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US

U S PHYSICAL THERAPY INC /NV (USPH)·Q2 2017 Earnings Summary

Executive Summary

  • Solid top-line with net revenues up 15.3% to $104.3M, driven by 10.0% PT revenue growth and a $4.4M contribution from the March-acquired workforce performance solutions (WPS) business; same-store revenue rose 3.5% as visits increased 2.6% and net rate per visit ticked up ~1% .
  • Record “operating results” EPS of $0.59 (+3.5% YoY), but GAAP EPS fell to $0.39 on higher non-cash mandatorily redeemable non-controlling interest (MRNCI) charges; gross margin contracted to 23.5% (vs. 25.5% LY) on elevated facility labor and start-up/low-margin deal mix .
  • Management reaffirmed FY17 operating EPS guidance of $2.07–$2.16 and flagged ~$1.8M 2H’17 facility labor cost reductions now in place; WPS margins (~15%) tracked ahead of plan, adding a new growth vector .
  • Dividend maintained: $0.20/share payable Sep 8, 2017; focus for the stock: execution on cost controls, sustained same-store growth, and incremental WPS/M&A momentum .

What Went Well and What Went Wrong

  • What Went Well

    • Demand and mix: April/May set records for visits per clinic per day; same-store revenue +3.5% and visit growth +2.6% with modest net rate improvement to $105.73/visit .
    • New platform contribution: WPS delivered $4.4M revenue at ~15% gross margin, “ahead of plan,” supporting diversification and cross-sell opportunities .
    • Development/M&A pipeline: Two deals closed in the quarter; management cites active broker and relationship-driven pipelines and added internal resource to accelerate sourcing .

  • What Went Wrong

    • Margin pressure from labor costs/start-ups: Facility salaries were 56.4% of revenue vs. 54.0% LY; gross margin fell to 23.5% (PT clinic margin 24.2%, down ~140 bps YoY) as start-ups and some lower-margin acquired clinics weighed on profitability .
    • Higher non-cash MRNCI costs reduced GAAP EPS: MRNCI change in redemption value rose to $3.9M (from $1.9M LY), lowering GAAP EPS to $0.39 despite record operating EPS .
    • Cost execution timing: Cost actions implemented late in the quarter reduced near-term impact; management acknowledged “too many balls in the air” with simultaneous analytics rollout and cost initiatives .

Financial Results

MetricQ2 2016Q1 2017Q2 2017
Net Revenues ($M)$90.430 $97.565 $104.251
GAAP Diluted EPS ($)$0.48 $0.38 $0.39
Operating Results Diluted EPS ($)$0.57 $0.51 $0.59
Gross Margin ($M)$23.059 $20.747 $24.534
Gross Margin (%)25.5% 21.3% 23.5%
Total Clinic Operating Costs (% of Rev)74.5% 78.7% 76.5%
Corporate Office Costs (% of Rev)8.9% 8.8% 8.5%
Operating Income ($M)$15.033 $12.200 $15.678
Adjusted EBITDA ($M)$15.374 $13.324 $15.940

Segment/Revenue Mix

Revenue Component ($M)Q2 2016Q1 2017Q2 2017
PT Net Patient Revenues$88.433 $93.654 $97.657
Workforce Performance Solutions (WPS)—$1.5 $4.4
Management Contracts$1.6 $1.9 $1.6
Other Revenue$0.4 $0.5 $0.6

KPIs

KPIQ2 2016Q1 2017Q2 2017
Total Patient Visits (000s)840.0 892.0 923.7
Avg Net Revenue/Visit ($)$105.27 $105.04 $105.73
Same-Store Revenue Growth (%)——3.5%
Same-Store Visit Growth (%)——2.6%
Clinic Count (End of Period)516 558 566
Adjusted EBITDA ($M)$15.374 $13.324 $15.940

Estimates Comparison (S&P Global)

