On February 27, 2020, the Company acquired interests in a 4-clinic physical therapy practice. The 4 clinics are in four4 separate partnerships. The Company’s interests in the four4 partnerships range from 10.0% to 83.8%, with an overall 65.0% based on the initial purchase transaction. The aggregate purchase price was $11.9 million, of which $11.6 million was paid in cash and $0.3 million in the form of a seller note. The note accrues interest at 4.75% per annum and the principal and interest is payable on February 2022.
The purchase price plus the fair value of the non-controlling interests for the acquisitions in 2020 was allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. trade names, referral relationships and non-compete agreements, and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used at March 31,June 30, 2020 based on additional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimated valuation of the tangible assets acquired, the completion of the valuation of identifiable intangible assets and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to goodwill. The Company does not expect the adjustments to be material.
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020 (“2019 Annual Report”); and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2019 Annual Report. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and in Part II, Item 1A. Risk Factors of this report.
References to “we,” “us,” “our” and the “Company” shall mean U.S. Physical Therapy, Inc. and its subsidiaries.
We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and rehabilitation of injured workers. We also operate an industrial injury prevention services business which include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments services.
In March 2017, we acquired a 55% interest in an initial industrial injury prevention business. On April 30, 2018, we made a second acquisition and subsequently combined the two businesses. After the combination, we owned a 59.45% interest in the combined business, Briotix Health, Limited Partnership (“Briotix Health”). Services provided include onsite injury and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. We perform these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers (ATCs). On April 11, 2019, we acquired a third company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network in 45 states including onsite at eleven client locations. The acquired business was then combined with Briotix Health increasing our ownership position in the partnership to approximately 76.0%.
On February 27, 2020, we acquired interests in a four-clinic physical therapy practice. The four clinics are in four separate partnerships. Our interests in the four partnerships range from 10.0% to 83.8%, with an overall 65.0% based on the initial purchase transaction. The purchase price was $11.9 million, of which $11.6 million was paid in cash and a $0.3 million seller note. The note accrues interest at 4.75% per annum and the principal and interest is payable on February 2022.
On September 30, 2019, we acquired a 67% interest in eleven-clinic physical therapy practice. The purchase price for the 67% interest was $12.4 million of which $12.1 million was paid in cash and $0.3 million in a seller note that is payable in two principal installments totaling $150,000 each, plus accrued interest in September 2020 and September 2021. The note accrues interest at 5.0% per annum.
The following table provides details of the diluted earnings per share computation and reconciles net income attributable to our shareholders calculated in accordance with GAAP to Operating Results. Management believes providing Operating Results to investors is useful information for comparing our period-to-period results. Operating Results, a non-GAAP measure, equals net income attributable to our shareholders per the consolidated statement of net income plus charges incurred for our CFO search and closure costs bothless gain on sale of partnership interest and clinics and Relief Funds, all net of tax. The earnings per share from Operating Results also excludes the impact of the revaluation of redeemable non-controlling interest. In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is included in the earnings per basic and diluted share calculation, although it is not included in net income but charged directly to retained earnings. Management uses Operating Results, which eliminates certain items described above that can be subject to volatility and unusual costs, as one of the principal measures to evaluate and monitor financial performance period over period. Management believes that Operating Results is useful information for investors to use in comparing our period-to-period results as well as for comparing with other similar businesses since most do not have redeemable non-controlling interest instruments and therefore have different liability and equity structures.
Operating Results is not a measure of financial performance under GAAP. Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.
| | Three Months Ended March 31, | | | Three Months Ended June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Computation of earnings per share - USPH shareholders: | | | | | | | | | | | | |
Net income attributable to USPH shareholders | | $ | 1,016 | | | $ | 8,443 | | | $ | 10,232 | | | $ | 14,620 | |
Credit (charges) to retained earnings: | | | | | | | | | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | 2,129 | | | | (4,661 | ) | | | 3,344 | | | | (5,169 | ) |
Tax effect at statutory rate (federal and state) of 26.25% | | | (559 | ) | | | 1,224 | | | | (878 | ) | | | 1,356 | |
| | $ | 2,586 | | | $ | 5,006 | | | $ | 12,698 | | | $ | 10,807 | |
| | | | | | | | | | | | | | | | |
Earnings per share (basic and diluted) | | $ | 0.20 | | | $ | 0.39 | | | $ | 0.99 | | | $ | 0.85 | |
| | | | | | | | | | | | | | | | |
Adjustments: | | | | | | | | | | | | | | | | |
Charges incurred for CFO search | | | 133 | | | | - | | | | - | | | | - | |
Closure costs | | | 3,752 | | | | - | | | | 94 | | | | - | |
Gain on sale of partnership interest and clinics | | | | (1,073 | ) | | | (5,823 | ) |
Receipts from the CARES Act Provider Relief Fund ("Relief Fund") | | | | (7,958 | ) | | | - | |
Allocation to non-controlling interest | | | | 1,900 | | | | - | |
Revaluation of redeemable non-controlling interest | | | (2,129 | ) | | | 4,661 | | | | (3,344 | ) | | | 5,169 | |
Tax effect at statutory rate (federal and state) of 26.25% | | | (461 | ) | | | (1,224 | ) | | | 2,725 | | | | 172 | |
Operating Results | | $ | 3,881 | | | $ | 8,443 | | |
Operating Results (without receipts from Relief Fund) | | | $ | 5,042 | | | $ | 10,325 | |
| | | | | | | | | | | | | | | | |
Basic and diluted Operating Results per share | | $ | 0.30 | | | $ | 0.66 | | |
Receipts from Relief Fund | | | | 7,958 | | | | - | |
Tax effect at statutory rate (federal and state) of 26.25% | | | | (2,089 | ) | | | - | |
Operating Results (including receipts from Relief Fund) | | | $ | 10,911 | | | $ | 10,325 | |
| | | | | | | | | |
Basic and diluted Operating Results (without receipts from Relief Fund) per share | | | $ | 0.39 | | | $ | 0.81 | |
Basic and diluted Operating Results (including receipts from Relief Fund) per share | | | $ | 0.85 | | | $ | 0.81 | |
| | | | | | | | | | | | | | | | |
Shares used in computation - basic and diluted | | | 12,796 | | | | 12,707 | | | | 12,843 | | | | 12,767 | |
The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements:
| | Three Months Ended | |
| | June 30, 2020 | | | June 30, 2019 | |
| | (in thousands) | |
Net operating revenues: | | | | | | |
Physical therapy operations | | $ | 74,199 | | | $ | 116,085 | |
Industrial injury prevention services | | | 9,658 | | | | 10,288 | |
Total Company | | $ | 83,857 | | | $ | 126,373 | |
| | | | | | | | |
Gross profit: | | | | | | | | |
Physical therapy operations (excluding closure costs) | | $ | 16,199 | | | $ | 28,433 | |
Industrial injury prevention services | | | 3,179 | | | | 3,005 | |
| | $ | 19,378 | | | $ | 31,438 | |
Physical therapy operations - closure costs | | | 94 | | | | 13 | |
Gross profit | | $ | 19,284 | | | $ | 31,425 | |
Revenues
ExcludingReported net revenues in the loss of revenues from2020 Second Quarter was $83.9 million as compared to $126.4 million in the 2019 Second Quarter. Adjusted for the clinics within the partnership sold in June of 2019 (“and 2020, net patient revenues were $83.7 million ($83.9 million less $0.2 million related to sold clinics”) of $5.7clinics) in the 2020 Second Quarter compared to $118.8 million for($126.4 million less $7.6 million related to sold clinics) in the 2019 First Quarter, net revenues for the 2020 First Quarter of $112.7 million increased 2.0% from adjustedSecond Quarter. The remaining reduction in revenue of $110.5$35.1 million ($116.2 million less the $5.7 million) in 2019 First Quarter despiteis due to the adverse effects beginning in mid-March, of the COVID-19 pandemic on the Company’s clinics.pandemic. Please see table below.
