U.S. Physical Therapy, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited; 2016 comparative results are identified as restated. Dollar amounts below are in millions unless stated otherwise.
Business context and period
The company operates outpatient physical therapy clinics and manages facilities for third parties. At quarter-end it operated 569 clinics in 41 states and managed 30 third-party facilities. It continued expanding through acquisitions, including three physical therapy practices and a workforce-performance-solutions business acquired in 2017.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenues | $103.0 | $88.3 | $304.8 | $265.7 |
| Operating income | $12.9 | $12.1 | $40.8 | $38.6 |
| Net income attributable to USPH shareholders | $5.2 | $4.8 | $14.9 | $15.3 |
| Diluted EPS | $0.41 | $0.38 | $1.19 | $1.22 |
| Management-defined operating results, non-GAAP | $6.0 | $6.0 | $20.0 | $19.0 |
| Operating results per diluted share, non-GAAP | $0.48 | $0.48 | $1.59 | $1.52 |
Q3 net revenues rose 16.6%; nine-month revenue rose 14.7%. Patient visits increased 11.2% in Q3 and 10.5% year to date, while revenue per visit was nearly flat at $105.26 and $105.35, respectively. Growth reflected newer clinics and the acquired workforce-solutions business.
Gross margin declined to 20.6% from 22.3% in Q3 and to 21.8% from 23.8% for the nine months. Salaries and related costs increased as a share of revenue: 58.5% versus 56.4% in Q3 and 57.4% versus 55.1% year to date. Higher operating costs and acquired-business mix weighed on margins. Nine-month GAAP attributable income and EPS fell despite revenue and operating-income growth, in part alongside higher interest expense related to mandatorily redeemable non-controlling interests.
Cash flow, debt and liquidity
For the nine months, operating cash flow was $40.8 million; investing cash use was $39.2 million, including $33.7 million for business acquisitions and $5.6 million for fixed assets. Financing cash use was $4.2 million, including $7.5 million of dividends. Cash declined $2.6 million from year-end to $17.4 million.
At September 30, 2017, the company had $56.0 million outstanding on its $125 million revolving facility, with $69.0 million available, and $6.7 million of notes payable. The revolver matures November 30, 2018; the company reported covenant compliance. Total notes payable and revolver borrowings were $62.7 million. Mandatorily redeemable non-controlling interests, reported separately from debt, were $84.3 million. Management said cash and unused credit availability were expected to fund operations, development and acquisitions through at least September 2018, except that significant acquisitions could require additional financing.
Outlook, risks and unusual items
- Outlook: No quantified earnings or revenue guidance was provided. Management planned to pursue acquisitions, new clinics and satellite locations, and increase patient volume through marketing and new programs.
- Weather: Hurricanes Harvey and Irma disrupted 81 clinics. The company estimated 8,500 lost visits and approximately $752,000 in lost revenue and gross-profit contribution, or $0.03 diluted EPS.
- Medicare reimbursement: CMS’s November 2017 final rule estimated an approximately 2% reduction in 2018 physical and occupational therapy provider rates; the company was evaluating its actual impact. Medicare generated approximately $68.5 million of revenue in the first nine months. Therapy-cap exceptions were scheduled to expire at year-end 2017 unless extended.
- Accounting and controls: Prior financial statements were restated to correct accounting for mandatorily redeemable partnership interests. Management reported a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective at quarter-end; remediation steps were initiated after the reporting period.
- Litigation: A putative shareholder class action alleges misstatements relating to the historical accounting issue. The case was at an early stage; the company said it intended to seek dismissal and did not expect existing proceedings to materially affect results.
- Other risks: The filing highlights reimbursement and regulatory changes, payor audits, therapist recruitment and retention, acquisition integration, legal exposure, and variable-rate borrowing. A 1% rate change on the September 30 revolver balance would change annual interest expense by approximately $560,000.
- Non-GAAP measure: “Operating results” excludes the change in redemption value of mandatorily redeemable interests and restatement-related costs, net of tax. It is not a substitute for GAAP results. The nine-month increase in redemption value was $7.8 million, a non-cash charge.
Investor facts to verify
- Whether patient-visit growth and acquisitions can sustain revenue growth without further gross-margin deterioration.
- The cash requirements and earnings impact of clinic acquisitions and future redemption of partner interests.
- Progress in remediating the material weakness and any developments in the shareholder litigation.
- The company’s actual exposure to the expected 2018 Medicare rate reduction and any extension of therapy-cap exceptions.
- Plans to refinance or repay the $56.0 million revolver before its November 2018 maturity.