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U S PHYSICAL THERAPY INC /NV (USPH)·Q4 2017 Earnings Summary

Executive Summary

  • Q4 2017 revenue rose 20.2% year over year to $109.2M, driven by 15.3% visit growth and contributions from the industrial injury prevention business; gross margin expanded 140 bps to 22.1% and operating income increased 27.5% to $14.0M .
  • Non‑GAAP Operating Results EPS was $0.49, beating the Street’s $0.47 consensus by $0.02; GAAP EPS was $0.57 aided by a $4.3M TCJA tax revaluation benefit .
  • Management raised the quarterly dividend 15% to $0.23 and issued 2018 Operating Results guidance of $29.5–$30.9M ($2.34–$2.44 EPS) assuming a ~28% tax rate; MRNCI instruments were extinguished, eliminating the associated non‑cash “interest” expense going forward .
  • Near‑term watch items: Medicare/commercial rate changes (~$0.65/visit blended hit; ~$0.15 EPS headwind baked into 2018), wage inflation, and Q1 seasonality (flu/weather) vs margin initiatives and acquisition pipeline as potential offsets .

What Went Well and What Went Wrong

  • What Went Well

    • Revenue and volume strength: Net revenues +20.2% YoY to $109.2M on 975.4K visits; PT clinic gross margin improved to 22.6% vs 20.8% YoY .
    • Operating leverage: Gross profit +$5.3M YoY to $24.1M (22.1% of revenue) and operating income +27.5% to $14.0M; Adjusted EBITDA +19.2% to $15.0M .
    • Strategy and tone: “Finish the year on a nice up‑note... strong revenue, patient visits, and same store growth... continued progress on cost and operational realignment” – CEO Chris Reading .

  • What Went Wrong

    • Rate/mix pressure: Average net revenue per visit fell to $104.21 from $105.14 YoY; management confirmed the quarter’s slight net rate dip was mix‑driven .
    • Elevated corporate costs: Corporate office costs rose to $10.2M (9.3% of revenue) vs $7.8M (8.6%) a year ago due to staffing/organizational changes .
    • Reimbursement headwind ahead: Medicare cut (~$2/visit) flows through to some commercial contracts; blended ~$0.65/visit impact equates to ~($0.15) EPS in 2018 guidance, partially offset by initiatives .

Financial Results

MetricQ2 2017Q3 2017Q4 2017
Net Revenues ($MM)$104.251 $103.0 $109.203
Diluted EPS (GAAP)$0.39 $0.41 $0.57
Operating Results EPS (Non‑GAAP)$0.59 $0.48 $0.49
Gross Profit Margin %23.5% 20.6% 22.1%
Operating Income ($MM)$15.678 $12.9 $13.962
Adjusted EBITDA ($MM)$15.940 $13.7 $14.979

Segment revenue mix

Revenue ($MM)Q2 2017Q3 2017Q4 2017
Physical Therapy Net Patient Revenues$97.7 $96.3 $101.642
Management Contracts$1.6 $1.7 $2.2
Workforce Performance Solutions$4.4 $4.4 $4.7
Other Revenue$0.6 $0.7 $0.7

Key operating KPIs

KPIQ2 2017Q3 2017Q4 2017
Total PT Visits (000s)923.7 —975.4
Avg Net Rev/Visit ($)$105.73 $105.26 $104.21
Same‑Store Revenue Growth %+3.5% +2.4% +4.6%
Same‑Store Visits Growth %+2.6% +1.2% +3.8%
Same‑Store Net Rate Change %~+1% ~+1% +0.8%
Clinics (period‑end)566 569 578

Non‑GAAP/Accounting items (context)

  • GAAP EPS in Q4 includes a $4.3M TCJA deferred tax revaluation benefit; Operating Results excludes this and MRNCI change in redemption value .
  • Effective 12/31/2017, mandatory redemption features were removed from partnership agreements; MRNCI was reclassified to temporary equity, eliminating future P&L “interest” charges tied to redemption value changes .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Operating Results (EPS)FY2018—$2.34 – $2.44 (tax ~28%) New
Operating Results ($)FY2018—$29.5M – $30.9M New
Operating Results (EPS)FY2017$2.02 – $2.10 (post‑hurricanes) —Maintained in Q3 update
Dividend per Share (Quarterly)2018$0.20 (Q4’17 declared) $0.23 (payable Apr 13, 2018) Raised 15%
Tax Rate AssumptionFY2018—~28% New planning input