| | Three Months Ended | |
| | June 30, 2020 | | | June 30, 2019 | |
| | (in thousands) | |
Reported net revenues | | $ | 83,857 | | | $ | 126,373 | |
2019 sold clinics | | | - | | | | (6,552 | ) |
2020 sold clinics | | | (112 | ) | | | (1,039 | ) |
| | $ | 83,745 | | | $ | 118,782 | |
Net patient revenues from physical therapy operations decreased $6.5 million, or 6.1%, to $100.1were approximately $72.3 million in the 2020 FirstSecond Quarter from $106.7and $113.4 million in the 2019 First Quarter primarily due to the $5.7 million of lost revenue from sold clinics and the adverse effects of COVID-19. TotalSecond Quarter. Included in net patient visits were 971,000 inrevenues for the 2020 FirstSecond Quarter and 1,001,510was $5.0 million related to clinics opened or acquired after June 30, 2019 (“New Clinics”). Included in net patient revenues for the 2019 FirstSecond Quarter (inclusive of 49,300 forwas $7.8 million related to clinics sold in the six months ended June 30, 2019 and 2020. During the 2019 Second Quarter, the Company sold clinics). its interest in a partnership that included 30 clinics and during the 2020 Second Quarter, the Company sold its interest in eleven closed clinics.
The average net patient revenue per visit was $103.11$106.97 for the 2020 FirstSecond Quarter and $106.49$107.16 for the 2019 FirstSecond Quarter. ExcludingTotal patient visits were 675,700 in the 49,300 visits, the net revenue per visit was $106.022020 Second Quarter and 1,058,000 for the 2019 FirstSecond Quarter. OfAdjusted for the $0.8 million ($6.5 million less $5.7 million) decreaseclinics sold in net patient revenues, $5.4 million related to a decrease in business of clinics opened or acquired prior to April 1, 2019 (“Mature Clinics”) and was offset by $4.6 million related to clinics opened or acquired after March 31, 2019 (“New Clinics”). Revenue from physical therapy management contracts was $2.1 million for both 2020 and 2019, first quarters.
Revenue from the industrial injury prevention business increased 43.1% to $9.9 milliontotal patient visits were 674,600 in the 2020 FirstSecond Quarter compared to $6.9 million inand 992,200 for the 2019 First Quarter due to internal growth and an acquisitionSecond Quarter. The reduction in the second quarter of 2019. Management estimates that the industrial injury prevention business lost approximately $126,000 in revenue and contribution marginadjusted total patient visits is due to the pandemic.
Other miscellaneous revenue was $0.6 million inadverse effects of the 2020 First Quarter and $0.5 million in the 2019 First Quarter.
COVID-19 pandemic. Net patient revenues are based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenues are determined after contractual and other adjustments relating to patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.
Also included in physical therapy operations was revenue from physical therapy management contracts which was $1.6 million for the 2020 Second Quarter and $2.2 million in 2019 Second Quarter. Other miscellaneous revenue from physical therapy operations was $0.3 million in the 2020 Second Quarter and $0.5 million in the 2019 Second Quarter. Other miscellaneous revenue include physical therapy services, including athletic trainers, provided on-site such as for schools.
Revenue from the industrial injury prevention services business decreased 6.1% to $9.7 million in the 2020 Second Quarter compared to $10.3 million in the 2019 Second Quarter. The reduction is primarily attributable to the adverse effects of the COVID-19 pandemic. Currently, the industrial injury prevention services business is running at slightly over 90% of normal.
Operating Costs
Total operating costs, excluding closure costs, were $93.3$64.5 million in the 2020 FirstSecond Quarter, or 82.7%76.9% of net revenues, as compared to $89.5$94.9 million in the 2019 FirstSecond Quarter, or 77.0%75.1% of net revenues. The $3.8Total operating costs for the physical therapy operations, excluding closure costs, were $58.0 million increase was attributablein the 2020 Second Quarter, or 78.2% of physical therapy operations revenues, as compared to $5.2$87.7 million in the 2019 Second Quarter, or 75.5% of physical therapy operations revenues. Included in operating costs for the physical therapy operations for the 2020 Second Quarter was $3.8 million related to New Clinics, andof which $2.6 million related to the industrial injury prevention business, primarilyclinics acquired in September 2019 and February 2020. Adjusted for the operating costs for clinics related to the acquisition, offsetpartnership interest sold in 2019 and 2020 of $6.6 million in 2019 Second Quarter and $0.5 million in 2020 Second Quarter, operating costs for clinic opened or acquired prior to July 1, 2019 (“Mature Clinics”) decreased by a decrease of $4.0$26.5 million in the 2020 Second Quarter compared to the 2019 Second Quarter. Operating costs, included in physical therapy operations, related to Mature Clinics.management contracts decreased by $0.7 million. Closure costs of $3.8$0.1 million include estimates of remaining lease obligations write-off of goodwill and other costs. The Company will incur additional closure costs offset by settlement of certain lease commitments recorded in the secondfirst quarter of 2020.2019 due to closed clinics.
Total operating costs for the industrial injury prevention services business, were $6.5 million in the 2020 Second Quarter, or 67.1% of industrial injury prevention services revenues, as compared to $7.3 million in the 2019 Second Quarter, or 70.8% of net industrial injury prevention revenues.
