U.S. Physical Therapy(USPH) - 2020 Q1 - Quarterly Report

EXPLANATORY NOTE The company delayed its Form 10-Q filing due to COVID-19 disruptions, relying on SEC Release No. 34-88465 - The filing of the Form 10-Q was delayed due to COVID-19 pandemic disruptions, including government restrictions and limited access to facilities and staff support[6] - The Company relied on SEC Release No. 34-88465 to delay the filing of this Report[6] PART I—FINANCIAL INFORMATION - UNAUDITED Item 1. Financial Statements. U.S. Physical Therapy, Inc.'s unaudited consolidated financial statements and comprehensive explanatory notes are presented Consolidated Balance Sheets Cash and cash equivalents significantly increased to $89.6 million by March 31, 2020, primarily due to increased borrowings, driving total assets Consolidated Balance Sheet Data | Metric | Dec 31, 2019 (in thousands) | Mar 31, 2020 (in thousands) | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Cash and cash equivalents | $23,548 | $89,551 | +$66,003 | | Patient accounts receivable, net | $46,228 | $42,649 | -$3,579 | | Total current assets | $85,386 | $148,672 | +$63,286 | | Total assets | $560,845 | $643,253 | +$82,408 | | Revolving line of credit | $46,000 | $114,000 | +$68,000 | | Total liabilities | $181,394 | $260,451 | +$79,057 | | Total USPH shareholders' equity | $240,257 | $241,064 | +$807 | Consolidated Statements of Income Net revenues declined and net income attributable to USPH shareholders substantially decreased in Q1 2020 due to COVID-19 impacts and increased operating costs Consolidated Statements of Income Data | Metric (Three Months Ended March 31) | 2020 (in thousands) | 2019 (in thousands) | Change | | :----------------------------------- | :------------------ | :------------------ | :----- | | Net revenues | $112,717 | $116,231 | -$3,514 | | Total operating costs | $97,026 | $89,513 | +$7,513 | | Gross profit | $15,691 | $26,718 | -$11,027 | | Operating income | $4,014 | $15,425 | -$11,411 | | Net income attributable to USPH shareholders | $1,016 | $8,443 | -$7,427 | | Basic and diluted EPS attributable to USPH shareholders | $0.20 | $0.39 | -$0.19 | | Dividends declared per common share | $0.32 | $0.27 | +$0.05 | Consolidated Statements of Cash Flows Cash and cash equivalents significantly increased by $66.0 million in Q1 2020, driven by financing activities and increased borrowings Consolidated Statements of Cash Flows Data | Metric (Three Months Ended March 31) | 2020 (in thousands) | 2019 (in thousands) | Change | | :----------------------------------- | :------------------ | :------------------ | :----- | | Net cash provided by operating activities | $16,380 | $13,563 | +$2,817 | | Net cash used in investing activities | $(15,923) | $(4,630) | -$11,293 | | Net cash provided by (used in) financing activities | $65,546 | $(12,063) | +$77,609 | | Net increase in cash and cash equivalents | $66,003 | $(3,130) | +$69,133 | | Cash and cash equivalents - end of period | $89,551 | $20,238 | +$69,313 | Consolidated Statements of Changes in Equity Total shareholders' equity increased slightly to $241.1 million by March 31, 2020, influenced by net income and equity compensation Consolidated Statements of Changes in Equity Data | Metric (Three Months Ended March 31, 2020) | Amount (in thousands) | | :----------------------------------------- | :-------------------- | | Balance December 31, 2019 | $240,257 | | Net income attributable to USPH shareholders | $1,016 | | Revaluation of redeemable non-controlling interest, net of tax | $1,570 | | Compensation expense - equity-based awards | $1,886 | | Dividends payable to USPT shareholders | $(4,110) | | Balance March 31, 2020 | $241,064 | Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note details the company's operations, recent acquisitions, and the significant impact of COVID-19 on its financial policies and presentation - The Company operates 567 clinics in 39 states and an industrial injury prevention business as of March 31, 2020, with 30 third-party facilities under management[26] - On February 27, 2020, the Company acquired interests in a four-clinic