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2017, Q3 2017)Current Period (Q4 2017)Trend
Cost control/operational realignmentAdded analytics tool; targeted labor adjustments (~$1.8M 2H impact) . Rebalanced regions; added leadership; hurricanes muddied cost read‑through .Split COO roles East/West; added ops resources; progressing on cost alignment .Improving oversight and leverage.
Reimbursement/MedicareCMS “misvalued code” outcome modestly positive/benign near‑term .Medicare cut cascades to some commercial; $0.65/visit blended hit ($0.15 EPS) in FY18 plan .Turning into a headwind in 2018.
Industrial injury prevention (Workforce)Strong out of gate; $4.4M in Q2; margin ~15% .$4.4M in Q3; pipeline/cross‑sell opportunities .$4.7M in Q4; “we like that business… more growth planned” .
Margin trajectoryGross margin % compressed; cost control priority .Closing gap; hurricanes pressured % .Gross margin 22.1% vs 20.6% in Q3; corporate cost elevated near‑term .
MRNCI accounting——MRNCI extinguished; moves from liability to temporary equity; no more P&L MRNCI “interest” .
Macro/weather—Hurricane impact, guidance lowered .Q1 flu/weather headwinds acknowledged .

Management Commentary

  • CEO Chris Reading: “Revenue, patient visits, and same store growth were strong in the final quarter, while we made continued progress on our cost and operational realignment initiatives.”
  • CFO Larry McAfee: “Operating results EPS was $0.49… the analyst consensus estimate was $0.47.”
  • CFO on capital and leverage: Despite five acquisitions ($41.3M) and $10.1M in dividends in 2017, net debt rose only $7.1M; net debt $38.8M vs $57.9M TTM Adjusted EBITDA .
  • CEO on workforce business: “We think… over time it will grow steadily… to be a decent part of our Company and our offering.”
  • CFO on reimbursement: ~$2/visit Medicare cut translates to ~$0.65/visit blended impact; ~$0.15 EPS headwind modeled for 2018 .

Q&A Highlights

  • Estimates/Beat: Operating Results EPS $0.49 vs $0.47 consensus; management advised using Operating Results for apples‑to‑apples comparisons .
  • Reimbursement and mix: Payer mix Q4: Commercial 52.5%, Workers’ Comp 13.3%, Medicare/Medicaid 26.5%, Other 7.7%; slight net rate dip was mix‑driven .
  • Structural accounting: MRNCI reclassification eliminates future non‑cash “interest” expense; impacts shift to equity/minority interest lines .
  • Margin levers: Focus on staffing/productivity (flexing part‑time hours, scheduling), modest wage inflation (~couple percent) manageable with tools/process .
  • Near‑term headwinds: Flu/weather pressured early Q1 volume; March is key; outlook within plan .

Estimates Context

MetricPeriodConsensusActualSurprise
Operating Results EPS (Non‑GAAP)Q4 2017$0.47 (per management citing analyst consensus) $0.49 +$0.02
  • S&P Global (Capital IQ) consensus data was unavailable via our feed today; revenue consensus could not be retrieved. We rely on management’s disclosure for the EPS consensus figure .

Key Takeaways for Investors

  • Quality print: Broad‑based growth (visits +15.3%) and margin uptick drove a clean non‑GAAP EPS beat vs consensus; sequential recovery from hurricane‑impacted Q3 .
  • 2018 setup: EPS guide $2.34–$2.44 embeds a ~$0.15 Medicare/commercial headwind; execution on cost control and mix, plus contributions from workforce solutions and M&A, are the key offsets .
  • Structural de‑risking: MRNCI accounting clean‑up removes a volatile non‑cash expense from the P&L, improving comparability and transparency going forward .
  • Cash returns + optionality: Dividend up 15%; strong cash generation limited net leverage despite active M&A, preserving capacity for continued acquisitions .
  • Watch mix/rate: Average net revenue per visit stepped down QoQ/YoY on mix; payer mix (26.5% Medicare/Medicaid) and regional exposure will influence rate trends .
  • Near‑term trading lens: Evidence of margin progress, clean beat, dividend hike, and accounting simplification are supportive; monitor Q1 flu/weather read‑through and any reimbursement commentary updates .
  • Medium‑term thesis: Multi‑year clinic roll‑up with embedded same‑store growth, operating discipline, and a growing industrial injury prevention arm that broadens enterprise customers and cross‑sell opportunities .

Additional Documents Reviewed (Q4 2017 period and prior two quarters)

  • Q4 2017 earnings press release (Form 8‑K Exhibit 99.1) – full financials, dividend increase, FY2018 guidance .
  • Q4 2017 earnings call transcript – operations, guidance context, consensus EPS, reimbursement/tax/MRNCI details .
  • Related press releases: ROTH Conference (3/8/2018) and Oppenheimer Conference (3/13/2018) – definitions/reconciliations of non‑GAAP measures .
  • Q3 2017 earnings call transcript – revenue/margin trends, hurricane impact, operations reorg .
  • Q2 2017 8‑K and press release – segment detail, margin profile, Adjusted EBITDA .
  • Q3 headline recap (Reuters): GAAP EPS $0.41; EPS view $0.49 .