Each component of operating costs is discussed below:
Operating Costs—Salaries and Related Costs
Salaries and related costs, increased to $69.0 million forincluding physical therapy operations and the industrial injury prevention services business, were 51.8% of net revenues in the 2020 FirstSecond Quarter from $66.3 million forversus 55.9% in the 2019 FirstSecond Quarter an increase of $2.7 million.primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic. Please see discussion in Business Update Related to COVID-19 for further information. Salaries and related costs for New Clinics amountedthe physical therapy operations were $37.9 million in the 2020 Second Quarter, or 51.1% of physical therapy operations revenues, as compared to $3.4$64.6 million in the 2019 Second Quarter, or 55.6% of physical therapy operations revenues. Included in salaries and related costs for the physical therapy operations for the 2020 First Quarter. Second Quarter was $2.2 million related to New Clinics. Adjusted for the salaries and related costs for clinics related to the partnership interest sold in 2019 and 2020 of $4.9 million in the 2019 Second Quarter and $0.1 million in the 2020 Second Quarter, salaries and related costs for Mature Clinics decreased by $23.5 million in the Second Quarter 2020 compared to the Second Quarter 2019 . Salaries and related costs, included in physical therapy operations, related to management contracts decreased by $0.6 million.
Salaries and related costs for the industrial injury prevention services business, was $6.9were $5.5 million in the 2020 FirstSecond Quarter, or 56.9% of industrial injury prevention services revenues, as compared to $4.3 million 2019 First Quarter, an increase of $2.6 million primarily due to the acquisition in April 2019. For Mature Clinics, salaries and related costs decreased by $3.3$6.0 million in the 2020 First2019 Second Quarter, compared to the 2019 First Quarter. For management contracts, salaries and related costs increased slightly by $0.1 million for the 2020 First Quarter compared to the 2019 First Quarter. Salaries and related costs as a percentageor 58.7% of net revenues were 61.2% for the 2020 First Quarter and 57.0% for the 2019 First Quarter.industrial injury prevention services revenues.
Operating Costs—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, were $22.9 million24.2% of net revenues in the 2020 Second Quarter versus 18.2% in the 2019 Second Quarter. Rent, supplies, contract labor and other costs for the physical therapy operations were $19.3 million in the 2020 FirstSecond Quarter, and $22.0or 26.0% of physical therapy operations revenues, as compared to $21.8 million forin the 2019 First Quarter. For New Clinics,Second Quarter, or 18.8% of physical therapy operations revenues. Included in rent, supplies, contract labor and other amounted to $1.7 millioncosts for the physical therapy operations for the 2020 First Quarter. For Mature Clinics,Second Quarter was $1.5 million related to New Clinics. Adjusted for the rent, supplies, contract labor and other decreased by $1.1costs for clinics related to the partnership interest sold in 2019 and 2020 of $1.6 million in the 2019 Second Quarter and $0.4 million in the 2020 First Quarter compared to the 2019 First Quarter. For the industrial injury prevention business,second quarter, rent, supplies, contract labor and other increasedcosts for Mature Clinics decreased by $0.3$2.6 million forin the respective periods.Second Quarter 2020 compared to the Second Quarter 2019 . Rent, supplies, contract labor and other costs, included in physical therapy operations, related to management contracts decreased slightly.
Rent, supplies, contract labor and other costs for the industrial injury prevention services business, were $1.0 million in the 2020 Second Quarter, or 10.2% of industrial injury prevention services revenues, as a percentagecompared to $1.2 million in the 2019 Second Quarter, or 12.1% of net revenues was 20.3% for the 2020 First Quarter and 19.0 % for the 2019 First Quarter.industrial injury prevention services revenues.
Operating Costs—Provision for Doubtful Accounts
The provision for doubtful accounts was $1.4 million for the 2020 First Quarter and $1.2 million for the 2019 First Quarter. The provision for doubtful accounts for patient accounts receivable as a percentage of net patient revenuesrevenue was 1.2% for0.9% in the 2020 FirstSecond Quarter and 1.0% for the comparable period in 2019.
Our provision for doubtful accounts for patient accounts receivable as a percentage of total patient accounts receivable was 5.66%6.4% at March 31,June 30, 2020, as compared to 5.50%5.6% at December 31, 2019. Our days’ sales outstanding were both36 days at June 30, 2020 and 33 days at March 31, 2020 and December 31, 2019.
Gross Profit
Gross profit, for 2020 First Quarter, excludingincluding physical therapy operations, without closure costs, and the industrial injury prevention service business, was $19.4 million, or 23.1% of net revenue, as compared to $26.7$31.4 million, or 24.9% of net revenues, in the 2019 Second Quarter. Gross profit for the physical therapy operations was $16.2 million in the 2020 Second Quarter, or 21.8% of physical therapy operations revenues, as compared to $28.4 million in the 2019 First Quarter. The grossSecond Quarter, or 24.5% of physical therapy operations revenues. Gross profit percentage,for the physical therapy operations, excluding closure costs, decreased andmanagement contracts, was 17.2% of net revenue$15.8 million in the 2020 FirstSecond Quarter, or 21.7% of net patient revenues, as compared to 23.1%$28.1 million in the 2019 First Quarter. The grossSecond Quarter, or 24.7% of net patient revenues. Gross profit percentage for our physical therapy clinics, excluding closure costs,management contracts was 17.3%$0.4 million in the 2020 FirstSecond Quarter, or 26.9% of management contract revenues, as compared to 23.0%$0.3 million in the 2019 First Quarter. The gross profit percentage on physical therapy management contracts was 15.7% in the 2020 FirstSecond Quarter, as compared to 18.5% in the 2019 First Quarter. or 15.4% of net patient revenues.
The gross profit for the industrial injury prevention service business was $1.7$3.2 million, or 16.8%32.9%, in the 2020 FirstSecond Quarter as compared to $1.5$3.0 million, or 22.3%29.2%, in the 2019 FirstSecond Quarter.
Corporate Office Costs
Corporate office costs, consisting primarily of salaries, incentive compensation, and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, accounting, professional, and recruiting fees, were $11.7$9.0 million for the 2020 FirstSecond Quarter and $11.3$11.5 million for the 2019 First Quarter.Second Quarter primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic. Please see discussion in Business Update Related to COVID-19 for further information. As a percentage of net revenues, corporate office costs were 10.4%10.8% for the 2020 FirstSecond Quarter and 9.7%9.1% for the 2019 FirstSecond Quarter.
Operating Income
Operating income for the 2020 FirstSecond Quarter was $4.0$10.3 million as compared to $15.4$19.9 million for the 2019 FirstSecond Quarter. Operating income as a percentage of net revenue decreased by 970 basis points from 13.3%15.7% in the 2019 period to 12.2% in 2020. For the 2020 Second Quarter, operating income increased $6.2 million or 3.6% incompared to the first quarter of 2020. See discussion above related to the effects of COVID-19 on our business and results of operation.
Relief Funds
Included in other income in the 2020 Second Quarter was $7.9 million of Relief Funds. The Relief Funds do not have to be repaid and were used for more.operations and offset of losses due to the COVID-19 pandemic.
Gain on Sale of Partnership Interest and Clinics
Included in other income was a gain of $1.1 million in the 2020 Second Quarter resulting from the sale of 11 previously closed clinics. A gain of $5.8 million was recognized in the 2019 Second Quarter resulting from the sale of a partnership interest which included 30 clinics.
