U.S. Physical Therapy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company operates outpatient physical therapy clinics and manages facilities for third parties. It had 558 clinics in 42 states and managed 30 third-party facilities at quarter-end. Comparative Q1 2016 figures are identified as restated.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenues | $97.6 million | $86.9 million |
| Operating income | $12.2 million | $11.5 million |
| Net income attributable to USPH shareholders | $4.8 million; $0.38 per diluted share | $4.5 million; $0.36 per diluted share |
| Operating results, company-defined non-GAAP measure | $6.4 million; $0.51 per diluted share | $5.8 million; $0.47 per diluted share |
| Net cash provided by operating activities | $14.2 million | $14.5 million |
| Capital expenditures | $1.6 million | $1.7 million |
Net revenues rose 12.3%, including physical therapy patient revenue growth of 10.1%. Patient visits increased 10.3% to 891,630; average net patient revenue per visit edged down to $105.04 from $105.22. The company attributed growth primarily to higher visit volume, acquisitions, increased management contract revenue, and one month of revenue from its workforce-performance acquisition.
Gross margin was $20.7 million, or 21.3% of revenue, versus $20.5 million, or 23.6%. Clinic operating costs increased to 78.7% of revenue from 76.4%; salaries and related costs rose 16.8% and were 57.2% of revenue versus 55.0%. Corporate costs declined to $8.5 million, or 8.8% of revenue, from $9.0 million, or 10.4%. Income before taxes was $7.8 million versus $8.1 million. Q1 2017 tax expense included an $0.8 million excess tax benefit related to stock compensation accounting.
Cash, debt, and liquidity
Cash was $25.2 million at March 31, 2017, up from $20.0 million at year-end. Operating cash flow was $14.2 million; investing activities used $17.2 million, including $15.7 million for acquisitions. Financing activities provided $8.1 million, including net revolving-credit borrowings of $12.0 million and payments to settle redeemable non-controlling interests of $2.2 million.
Total notes and revolving-credit borrowings were $64.0 million, including $58.0 million outstanding on the $125 million unsecured revolving facility; $67.0 million remained available. The revolver matures November 30, 2018, bears variable interest, and is subject to leverage and fixed-charge coverage covenants. The company reported covenant compliance. A 1% rate change would change annual interest expense by approximately $0.58 million. Management said cash and available credit were expected to support operating needs, clinic development, and acquisitions through at least March 2018; significant acquisitions could require additional financing.
Mandatorily redeemable non-controlling interests were $80.2 million, up from $69.2 million at year-end; changes in their redemption value are recorded as interest expense. The company declared dividends of $0.20 per common share, versus $0.17 a year earlier. Current liabilities were $34.0 million and total liabilities were $195.0 million at quarter-end.
Material changes, outlook, and risks
- Q1 acquisitions included a 70% interest in a 17-clinic practice and a 55% interest in a workforce-performance solutions company. Total preliminary consideration was $16.6 million, including $15.7 million cash and $0.9 million seller notes. The company also acquired a 70% interest in a four-clinic practice in May 2017 for $2.25 million cash and a $0.25 million seller note.
- Management intended to continue acquisitions, open new and satellite clinics, and pursue patient-volume growth through marketing and new programs. No specific full-year revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- The filing describes the prior-period accounting error involving mandatorily redeemable non-controlling interests as material. Management reported a material weakness in internal control over financial reporting and concluded disclosure controls were not effective at quarter-end. It described new procedures implemented after the period to begin remediation; effectiveness had not yet been established.
- Risks include Medicare and other payer reimbursement changes, audits and regulatory compliance, therapist recruitment and retention, acquisition integration, collection estimates, access to capital, and possible clinic closures or impairment. Medicare represented approximately $22.3 million of Q1 revenue. The Medicare therapy-cap exceptions process was scheduled to expire December 31, 2017 unless extended.
- Acquisition purchase-price allocations were preliminary. The company reported no material pending or threatened investigations known to it as of March 31, 2017; the filing notes regulatory reviews, claims, and legal actions could nevertheless result in costs or liabilities.
Important facts for investors to verify
- Review the 2016 restatement, its effects on comparative periods, and progress remediating the material weakness and ineffective disclosure controls.
- Assess whether increased patient volume and acquired revenue can offset lower gross margin and rising clinic labor costs.
- Check the terms, covenant headroom, variable-rate exposure, and November 2018 maturity of the revolving facility, as well as funding needs for planned acquisitions.
- Monitor the valuation and eventual redemption payments for non-controlling interests, which are substantial and partly based on earnings multiples.
- Verify the impact of Medicare reimbursement rules, therapy-cap changes, payer audits, and collection trends, including days sales outstanding of 39 at quarter-end versus 36 at year-end.