MetricQ2 2017 ActualQ2 2017 Consensus
Revenue ($M)$104.251 Unavailable (S&P Global request limit reached)
GAAP Diluted EPS ($)$0.39 Unavailable (S&P Global request limit reached)
Note: We attempted to retrieve S&P Global consensus via GetEstimates; data was unavailable due to API daily limit. Where estimates are not shown, comparisons are not provided.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance/UpdateChange
Operating Results EPS (Diluted)FY 2017$2.07–$2.16 (6/7/17) Reaffirmed $2.07–$2.16 (8/3 call) Maintained
Corporate Tax Rate AssumptionFY 2017~37% (guidance basis) Expect ~37–38% in remaining quarters; ~36% for year (Q1 call) Maintained
Dividend per ShareQ3 2017$0.20/share in prior quarter $0.20/share payable Sep 8, 2017 Maintained
Facility Labor Cost Reduction2H 2017—~$1.8M cost takeout expected to benefit 2H New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2016)Previous Mentions (Q1 2017)Current Period (Q2 2017)Trend
Cost control/labor productivityAcquisitions/start-ups pressure gross margin; plan to take costs out over time ~$2M annual cost actions initiated late Q1; focus on day-to-day staffing discipline Acknowledged excess facility labor; cuts in May–July with ~$1.8M 2H benefit; adding corporate resource Improving focus; benefits ahead
Analytics/technology for growthNew tool to identify referrals and targets launched Analytics tool rolled out; expecting impact through year Tool live; may have overloaded ops initially; expect payoff as focus returns Execution normalization
CMS/regulatoryMarket “benign”; reimbursement steady —CMS misvalued codes review resulted in modest upward adjustments/no cuts—viewed as a win Slight positive
M&A/inorganic growthHealthy pipeline; pricing high but peaking Active; broadened scope with WPS/industrial prevention Active deal flow; added internal sourcing capacity; reaffirmed flexibility on revolver ($125M facility, $69M drawn) Continued momentum
De novo ramp/mixStart-ups depress near-term margins; profitable by ~9–12 months De novo ramp: ~7–10 visits/day at 6 months; ~12–15 by year-end; maturity by year 2–3 Start-ups plus lower-margin deals at ~11–12% combined gross margin; drag near term Near-term headwind
Accounting/MRNCIRestatement; non-cash MRNCI treatment; no EBITDA/cash impact Q1 tax/stock comp effects; MRNCI remains non-cash MRNCI change in redemption value increased to $3.9M in Q2, pressuring GAAP EPS GAAP EPS volatility persists

Management Commentary

  • “The second quarter of 2017 was a record quarter for operating results... Highlights... include strengthening visit volume coupled with excellent results from our recently acquired workforce performance solutions business... The results of our facility-level cost control initiative, which started in the second quarter, should be demonstrated as we go forward.” — Chris Reading, CEO .
  • “In spite of the fact that this was technically a record operating results quarter... we left some opportunity on the table in the form of carrying too much facility-based expense... Our pace of start-ups has increased... combined with some lower-margin deals... results in gross margins... around 11% to 12%... We made a lot of adjustments... too late in the quarter to have any real impact. But for the remainder of the year, those adjustments should have a beneficial effect.” — Chris Reading, CEO .
  • “Gross margin for the second quarter was $24.5 million or 23.5%... The margin from the PT operations was 24.4%, and the lower-margin workforce performance business came in at 15%, which was actually ahead of plan.” — Lawrance McAfee, CFO .

Q&A Highlights

  • Guidance: Management reaffirmed FY17 operating EPS guidance of $2.07–$2.16 and will update only if materially outside the range .
  • Rate sustainability: Net revenue per visit modeled flat for the year; recent acquisitions with lower rates temper mix; cautious optimism from CMS outcome but not modeling increases yet .
  • Cost reductions: ~$1.8M facility labor cost savings expected across 2H’17; actions included full-time reductions, hour cuts for part-time/PRN; severance impacted Q2 .
  • Regulatory: CMS misvalued code process concluded with modest upward adjustments and no cuts—reduces near-term reimbursement risk .
  • Capital/M&A: $125M revolver with potential accordion; $69M drawn at quarter end; active M&A across PT and WPS; not capital constrained .
  • Payer mix: Commercial ~50.2%, Workers’ comp 14.9%, Medicare/Medicaid 26.9%, Other 8.0% in Q2; minimal Medicaid exposure (<2%) .

Estimates Context

  • We attempted to retrieve S&P Global consensus for Q2 2017 revenue and EPS; data was unavailable due to API daily limit, so we cannot provide versus-estimate comparisons for this quarter. Management’s FY17 operating EPS guidance remains $2.07–$2.16, implying confidence despite Q2 cost pressures .

Key Takeaways for Investors

  • Volume-led top-line strength and WPS contribution offset margin drag; near-term stock drivers are execution on facility cost controls and sustaining same-store growth into 2H .
  • GAAP EPS volatility from MRNCI accounting persists, but non-cash; focus on operating EPS and EBITDA for underlying performance trends .
  • Cost actions (~$1.8M in 2H) and analytics-driven referral initiatives should support sequential margin recovery; watch Q3/Q4 gross margin and clinic salaries % as proof points .
  • Regulatory backdrop modestly improved (CMS codes), reducing reimbursement overhang; rate modeling remains conservative (flat) .
  • Balance sheet/debt capacity supports continued M&A; expect further tuck-ins and expansion of WPS platform, which is tracking ahead of plan .
  • Dividend continuity ($0.20/quarter) underscores cash generation; leverage at conservative levels historically (management cited ~1.2x EBITDA in 1H) .
  • Monitor de novo ramp and acquired clinic integration; management acknowledges temporary mix-driven margin headwinds but expects normalization over time .