Interest Expense
Interest expense was $0.4 million$653,000 in the 2020 FirstSecond Quarter compared to $ 0.3 millionand $607,000 in the 2019 FirstSecond Quarter due to higher average borrowings under our revolving credit line.the Company’s Amended Credit Agreement. At March 31,June 30, 2020, $114.0$33.0 million was outstanding under our Amended Credit Agreement (as defined below). See “—Liquidity and Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.
Provision for Income Taxes
The provision for income tax was $3.9 million for the 2020 FirstSecond Quarter was $0.3and $5.3 million and $2.7 million infor the 2019 FirstSecond Quarter. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest was 22.3%27.5% for the 2020 FirstSecond Quarter and 24.3%26.7% for the 2019 FirstSecond Quarter.
See table below detailing calculation of the provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):
| | Three Months Ended | | | Three Months Ended | |
| | March 31, 2020 | | | March 31, 2019 | | | June 30, 2020 | | | June 30, 2019 | |
| | | | | | | | | | | | |
Income before taxes | | $ | 3,630 | | | $ | 15,083 | | | $ | 18,645 | | | $ | 25,118 | |
| | | | | | | | | | | | | | | | |
Less: net income attributable to non-controlling interests: | | | | | | | | | | | | | | | | |
Non-controlling interests - permanent equity | | | (526 | ) | | | (1,537 | ) | | | (1,535 | ) | | | (1,802 | ) |
Redeemable non-controlling interests - temporary equity | | | (1,796 | ) | | | (2,395 | ) | | | (2,996 | ) | | | (3,378 | ) |
| | $ | (2,322 | ) | | $ | (3,932 | ) | | $ | (4,531 | ) | | $ | (5,180 | ) |
| | | | | | | | | | | | | | | | |
Income before taxes less net income attributable to non-controlling interests | | $ | 1,308 | | | $ | 11,151 | | | $ | 14,114 | | | $ | 19,938 | |
| | | | | | | | | | | | | | | | |
Provision for income taxes | | $ | 292 | | | $ | 2,708 | | | $ | 3,882 | | | $ | 5,318 | |
| | | | | | | | | | | | | | | | |
Percentage | | | 22.3 | % | | | 24.3 | % | | | 27.5 | % | | | 26.7 | % |
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests (permanent equity) was $0.5$1.5 million in the 2020 FirstSecond Quarter and $1.5$1.8 million in the 2019 FirstSecond Quarter. Net income attributable to redeemable non-controlling interests (temporary equity) was $1.8$3.0 million in the 2020 FirstSecond Quarter and $2.4$3.4 million in the 2019 FirstSecond Quarter.
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
For the six months ended June 30, 2020 (“2020 Six Months”), our Operating Results (as defined below), was $14.8 million, or $1.15 per diluted share, inclusive of Relief Funds, as compared to $18.8 million, or $1.47 per diluted share in the six months ended June 30, 2019 (“2019 Six Months”). For the 2020 Six Months, our Operating Results, was $8.9 million, or $0.70 per diluted share, without the Relief Funds. Please see page 32 for the definition of Operating Results.
For the 2020 Six Months, our net income attributable to its shareholders, in accordance with GAAP, was $11.2 million as compared to $23.0 million for the 2019 Six Months. Inclusive of the credit or charge for the revaluation of non-controlling interest, net of tax, used to compute diluted earnings per share, in accordance with GAAP, in the 2020 Six Months, the amount is $15.3 million, or $1.19 per share, as compared to $15.8 million, or $1.24 per share, in the 2019 Six Months. In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but charged or credited directly to retained earnings; however, the charge or credit for this change is included in the earnings per basic and diluted share calculation.
The following table provides details of the diluted earnings per share computation and reconciles net income attributable to our shareholders calculated in accordance with GAAP to Operating Results. Management believes providing Operating Results to investors is useful information for comparing our period-to-period results. Operating Results, a non-GAAP measure, equals net income attributable to our shareholders per the consolidated statement of net income plus charges incurred for closure costs less gain on sale of partnership interest and clinics and Relief Funds, and excludes the ongoing CFO search, all net of tax. The earnings per share from Operating Results also excludes the impact of the revaluation of redeemable non-controlling interest. In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is included in the earnings per basic and diluted share calculation, although it is not included in net income but charged directly to retained earnings. Management uses Operating Results, which eliminates certain items described above that can be subject to volatility and unusual costs, as one of the principal measures to evaluate and monitor financial performance period over period. Management believes that Operating Results is useful information for investors to use in comparing our period-to-period results as well as for comparing with other similar businesses since most do not have redeemable non-controlling interest instruments and therefore have different liability and equity structures.
Operating Results is not a measure of financial performance under GAAP. Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.
| | Six Months Ended June 30, | |
| | 2020 | | | 2019 | |
Computation of earnings per share - USPH shareholders: | | | | | | |
Net income attributable to USPH shareholders | | $ | 11,248 | | | $ | 23,063 | |
Credit (charges) to retained earnings: | | | | | | | | |
Revaluation of redeemable non-controlling interest | | | 5,473 | | | | (9,830 | ) |
Tax effect at statutory rate (federal and state) of 26.25% | | | (1,437 | ) | | | 2,580 | |
| | $ | 15,284 | | | $ | 15,813 | |
| | | | | | | | |
Earnings per share (basic and diluted) | | $ | 1.19 | | | $ | 1.24 | |
| | | | | | | | |
Adjustments: | | | | | | | | |
Charges incurred for CFO search | | | 133 | | | | - | |
Closure costs | | | 3,846 | | | | - | |
Gain on sale of partnership interest and clinics | | | (1,073 | ) | | | (5,823 | ) |
Receipts from the CARES Act Provider Relief Fund ("Relief Fund") | | | (7,958 | ) | | | - | |
Allocation to non-controlling interest | | | 1,900 | | | | - | |
Revaluation of redeemable non-controlling interest | | | (5,473 | ) | | | 9,830 | |
Tax effect at statutory rate (federal and state) of 26.25% | | | 2,264 | | | | (1,052 | ) |
Operating Results (without receipts from Relief Fund) | | $ | 8,923 | | | $ | 18,768 | |
| | | | | | | | |
Receipts from Relief Fund | | | 7,958 | | | | - | |
Tax effect at statutory rate (federal and state) of 26.25% | | | (2,089 | ) | | | - | |
Operating Results (including receipts from Relief Fund) | | $ | 14,792 | | | $ | 18,768 | |
| | | | | | | | |
Basic and diluted Operating Results (without receipts from Relief Fund) per share | | $ | 0.70 | | | $ | 1.47 | |
Basic and diluted Operating Results (including receipts from Relief Fund) per share | | $ | 1.15 | | | $ | 1.47 | |
| | | | | | | | |
Shares used in computation - basic and diluted | | | 12,820 | | | | 12,738 | |
The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements:
| | Six Months Ended | |
| | June 30, 2020 | | | June 30, 2019 | |
| | (in thousands) | |
Net operating revenues: | | | | | | |
Physical therapy operations | | $ | 177,040 | | | $ | 225,416 | |
Industrial injury prevention services | | | 19,534 | | | | 17,188 | |
Total Company | | $ | 196,574 | | | $ | 242,604 | |
| | | | | | | | |
Gross profit: | | | | | | | | |
Physical therapy operations (excluding closure costs) | | $ | 33,978 | | | $ | 53,610 | |
Industrial injury prevention services | | | 4,843 | | | | 4,542 | |
| | $ | 38,821 | | | $ | 58,152 | |
Physical therapy operations - closure costs | | | 3,846 | | | | 9 | |
Gross profit | | $ | 34,975 | | | $ | 58,143 | |
| | | | | | | | |
Total Assets: | | | | | | | | |
Physical therapy operations | | $ | 534,238 | | | $ | 512,657 | |
Industrial injury prevention services | | | 50,780 | | | | 48,188 | |
Total Company | | $ | 585,018 | | | $ | 560,845 | |
Revenues
Reported net revenues in the 2020 Six Months was $196.6 million as compared to $242.6 million in the 2019 Six Months. Adjusted for the clinics sold in 2019 and 2020, net patient revenues were $195.6 million ($196.6 million less $1.0 million related to sold clinics) in the 2020 Six Months compared to $228.4 million ($242.6 million less $14.2 million related to sold clinics) in the 2019 Six Months. The remaining reduction in revenue of $32.8 million is due to the adverse effects of the COVID-19 pandemic. Please see table below.
