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US

U S PHYSICAL THERAPY INC /NV (USPH)·Q1 2017 Earnings Summary

Executive Summary

  • Q1 2017 delivered double‑digit top-line growth with net revenues up 12.3% to $97.6M, driven by visits +10.3% to 892K and contribution from recent acquisitions and the March industrial prevention (workforce performance solutions) deal; adjusted EBITDA rose 7.0% to $13.3M.
  • Operating results EPS (non‑GAAP) was $0.51 vs $0.47 a year ago and vs analyst consensus of $0.47, a clear beat; GAAP diluted EPS was $0.38 vs $0.36. Bold beat: operating EPS +$0.04 vs consensus.
  • Margin pressure persisted: gross margin fell ~230 bps YoY to 21.3% (clinic salaries 57.2% of net revenues vs 55.0% LY), reflecting higher cost structures at acquired clinics and mix.
  • 2017 annual guidance (issued June 7) reiterated operating results of $26.0–$27.3M and $2.07–$2.16 EPS, assuming ~37% corporate tax rate; Q1 did not include new guidance.
  • Catalysts: resolution of accounting restatement and being current on filings, $2M annualized cost takeout actions exiting Q1, and ramp of an industrial prevention services platform with blue‑chip customers.

What Went Well and What Went Wrong

What Went Well

  • Strong volume and revenue growth: visits +10.3% to 892K; net revenues +12.3% to $97.6M, with acquisitions and industrial prevention services contributing as intended.
  • Cost discipline at corporate: corporate office costs fell YoY to $8.5M and were 8.8% of revenue (vs 10.4% LY), supporting EPS outperformance.
  • Strategy execution: management rolled out a new analytics tool to expand referrals and highlighted solid performance of the industrial prevention deal and robust de novo/M&A pipelines. “We rolled out our new analytics tool… expecting that to bear good fruit” and “industrial prevention… performing very well.”

What Went Wrong

  • Margin compression: gross margin declined to 21.3% (vs 23.6% LY), with clinic salaries rising to 57.2% of revenue, reflecting higher cost structures in acquired clinics and mix.
  • Rate per visit modestly lower: average net patient revenue per visit dipped $0.18 to $105.04; same‑store revenue per visit was flat, limiting same‑store revenue progression.
  • Higher non‑controlling interest charges: MRNCI change in redemption value rose to $2.7M (non‑cash) and earnings allocable to MRNCI rose to $1.3M, pressuring GAAP earnings lines.

Financial Results

MetricQ1 2016Q4 2016Q1 2017
Net Revenues ($USD Millions)$86.9 $90.9 $97.6
Net Patient Revenues ($USD Millions)$85.0 $88.9 $93.7
Other Revenues ($USD Millions)$1.9 $1.9 $3.9
Patient Visits (000s)808 846 892
Avg Net Rate per Visit ($)$105.22 $105.14 $105.04
Total Clinic Operating Costs ($USD Millions)$66.4 $72.1 $76.8
Gross Margin ($USD Millions)$20.5 $18.8 $20.7
Gross Margin (%)23.6% 20.7% 21.3%
Corporate Office Costs ($USD Millions)$9.0 $7.8 $8.5
Corporate Costs (% of Net Revenues)10.4% 8.6% 8.8%
Operating Income ($USD Millions)$11.5 $11.0 $12.2
Adjusted EBITDA ($USD Millions)$12.5 $12.6 $13.3
EBITDA Margin (%)14.3% 13.8% 13.6%
GAAP Diluted EPS ($)$0.36 $0.48 $0.38
Operating Results EPS ($)$0.47 $0.49 $0.51
Dividends per Share ($)$0.17 $0.17 $0.20

Segment/Revenue Components (Q1 YoY):

ComponentQ1 2016 ($USD Millions)Q1 2017 ($USD Millions)
Net Patient Revenues (PT clinics)$85.1 $93.7
Management Contracts$1.4 $1.9
Workforce Performance Solutions (Industrial Prevention)—$1.5 (March only)
Other Revenue$0.5 $0.5
Total Net Revenues$86.9 $97.6

Operational KPIs:

