U.S. Physical Therapy, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; amounts below are in millions unless stated otherwise. The company operated 581 clinics in 42 states and managed 28 facilities for third parties.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net revenue | $115.1 | $104.3 | $223.4 | $201.8 |
| Operating income | $17.0 | $15.7 | $30.1 | $27.9 |
| Net income attributable to USPH shareholders | $9.2 | $4.9 | $16.4 | $9.8 |
| GAAP diluted EPS | $0.48 | $0.39 | $0.74 | $0.78 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $30.6 | $22.2 |
- Revenue rose 10.4% in Q2 and 10.7% in the first half. Physical therapy patient revenue increased 8.5% and 8.0%, respectively; patient visits rose 8.1% in Q2 and 7.7% in the first half. Industrial injury prevention revenue reached $6.3 million in Q2 and $11.1 million in the first half, aided by acquisitions and internal growth.
- Gross margin was 23.6% in Q2 versus 23.5% a year earlier, and 22.5% in the first half versus 22.4%. Operating costs were 76.4% and 77.5% of revenue, respectively. Corporate costs increased to $10.1 million in Q2 and $20.3 million in the first half.
- Net income attributable to USPH increased substantially, but reported EPS comparisons are affected by the accounting for redeemable non-controlling interests. The company’s non-GAAP “Operating Results” were $9.2 million, or $0.73 per diluted share, in Q2 and $16.4 million, or $1.29 per diluted share, in the first half. These measures are not equivalent to GAAP EPS.
- Cash and equivalents were $27.1 million at June 30, 2018, up from $21.9 million at year-end. Current assets were $86.4 million and current liabilities $41.9 million. Operating cash flow of $30.6 million funded acquisitions, capital spending, dividends and other uses.
- Total borrowings were $61.4 million: $56.0 million drawn on the revolving facility and $5.4 million in notes payable. The $125 million facility had $69.0 million available and matures November 30, 2021. The company reported covenant compliance. Redeemable non-controlling interests of $117.0 million are classified as temporary equity, not debt.
Material changes and notable items
- On April 30, 2018, the company acquired another industrial injury prevention business and combined it with its prior business; it owns 59.45% of the combined operation. It also acquired two physical therapy practices in February. Acquisition spending, net of acquired cash, was $9.1 million in the first half.
- The company amended partnership agreements effective at year-end 2017, replacing mandatory redemption features with put/call rights. In 2018, changes in redemption value are recorded directly in retained earnings, but affect EPS calculations. The first-half redemption-value adjustment was $9.4 million, net of tax, and contributed to the difference between GAAP EPS and Operating Results per share.
- The effective income tax rate cited by management fell to 26.0% for the first half from 33.4%, primarily reflecting the lower U.S. corporate tax rate and other items.
- The 2017 shareholder class action concerning historical accounting for redeemable partnership interests was dismissed in its entirety, with prejudice, on July 23, 2018.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Management plans to continue acquiring practices, opening clinics and satellites, and growing patient volume. It believes cash and revolver availability can fund operating needs, clinic development and acquisitions through at least June 2019, excluding the financing needs of significant acquisitions.
- Key risks include Medicare and other payer reimbursement changes, regulatory reviews and compliance, therapist recruitment and retention, collections and payer estimates, acquisition integration, competition, litigation, clinic closures, cybersecurity and access to capital. Medicare patient revenue was approximately $51.1 million in the first half.
- Patient receivables and collection indicators warrant attention: days sales outstanding increased to 39 from 36 at year-end, and the doubtful-account allowance as a percentage of patient receivables rose to 5.8% from 4.9%.
- The company leases nearly all clinic facilities and expected to recognize significant lease assets and liabilities when adopting the new lease standard on January 1, 2019. It reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
- A 1% change in the variable rate on the revolver would change annual interest expense by approximately $0.56 million, based on the June 30 balance.
Important facts for investors to verify
- Reconcile GAAP EPS with the company’s non-GAAP Operating Results and the $9.4 million first-half redeemable-interest revaluation adjustment.
- Assess whether growth in visits and acquired revenue is translating into sustained clinic-level margins, particularly as physical therapy clinic gross margin softened in Q2.
- Monitor receivables, days sales outstanding and doubtful-account provisioning for changes in collections or payer mix.
- Review acquisition valuations, goodwill and the potential cash cost of partnership put/call rights; goodwill was $284.6 million and redeemable non-controlling interests were $117.0 million at June 30.
- Check future borrowing needs, revolver capacity, covenant headroom, variable-rate exposure and the financing required for larger acquisitions.