| | Six Months Ended | |
| | June 30, 2020 | | | June 30, 2019 | |
| | (in thousands) | |
Reported net revenues | | $ | 196,574 | | | $ | 242,604 | |
2019 sold clinics | | | - | | | | (12,237 | ) |
2020 sold clinics | | | (949 | ) | | | (1,997 | ) |
| | $ | 195,625 | | | $ | 228,370 | |
Net patient revenues from physical therapy operations were approximately $172.4 million in the 2020 Six Months and $220.0 million in the 2019 Six Months. Included in net patient revenues for the 2020 Six Months was $9.1 million related to New Clinics. Included in net patient revenues for the 2020 Six Months was $1.0 million related to the clinics sold in 2020. For the 2019 Six Months, net patient revenue included $7.8 million related to the clinics sold in the six months ended June 30, 2019 and 2020. During the 2019 Six Months, the Company sold its interest in a partnership that included 30 clinics and during the 2020 six month period, the Company sold its interest in 11 closed clinics.
The average net patient revenue per visit was $104.70 for the 2020 Six Months and $106.83 for the 2019 Six Months. Total patient visits were 1,646,700 in the 2020 Six Months and 2,059,000 for the 2019 Six Months. Adjusted for the clinics sold in 2020 and 2019, total patient visits were 1,637,800 in the 2020 Six Months and 1,934,500 for the 2019 Six Months. The reduction in adjusted total patient visits is due to the adverse effects of the COVID-19 pandemic. Net patient revenues are based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenues are determined after contractual and other adjustments relating to patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.
Also included in physical therapy operations was revenue from physical therapy management contracts which was $3.7 million for the 2020 Six Months and $4.4 million in 2019 Six Months. Other miscellaneous revenue from physical therapy operations was $0.9 million in the 2020 Six Months and $1.0 million in the 2019 Six Months. Other miscellaneous revenue include physical therapy services, including athletic trainers, provided on-site such as for schools.
Revenue from the industrial injury prevention services business increased 13.6% to $19.5 million in the 2020 Six Months compared to $17.2 million in the 2019 Six Months. The increase is primarily attributable to the acquisition in April 2019 offset by the adverse effects of the COVID-19 pandemic. Currently, the industrial injury prevention services business is running at slightly over 90% of normal.
Operating Costs
Total operating costs, excluding closure costs, were $157.8 million in the 2020 Six Months, or 80.3% of net revenues, as compared to $184.5 million in the 2019 Six Months, or 76.0% of net revenues. Total operating costs for the physical therapy operations, excluding closure costs, were $143.1 million in the 2020 Six Months, or 80.8% of physical therapy operations revenues, as compared to $171.8 million in the 2019 Six Months, or 76.2% of physical therapy operations revenues. Included in operating costs for the physical therapy operations for the 2020 Six Months was $7.3 million related to New Clinics, of which $4.7 million related the clinics acquired in September 2019 and February 2020. Adjusted for the operating costs for clinics related to the partnership interests sold in 2019 and 2020 of $6.6 million in the 2019 Six Months and $0.5 million in the 2020 Six Months, operating costs for clinic opened or acquired prior to July 1, 2019 (“Mature Clinics”) decreased by $26.5 million in the Second Quarter 2020 compared to the Second Quarter 2019. Operating costs, included in physical therapy operations, related to management contracts decreased by $0.7 million. Closure costs of $0.1 million include estimates of remaining lease obligations and other costs offset by settlement of certain lease commitments recorded in the 2019 First Quarter due to closed clinics.
Operating costs for the industrial injury prevention services business, were $14.7 million in the 2020 Six Months, or 74.7% of industrial injury prevention services revenues, as compared to $12.7 million in the 2019 Six Months, or 52.1% of net industrial injury prevention revenues.
Each component of operating costs is discussed below:
Operating Costs—Salaries and Related Costs
Salaries and related costs, including physical therapy operations and the industrial injury prevention services business, were 57.2% of net revenues in the 2020 Six Months versus 56.4% in the 2019 Six Months primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic. Please see discussion in Business Update Related to COVID-19 for further information. Salaries and related costs for the physical therapy operations were $100.0 million in the 2020 Six Months, or 56.5% of physical therapy operations revenues, as compared to $126.5 million in the 2019 Six Months, or 56.1% of physical therapy operations revenues. Included in salaries and related costs for the physical therapy operations for the 2020 Six Months was $4.5 million related to New Clinics. Adjusted for the salaries and related costs for clinics related to the partnership interest sold in 2019 and 2020 of $9.6 million in the 2019 Six Months and $0.6 million in the 2020 Six Months, salaries and related costs for Mature Clinics decreased by $21.4 million in the Second Quarter 2020 compared to the Second Quarter 2019. Salaries and related costs, included in physical therapy operations, related to management contracts decreased by $0.7 million.
Salaries and related costs for the industrial injury prevention services business, were $12.4 million in the 2020 Six Months, or 63.6% of industrial injury prevention services revenues, as compared to $10.4 million in the 2019 Six Months, or 60.4% of net industrial injury prevention services revenues.
