U.S. Physical Therapy, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. The company operates outpatient physical therapy clinics and manages facilities for third parties. At quarter-end it operated 524 clinics in 42 states and managed 22 third-party facilities.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenues | $88.3 million | $84.0 million | $265.7 million | $244.6 million |
| Operating income | $12.1 million | $11.9 million | $38.6 million | $34.7 million |
| Net income attributable to common shareholders | $5.7 million | $5.8 million | $18.1 million | $16.3 million |
| Diluted EPS, before redeemable-interest revaluation | $0.46 | $0.47 | $1.45 | $1.32 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $42.0 million | $28.9 million |
Margins and cost trends: Clinic operating costs were 77.7% of revenue in Q3, versus 77.5%; for the nine months they were 76.2%, versus 76.8%. Gross margin was $19.7 million in Q3 and $63.2 million for nine months. Operating margin, calculated from reported figures, was approximately 13.6% and 14.5%, respectively. Salaries and related costs rose to 56.4% of revenue in Q3 and 55.1% for nine months, from 55.4% and 54.8%.
Balance sheet and liquidity at September 30, 2016
- Cash was $15.0 million; current assets were $66.6 million and current liabilities were $26.4 million.
- Revolving credit borrowings were $36.0 million, with $89.0 million available under the $125 million facility. Notes payable totaled $5.5 million; total revolving and note debt was $41.5 million, compared with $49.1 million at December 31, 2015.
- Total assets were $309.9 million, including goodwill of $191.2 million and identifiable intangible assets of $33.4 million. Total liabilities were $82.8 million.
- Management said operating cash flow and unused credit availability were sufficient for working capital, clinic development and acquisitions through at least September 2017; significant acquisitions could require additional financing. The company was in compliance with credit covenants.
Material changes and drivers
- Revenue increased 5.1% in Q3 and 8.6% for the first nine months. Patient visits rose about 5.2% and 8.8%, respectively; revenue per visit was nearly flat in Q3 and slightly lower for nine months.
- In Q3, new clinics contributed $5.2 million of patient revenue, while mature-clinic revenue declined $1.0 million. For nine months, new clinics contributed $12.1 million and mature-clinic revenue increased $8.4 million.
- Common-shareholder net income declined slightly in Q3 despite revenue growth, while nine-month income increased. Corporate office costs and interest expense were higher; lower doubtful-account expense and improved nine-month clinic cost ratios partly offset cost pressures.
- Operating cash flow rose to $42.0 million from $28.9 million. Investing used $20.3 million, principally for acquisitions and capital expenditures; financing used $22.4 million, including dividends and distributions to non-controlling partners. Cash declined $0.8 million over the period.
- The February 2016 acquisition of an 8-clinic practice involved a 55% interest; the company also acquired one clinic in June. Acquisition accounting was preliminary. Goodwill increased $19.7 million, largely reflecting acquisitions; the annual impairment assessment found no impairment.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management intends to continue opening clinics and pursuing acquisitions and purchases of partner interests.
- The company estimated that adopting new stock-compensation tax guidance in Q4 would increase full-year 2016 earnings by about $1.0 million, or $0.09 per share. The filing identified quarterly credits, including $242,000, or $0.02 per share, for Q3.
- Medicare generated approximately $61.8 million of revenue in the first nine months. Reimbursement changes, audits, certification requirements, therapy caps and related regulatory developments present risks; 2016 Medicare fee schedule rates included a 0.3% decrease. The filing notes the therapy-cap exceptions process was extended through 2017.
- Other cited risks include therapist availability and retention, payor collections and reimbursement, acquisition integration, legal or regulatory actions, clinic closures, and access to capital. Receivable days sales outstanding rose to 38 from 36 at year-end, and the doubtful-account allowance as a percentage of patient receivables rose to 4.4% from 3.8%.
- The $36 million variable-rate credit balance exposes the company to interest-rate changes; a 1 percentage-point rate change would alter annual interest expense by approximately $360,000. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether visit growth and mature-clinic performance can offset largely flat revenue per visit and rising labor costs.
- Review receivables quality, collection trends and the adequacy of contractual and doubtful-account estimates.
- Verify acquisition integration, final purchase-price allocations and the performance supporting goodwill and intangible-asset values.
- Monitor Medicare and other payor reimbursement rules, audits, and therapy-cap developments.
- Check covenant headroom, variable-rate borrowing costs, acquisition funding needs and the timing of credit-facility repayment.