KPIQ1 2016Q4 2016Q1 2017
Same‑store visits YoY“Slight increase” (qualitative) +2.5% “Slight increase” (qualitative)
DSO (days)N/A36 39
PT Clinic Gross Margin (%)23.6% N/A21.5%
Management Contracts GM (%)19.8% N/A14.8%
Industrial Prevention GM (%)——14.3%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Operating Results ($USD Millions)FY 2017N/A$26.0–$27.3 Initiated
Operating Results EPS ($)FY 2017N/A$2.07–$2.16 Initiated
Corporate Tax Rate (assumption)FY 2017N/A~37% Initiated
Restatement/consulting expensesQ2 2017N/AExpect breakout in Q2 (not material in Q1) New disclosure
DividendQ1 2017$0.17 (Q4 2016) $0.20 Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2016, Q4 2016)Current Period (Q1 2017)Trend
Analytics/technology to drive referralsPlanning analytics; salesforce 90 reps and EMR upgrades discussed New analytics tool rolled out to identify referral opportunities Positive execution momentum
Pricing/reimbursement environmentFlat net rate, pockets of pressure; Medicare flat; mix impacts Avg net rate −$0.18 YoY; same‑store net rate per visit flat Stable to slightly negative rate
Weather/seasonalityHurricane impacts (Oct) but not material enough for 8‑K Weather impacted Pacific NW and East; sequential visit progression through quarter Typical seasonal volatility
De novo ramp/unit economicsLosses in year 1, breakeven by months 10–11; maturity ~3 years Ramp cadence reiterated: 7–10 visits/day at 6 months; 12–15 by year 1; 18–20 by year 2; mid‑20s by year 3 Consistent framework
M&A pace and multiplesActive pipeline; pricing at high end but cooling soon Active deals; multiples ~7.5x–8.5x EBITDA; industrial prevention broadens scope Robust pipeline at healthy valuations
Tax/accounting changesEarly adoption of stock comp tax accounting; lower Q4 ETR 28% Q1 ETR 27.3% (stock comp benefit); model 37–38% rest of year, ~36% FY ETR normalizing post Q1
MRNCI accounting/restatementRestatement explained; non‑cash impact; bank waivers supportive MRNCI change value +$2.7M (non‑cash); cash redemption schedules not predictable Ongoing non‑cash P&L volatility
Industrial prevention servicesNot present$1.5M revenue (March); GM 14.3–14.5%; fragmented market, cross‑sell potential New growth vector

Management Commentary

  • “In the first quarter we had solid revenue and visit growth driven in large part by recent acquisitions which are performing very well… Operating costs have increased in large part due to acquisitions.”
  • “We rolled out our new analytics tool… to help identify and impact additional referral opportunities.”
  • “We further adjusted our structure, taking out about $2 million in what will be annual cost.”
  • “The early performance from our industrial prevention services deal has been solid… We are looking for other opportunities with the right partners in that space.”
  • “Analyst consensus estimate for the first quarter was $0.47.”

Q&A Highlights

  • Same‑store trajectory: Management sees 2–3% as a reasonable near‑term aim, with sequential improvement through March–May; not expecting 4–5% seen in prior years.
  • Cost focus: $2M annualized cost removal at quarter end; opportunity to better align flat net rates with labor cost across the platform, especially given acquired clinics’ higher costs.
  • Corporate costs outlook: Expect corporate costs to be in upper‑8% to low‑9% of net revenues for the year (Q1 was 8.8%).
  • De novo ramp detail: Visits/day ramp from 7–10 at 6 months to 12–15 by year 1, 18–20 by year 2, mid‑20s by year 3; profitable by end of year 1.
  • MRNCI cash redemptions: No schedule provided; redemptions typically occur in tranches over time; cash payments do not hit the P&L, but MRNCI accounting drives non‑cash interest expense lines.
  • Tax rate: Expect 37–38% for Q2–Q4 and ~36% for full‑year, with stock price influencing discrete benefits on vesting.
  • Industrial prevention services: Margin ~14.5% in March; fragmented market; integration and cross‑sell with Fit2WRK and salesforce underway.

Estimates Context

  • EPS vs consensus: Operating results EPS of $0.51 exceeded consensus of $0.47, reflecting revenue/visit growth and lower corporate costs; GAAP diluted EPS was $0.38. Bold beat: +$0.04 vs consensus.
  • Revenue consensus: Attempted retrieval from S&P Global; unavailable due to request limits. Values retrieved from S&P Global were unavailable; EPS consensus cited from management’s call commentary.
  • Implications: Estimate models should reflect higher visits and industrial prevention revenue, while embedding lower corporate cost ratio and continued gross margin pressure from acquired clinics’ cost profile.

Key Takeaways for Investors

  • Volume‑led quarter: Strong visits growth (+10.3%) and acquisition contribution drove double‑digit revenue growth; industrial prevention adds a new lever.
  • EPS beat: Operating results EPS beat consensus by $0.04, aided by revenue growth and disciplined corporate costs.
  • Margin watch: Gross margin compressed ~230 bps YoY; clinic salaries at 57.2% of revenue highlight need for continued labor productivity improvements, especially in acquired clinics.
  • Cost actions: $2M annualized cost removal is a tangible effort to defend margins; monitor flow‑through in Q2–Q4.
  • Guidance: FY17 operating results/EPS guidance (issued June 7) frames expectations; tax rate normalizes to 37–38% for the remainder of the year after Q1’s stock‑comp benefit.
  • New platform: Industrial prevention services delivered $1.5M in March and ~14.5% GM; management sees fragmented market opportunity and cross‑sell potential.
  • Capital deployment: Active de novo and M&A pipelines with healthy deal multiples (7.5x–8.5x EBITDA) support unit growth; de novos reach maturity over ~3 years.