Operating Costs—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs, including physical therapy operations and the industrial injury prevention services business, were 22.0% of net revenues in the 2020 Six Months versus 18.6% in the 2019 Six Months. Rent, supplies, contract labor and other costs for the physical therapy operations were $40.9 million in the 2020 Six Months, or 23.1% of physical therapy operations revenues, as compared to $45.1 million in the 2019 Six Months, or 20.0% of physical therapy operations revenues. Included in rent, supplies, contract labor and other costs for the physical therapy operations for the 2020 Six Months was $2.4 million related to New Clinics. Adjusted for the rent, supplies, contract labor and other costs for clinics related to the partnership interest sold in 2019 and 2020 of $3.1 million in the 2019 Six Months and $0.2 million in the 2020 Six Months, rent, supplies, contract labor and other costs for Mature Clinics decreased by $1.4 million in the Second Quarter 2020 compared to the Second Quarter 2019. Rent, supplies, contract labor and other costs, included in physical therapy operations, related to management contracts increased slightly.
Rent, supplies, contract labor and other costs for the industrial injury prevention services business, were $2.3 million in both the 2020 and 2019 Six Months. As a percentage of industrial injury prevention services revenues, rent, supplies, contract labor and other costs were 11.6% and 13.1% of net industrial injury prevention services revenues for the 2020 and 2019 Six Months, respectively.
Operating Costs—Provision for Doubtful Accounts
The provision for doubtful accounts as a percentage of net revenue was 1.1% in the 2020 Six Months and 1.0% for the 2019 Six Months.
Our provision for doubtful accounts for patient accounts receivable as a percentage of total patient accounts receivable was 6.4% at June 30, 2020, as compared to 5.6% at December 31, 2019. Our days’ sales outstanding were 36 days at June 30, 2020 and 33 days at December 31, 2019.
Gross Profit
Gross profit, including physical therapy operations, without closure costs, and the industrial injury prevention services business, was $38.8 million, or 19.7% of net revenue, as compared to $58.2 million, or 24.0% of net revenues, in the 2019 Six Months. Gross profit for the physical therapy operations was $34.0 million in the 2020 Six Months, or 19.2% of physical therapy operations revenues, as compared to $53.6 million in the 2019 Six Months, or 23.8% of physical therapy operations revenues. Gross profit for the physical therapy operations, excluding management contracts, was $33.2 million in the 2020 Six Months, or 19.2% of net patient revenues, as compared to $52.9 million in the 2019 Six Months, or 23.9% of net patient revenues. Gross profit for management contracts was $0.8 million in the 2020 Six Months, or 20.5% of management contract revenues, as compared to $0.7 million in the 2019 Six Months, or 16.9% of net patient revenues.
The gross profit for the industrial injury prevention services business was $4.8 million, or 24.8%, in the 2020 Six Months as compared to $4.5 million, or 26.4%, in the 2019 Six Months.
Corporate Office Costs
Corporate office costs, consisting primarily of salaries, incentive compensation, and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, accounting, professional, and recruiting fees, were $20.7 million for the 2020 Six Months and $22.8 million for the 2019 Six Months primarily due to a reduction in staffing and salary reductions due to management response to the COVID-19 pandemic. As a percentage of net revenues, corporate office costs were 10.5% for the 2020 Six Months and 9.4% for the 2019 Six Months.
Operating Income
Operating income for the 2020 Six Months was $14.3 million as compared to $35.3 million for the 2019 Six Months. Operating income as a percentage of net revenue decreased from 14.6% in the 2019 Six Months to 7.3% in 2020. See discussion above related to the effects of COVID-19 on our business and results of operations.
Relief Funds
Included in other income in the 2020 Six Months was $7.9 million of Relief Funds. The Relief Funds do not have to be repaid and were used for operations and offset of losses due to the COVID-19 pandemic.
Gain on Sale of Partnership Interest and Clinics
Included in other income was a gain of $1.1 million in the 2020 Six Months resulting from the sale of 11 previously closed clinics and, as previously disclosed, a gain of $5.8 million in the 2019 Six Months resulting from the sale of a partnership interest which included 30 clinics.
Interest Expense
Interest expense was $1.1 million in the 2020 Six Months and $1.0 in the 2019 Six Months due to higher average borrowings under the Company’s Amended Credit Agreement. At June 30, 2020, $33.0 million was outstanding under our Amended Credit Agreement (as defined below). See “—Liquidity and Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.
Provision for Income Taxes
The provision for income tax was $4.2 million for the 2020 Six Months and $8.0 million for the 2019 Six Months. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest was 27.1% for the 2020 Six Months and 25.8% for the 2019 Six Months.
See table below detailing calculation of the provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):
| | Six Months Ended | |
| | June 30, 2020 | | | June 30, 2019 | |
| | | | | | |
Income before taxes | | $ | 22,275 | | | $ | 40,201 | |
| | | | | | | | |
Less: net income attributable to non-controlling interests: | | | | | | | | |
Non-controlling interests - permanent equity | | | (2,061 | ) | | | (3,339 | ) |
Redeemable non-controlling interests - temporary equity | | | (4,792 | ) | | | (5,773 | ) |
| | $ | (6,853 | ) | | $ | (9,112 | ) |
| | | | | | | | |
Income before taxes less net income attributable to non-controlling interests | | $ | 15,422 | | | $ | 31,089 | |
| | | | | | | | |
Provision for income taxes | | $ | 4,174 | | | $ | 8,026 | |
| | | | | | | | |
Percentage | | | 27.1 | % | | | 25.8 | % |
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests (permanent equity) was $2.0 million in the 2020 Six Months and $3.3 million in the 2019 Six Months. Net income attributable to redeemable non-controlling interests (temporary equity) was $4.8 million in the 2020 Six Months and $5.8 million in the 2019 Six Months.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. At March 31,June 30, 2020 and December 31, 2019, we had $89.5$43.5 million and $23.5 million, respectively, in cash. We believe that our cash is sufficient to fund the working capital needs of our operating subsidiaries through at least March 31,June 30, 2021.
Included in our cash at June 30, 2020 are the date of this filing, we have approximately $110.0 million in cash. In addition to collectionsreceipts from our patient receivables, we have drawn all funds available under the Amended Credit Agreement of $125.0 million, received funds from (a) the Medicare Accelerated and Advance Payment Program (“MAAPP”) ($12.4 million to date) and (b) the Public Health and Social Services Emergency Fund (“Relief Fund”) ($5.7 million to date) as part of the Coronavirus Aid, Relief, and Economics Securities Act (“CARES Act”).$12.4 million. Based on current regulations, MAAPP funds received will be applied to future Medicare billings commencing in August 2020, with all such remaining amounts required to be repaid by us by November 2020. Beginning November 2020, any unpaid balance will begin accruing interest.
