visit fell to $103.40 from $104.00.
- IIPS revenue nearly doubled in Q3 to $20.2 million and rose 92.1% for the nine months to $58.7 million, substantially reflecting the November 2021 acquisition. Excluding that acquisition, IIPS revenue grew 27.1% in Q3 and 25.0% year to date.
- Profitability weakened despite revenue growth. Q3 operating costs were 80.8% of revenue versus 76.3% a year earlier; nine-month costs were 79.6% versus 75.4%. Management cited wage and other inflationary pressures. Q3 operating margin declined to 10.7% from 13.4%; year-to-date operating margin declined to 12.1% from 14.8%.
- GAAP diluted EPS increased in both comparisons despite lower shareholder-attributable net income. The EPS calculation includes the revaluation of redeemable non-controlling interests, which is charged directly to retained earnings rather than net income; that charge was substantially lower year to date than in 2021.
- The company’s non-GAAP “Operating Results” were $7.5 million, or $0.58 per diluted share, in Q3 versus $10.0 million, or $0.78, and $27.5 million, or $2.12, for nine months versus $30.6 million, or $2.37. The measure excludes specified put-right and earn-out revaluation effects and adjusts for redeemable non-controlling-interest revaluation; it is not a substitute for GAAP results.
Balance sheet, cash flow and financing
- At September 30, cash was $37.9 million, up from $28.6 million at December 31, 2021. Current assets were $112.9 million and current liabilities $81.5 million.
- Nine-month operating cash flow was $41.2 million, down from $60.5 million. Investing used $37.9 million, including $18.6 million for business acquisitions, $14.1 million for redeemable non-controlling interests and $7.3 million for fixed assets. Financing provided $6.0 million net; the company paid $16.0 million in shareholder dividends.
- Reported total debt, net of financing costs, was $154.2 million, versus $118.4 million at year-end. This comprised $148.1 million net under the term facility and $6.1 million of other debt; no revolver balance was outstanding at quarter-end. The company reported $175 million of revolver availability and compliance with credit-agreement covenants. It subsequently drew $5 million on the revolver through the filing date.
- The June 2022 credit agreement provides a $150 million term loan and a $175 million revolving facility, maturing June 17, 2027. Borrowings have variable-rate exposure. A $150 million interest-rate swap, effective June 30, fixes the SOFR component at 2.815% through June 2027; the reported rate including the applicable margin was 4.665%. The swap had a $5.9 million fair value at quarter-end and generated a $4.8 million after-tax unrealized gain in Q3, recorded in other comprehensive income.
- Management stated that cash and available credit were expected to fund operating subsidiaries’ working-capital needs through at least September 30, 2023.
Material changes, outlook and risks
- During 2022, the company acquired controlling interests in three physical therapy practices totaling 14 clinics, with aggregate preliminary consideration of approximately $19.5 million. Goodwill rose to $449.5 million from $434.7 million. An additional 14-clinic practice was acquired on October 31, 2022, for approximately $19.3 million for a 60% interest, with potential further performance-based consideration.
- Q3 and nine-month results included a $2.0 million gain from eliminating a previously recorded contingent earn-out liability. The company also recorded a $0.8 million gain from revaluing a put-right liability tied to a potential future purchase; the liability was $2.8 million at September 30. These items increased reported earnings and may fluctuate.
- The filing provides no specific earnings or revenue guidance. Management described plans to continue clinic development, acquisitions and organic growth, while noting the need to attract and retain qualified employees. Management cautioned that interim results are not necessarily indicative of full-year results.
- Reimbursement is a key risk: the filing describes a proposed 4.4% reduction in the Medicare Physician Fee Schedule conversion factor and an approximately 3% reduction scheduled for 2024, subject to potential regulatory or legislative changes. The 15% payment reduction for services furnished in whole or part by therapy assistants began in 2022; Medicare sequestration relief ended June 30, 2022.
- Other highlighted risks include labor availability and inflation, reimbursement and regulatory changes, acquisition integration, variable interest rates and debt covenants, litigation and government audits, and the potential funding required if the acquisition-related put right is exercised. The company reported ordinary-course legal matters but did not quantify a clear aggregate exposure. A $2.75 million legal settlement was agreed in January 2022, with no admission of liability or wrongdoing; most of the expense had been recorded in 2021.
Important facts for investors to verify
- Whether revenue growth, particularly in IIPS and acquired clinics, can offset continued labor, occupancy and other cost inflation—and whether margins recover.
- The trend in mature-clinic visits and revenue per visit, along with the company’s ability to recruit and retain therapists.
- Cash conversion and funding needs given lower year-to-date operating cash flow, acquisition spending, dividends and additional revolver borrowing after quarter-end.
- Variable-rate debt exposure, swap effectiveness, covenant headroom and the possible cash obligation under the acquisition-related put right.
- The effects of Medicare and other payor rate changes, audits, contractual allowance estimates and the pending goodwill impairment assessment.