Cash and cash equivalents increased by $20.0 million from December 31, 2019 to June 30, 2020. During the 2020 Six Months, $48.4 million was provided by operations and $12.9 million from MAAPP, as described above. The Relief Fund monies do not havemajor uses of cash for investing and financing activities included: net reduction in credit line ($33.0 million), distributions to be repaid. In addition,non-controlling interests inclusive of those classified as redeemable non-controlling interests ($5.7 million), purchase of business ($11.6 million), purchase of fixed assets ($4.6 million), cash dividends paid to our shareholders ($4.1 million), and a purchase of redeemable non-controlling interests ($2.4 million). During the 2020 Second Quarter, we are taking advantage of the allowed deferral of the employer payroll taxes under the CARES Act.were able to negotiate rent abatements and deferrals totaling $1.6 million.
Effective December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility. This agreement was amended in August 2015, January 2016, March 2017 and November 2017 (hereafter referred to as “Amended Credit Agreement”). The Amended Credit Agreement is unsecured and has loan covenants, including requirements that we comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceeds from the Amended Credit Agreement may be used for working capital, acquisitions, purchases of our common stock, dividend payments to our common stockholders, capital expenditures and other corporate purposes. The pricing grid is based on our consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.25% to 2.0% or the applicable spread over the Base Rate ranging from 0.1% to 1%. Fees under the Amended Credit Agreement include an unused commitment fee ranging from 0.25% to 0.3% depending on our consolidated leverage ratio and the amount of funds outstanding under the Amended Credit Agreement.
The January 2016 amendment to the Amended Credit Agreement increased the cash and noncash consideration that we could pay with respect to acquisitions permitted under the Amended Credit Agreement to $50.0 million for any fiscal year, and increased the amount we may pay in cash dividends to our shareholders in an aggregate amount not to exceed $10.0 million in any fiscal year. The March 2017 amendment, among other items, increased the amount we may pay in cash dividends to our shareholders in an aggregate amount not to exceed $15.0 million in any fiscal year. The November 2017 amendment, among other items, adjusted the pricing grid as described above, increased the aggregate amount we may pay in cash dividends to $20.0 million to our shareholders and extended the maturity date to November 30, 2021.
As of March 31,June 30, 2020, we were in compliance with all of the covenants contained in the credit agreement. Management cannot be certainGiven the uncertainty inherent in operating results due to the COVID-19 pandemic, the Company continues to closely monitor covenant compliance. The Company will be in compliance with covenants at the end of second quarter of 2020. Management isengage as required in discussions with ourits lender regarding an amendment to the facility so as to maintain compliance with all covenants. Management anticipates an amendment will be in place by the end of the second quarter of 2020.
Cash and cash equivalents increased by $66.1 million from December 31, 2019 to March 31, 2020. During the 2020 First Quarter, $16.4 million was provided by operations, and $68.0 million of net proceeds from our revolving line of credit. The major uses of cash for investing and financing activities included: purchases of interests in the four-clinic practice acquired ($11.6 million), distributions to non-controlling interests inclusive of those classified as redeemable non-controlling interests ($2.3 million), purchase of fixed assets ($2.7 million) and a purchase of redeemable non-controlling interests ($1.9 million).
On February 27, 2020, we acquired interests in a four-clinic physical therapy practice. The four clinics are in four separate partnerships. Our interests in the four partnerships range from 10.0% to 83.8%, with an overall 65.0% based on the initial purchase transaction. The aggregate purchase price was $11.9 million, of which $11.6 million was paid in cash and a $0.3 million seller note. The note accrues interest at 4.75% per annum and the principal and interest is payable on February 2022.
On September 30, 2019, we acquired a 67% interest in eleven-clinic physical therapy practice. The purchase price for the 67% interest was $12.4 million, of which $12.1 million was in cash and $0.3 million in a seller note that is payable in two principal installments totaling $150,000 each, plus accrued interest in September 2020 and September 2021. The note accrues interest at 5.0% per annum.
On April 11, 2019, we acquired a company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network of 45 states including onsite at eleven client locations. The business was then combined with Briotix Health, our industrial injury prevention operation, increasing our ownership position in the Briotix Health partnership to approximately 76.0%. The purchase price for the acquired company was $22.9 million ($23.6 million less cash acquired of $0.7 million), which consisted of $18.9 million in cash, (of which $0.5 million will be paid to certain shareholders), and a $4.0 million seller note. The note accrues interest at 5.5% and the principal and accrued interest is payable, on April 9, 2021.
On March 4, 2019, in conjunction with the purchase of a redeemable non-controlling interest, we entered into a note payable in the amount of $228,120 that was payable in two equal installments of $114,080 each, plus accrued interest. The first installment was paid in March 2020 and the second installment remains payable in March 2021.
We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting Medicare Rehab Agency status approval initially may be delayed for a relatively short transition period. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the accounts receivable has been outstanding for at least 120 days.
We generally enter into various notes payable as a means of financing our acquisitions. Our outstanding notes payable as of MarchJune 30, 2020 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interests that occurred in 2018 through MarchJune 2020. Typically, the notes are payable over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 5.5% per annum, subject to adjustment. At March 31,June 30, 2020, the balance on these notes payable was $5.3 million. In addition, we assumed leases with remaining terms of 1 month to 6 years for the operating facilities.
In conjunction with the above mentioned acquisitions, in the event that a limited minority partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition date, we have agreed to certain contractual provisions which enable such minority partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.
As of March 31,June 30, 2020, we have accrued $5.1$6.9 million related to credit balances due to patients and payors. This amount is expected to be paid in the next twelve months.
From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). Our Amended Credit Agreement permits share repurchases of up to $15,000,000, subject to compliance with covenants. We are required to retire shares purchased under the March 2009 Authorization.
There is no expiration date for the share repurchase program. As of March 31,June 30, 2020, there are currently an additional estimated 217,391185,139 shares (based on the closing price of $69.00$81.02 on March 31,June 30, 2020) that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during the threesix months ended March 31,June 30, 2020.
FACTORS AFFECTING FUTURE RESULTS
The risks related to our business and operations include:
the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19, for which the financial magnitude cannot be currently estimated;
changes as the result of government enacted national healthcare reform;
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
business and regulatory conditions including federal and state regulations;
governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs;
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients;
revenue and earnings expectations;
legal actions, which could subject us to increased operating costs and uninsured liabilities;
general economic conditions;
availability and cost of qualified physical therapists;
personnel productivity and retaining key personnel;
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
competitive environment in the industrial injury prevention business, which could result in the termination or non-renewal of contractual service arrangements and other adverse financial consequences for that service line;
acquisitions, and the successful integration of the operations of the acquired businesses;
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non controlling interests (minority interests);
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
maintaining adequate internal controls;
maintaining necessary insurance coverage;
availability, terms, and use of capital; and
weather and other seasonal factors.
See Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and our subsequent current and periodic reports, including the additional risk factor noted in our Current Report on Form 8-K filed on April 24, 2020.
Forward-Looking Statements
We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to the risks listed above.
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We do not maintain any derivative instruments, interest rate swap arrangements, hedging contracts, futures contracts or the like. Our primary market risk exposure is the changes in interest rates obtainable on our Amended Credit Agreement. The interest on our Amended Credit Agreement is based on a variable rate. At March 31,June 30, 2020, $114.0$33.0 million was outstanding under our Amended Credit Agreement. Based on the balance of the Amended Credit Agreement at March 31,June 30, 2020, any change in the interest rate of 1% would yield a decrease or increase in annual interest expense of $1,140,000.$330,000.
| ITEM 4. | CONTROLS AND PROCEDURES. |
(a) | Evaluation of Disclosure Controls and Procedures |
As of the end of the period covered by this report, the Company’s management completed an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded (i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure and (ii) that our disclosure controls and procedures are effective.
(b) | Changes in Internal Control Over Financial Reporting |
In the second quarter ended June 30, 2020, we have added and/or modified certain internal controls and processes to address risks related to COVID-19. Additionally, in the second quarter of 2020, as a result of both quantitative and qualitative tests performed as part of the existing quarterly reporting process, it was determined that Briotix met the requirements to be considered a reportable segment. Accordingly, we have added and/or modified certain internal controls and processes to address required changes in reporting. There have not been noany additional changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the first quarter of 2020, we properly assessed the impact of new accounting standards related to measurement of credit losses on financial assets (CECL) and assessment of goodwill to facilitate the adoption of such standards on January 1, 2020. There were no significant changes to our internal control over financial reporting due to the adoption of the new standards.
PART II—OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
We are a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of our business. We cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future that may, either individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, and liquidity.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. We are and have been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Florida Litigation
On August 19, 2019, we received notice of a qui tam lawsuit filed by a relator on behalf of the United States, titled U.S. ex rel. Bonnie Elsdon, v. U.S. Physical Therapy, Inc., U.S. Physical Therapy, Ltd., Rehab Partners #2, Inc., The Hale Hand Center, Limited Partnership (the “Hale Partnership”), and Suzanne Hale. This whistleblower lawsuit was filed in the U.S. District Court for the Southern District of Texas, seeking damages and civil penalties under the federal False Claim Act. This lawsuit was originally filed under seal by a former employee of The Hale Hand Center, Limited Partnership (“Hale Partnership”), a majority-owned subsidiary of the Company, on May 25, 2018. The U.S Government declined to intervene in the case and unsealed the Complaint on July 17, 2019. The plaintiff - relator served the Complaint on us and the other named defendants on August 19, 2019.
The Complaint alleges that the Hale Partnership engaged in conduct to purposely “upcode” its billings for services provided to Medicare patients. The plaintiff - relator points to three dates of service and provides examples of what it alleges are inflated billings by the Hale Partnership; the relator then claims that similar false claims must have occurred on other days and at other Company-owned partnerships.
On October 3, 2019, we filed Motions to Dismiss based on numerous grounds on behalf of each of the named defendants. On October 29, 2019, the plaintiff-relator dismissed three of the named defendants, Rehab Partners #2, Inc., U.S. Physical Therapy, Ltd., and Suzanne Hale. The Motions to Dismiss as to the remaining two defendants has been fully briefed and is pending before the Court for a ruling.
We have engaged counsel and fully investigated the matter, and believe that the allegations in the Complaint have no merit. We intend to vigorously defend this action, but at this time we are unable to predict the timing and outcome of the matter.
The risk factors set forth in this report update, and should be read in conjunction with, the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.
We are subject to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19).
Our operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19) that has spread globally. Since February, the continued spread has led to disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases economic uncertainty. The pandemic has caused an economic slowdown of potentially extended duration, and it is possible that it could cause a global recession.
COVID-19 is having, and will continue to have, an adverse impact on our operations and supply chains, including an increase in cancellations of physical therapy patient appointments and a decline in the scheduling of new or additional patient appointments. Due to these impacts and measures, we have experienced, and will continue to experience, significant and unpredictable reductions and cancellations of our patient visits.
As a result, given the rapid and evolving nature of the virus, COVID-19 will negatively affect our revenue, and it is uncertain how materially COVID-19 will affect operations generally if these impacts persist or worsen over an extended period of time. Any of these impacts would have a significant adverse effect on our business, financial condition and results of operations, and at this point, the extent of the impact of COVID-19 remains uncertain.
Impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interests (minority interests)
As described in Note 5,6, the redeemable non-controlling interests in our partnerships are held by our partners. Upon the occurrence of certain events, such as retirement or other termination of employment, partners from acquired partnerships may have the right to exercise a “put” to cause the Company to purchase their redeemable non-controlling interests. Depending on the amount and timing of the exercise of any “put” rights, the funds required could have an adverse impact on the Company’s capital structure.
Exhibit Number | Description |
| |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| |
| Rule 13a-14(a)/15d-14(a) Certification of Corporate Controller. |
| |
| Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| U. S. Physical Therapy, Inc. Objective Long-Term Incentive Plan for Senior Management for 2020, effective March 3, 2020 [incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on March 6, 2020]. |
| |
| Amendment to Employment Agreement entered into as of March 26, 2020 by and between the Company and Lawrance McAfee [incorporated by reference to Exhibit 10.2 to the Company Current Report on Form 8-K filed with the SEC on March 26, 2020]. |
| |
| Amendment to Employment Agreement entered into as of March 26, 2020 by and between the Company and Glenn McDowell [incorporated by reference to Exhibit 10.3 to the Company Current Report on Form 8-K filed with the SEC on March 26, 2020]. |
| |
| Amendment to Employment Agreement entered into as of March 26, 2020 by and between the Company and Graham Reeve [incorporated by reference to Exhibit 10.4 to the Company Current Report on Form 8-K filed with the SEC on March 26, 2020]. |
| |
| U. S. Physical Therapy, Inc. Objective Long-Term Incentive Plan for Senior Management for 2020, effective March 3, 2020 [incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on March 6, 2020]. |
| |
| U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for 2020, effective March 3, 2020 [incorporated by reference to Exhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC on March 6, 2020]. |
| |
| U. S. Physical Therapy, Inc. Objective Cash/RSA Bonus Plan for Senior Management for 2020, effective March 3, 2020 [incorporated by reference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on March 6, 2020]. |
| |
| U. S. Physical Therapy, Inc. Discretionary Cash/RSA Bonus Plan for Senior Management for 2020, effective March 3, 2020 [incorporated by reference to Exhibit 99.4 to the Company Current Report on Form 8-K filed with the SEC on March 6, 2020]. |
| |
101.INS* | XBRL Instance Document |
| |
101.SCH* | XBRL Taxonomy Extension Schema Document |
| |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Documen |
| |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
| U.S. PHYSICAL THERAPY, INC. |
| | |
Date: May 21,August 7, 2020 | By: | /s/ LAWRANCE W. MCAFEE |
| | Lawrance W. McAfee |
| | Chief Financial Officer |
| | (duly authorized officer and principal financial and accounting officer) |
| | |
| By: | /s/ JON C. BATES |
| | Jon C. Bates |
| | Vice President/Corporate Controller |