physical therapy practice for $11.9 million ($11.6 million cash, $0.3 million seller note)[21][81] - The COVID-19 pandemic has caused significant disruptions, leading to a decline in patient visits (as low as 45% of normal in April, currently slightly over 60%), closure of 69 clinics (35 permanently), furloughs/terminations of over 2,150 employees (40% of workforce), and salary reductions for corporate staff and executives, resulting in estimated annualized savings of $87 million[75] - The Company received $12.3 million from the Medicare Accelerated and Advance Payments Program (MAAPP) and $5.9 million from the Public Health and Social Services Emergency Fund (Relief Fund) under the CARES Act, and is deferring employer payroll taxes[77][78] - The Company derecognized $1.9 million in goodwill related to clinics permanently closed due to COVID-19[50][126] - The Company adopted ASU 2016-13 (CECL) and ASU 2017-04 (Goodwill Impairment) on January 1, 2020, with no material impact on financial statements[71][72] 2. ACQUISITIONS OF BUSINESSES This note details the company's 2020 and 2019 acquisitions, outlining purchase prices and preliminary asset allocation, including goodwill and intangibles - On February 27, 2020, the Company acquired interests in a four-clinic physical therapy practice for $11.9 million ($11.6 million cash, $0.3 million seller note), resulting in a 65.0% overall ownership[81] 2020 Acquisition Allocation Data | 2020 Acquisition Allocation (in thousands) | Amount | | :--------------------------------------- | :----- | | Total consideration | $11,933 | | Net tangible assets acquired | $922 | | Referral relationships | $1,600 | | Non-compete | $750 | | Tradename | $1,500 | | Goodwill | $13,632 | | Fair value of non-controlling interest | $(6,471) | - In 2019, the Company acquired a 67% interest in an eleven-clinic physical therapy practice for $12.4 million and a third industrial injury prevention company for $22.9 million, increasing its ownership in Briotix Health to approximately 76.0%[86][158] 2019 Acquisition Allocation Data | 2019 Acquisition Allocation (in thousands) | IIPS | Clinic Practice | Total | | :--------------------------------------- | :--- | :-------------- | :---- | | Total consideration | $22,913 | $12,470 | $35,383 | | Net tangible assets acquired | $(365) | $908 | $543 | | Referral relationships | $1,500 | $1,500 | $3,000 | | Non-compete | $590 | $700 | $1,290 | | Tradename | $2,500 | $1,600 | $4,100 | | Goodwill | $18,688 | $13,991 | $32,679 | | Fair value of non-controlling interest | - | $(6,229) | $(6,229) | 3. REVENUE RECOGNITION This note details revenue recognition policies across services, discussing Medicare changes, telehealth waivers, and contractual allowance methodology Revenue Category Data | Revenue Category (Three Months Ended March 31) | 2020 (in thousands) | 2019 (in thousands) | Change | | :--------------------------------------------- | :------------------ | :------------------ | :----- | | Net patient revenues | $100,126 | $106,650 | -$6,524 | | Management contract revenues | $2,149 | $2,146 | +$3 | | Industrial injury prevention services revenues | $9,876 | $6,900 | +$2,976 | | Other revenues | $566 | $535 | +$31 | | Total Net revenues | $112,717 | $116,231 | -$3,514 | - Medicare reimbursement for physical/occupational therapy services could see an estimated 8% decrease in payment effective January 1, 2021, due to proposed changes in code valuations[102] - Effective March 1, 2020, CMS provided a temporary waiver allowing physical and occupational therapists to perform and be reimbursed for telehealth visits for Medicare beneficiaries, applicable to approximately 60% of the Company's clinics enrolled as private practices[103] - The CARES Act temporarily suspended the 2% Medicare payment adjustment from May 1, 2020, through December 31, 2020[106] - Net patient revenue from Medicare was approximately $27.5 million in Q1 2020, down from $28.3 million in Q1 2019[112] 4. EARNINGS PER SHARE This note details basic and diluted EPS computation, highlighting the inclusion of revaluation of redeemable non-controlling interest EPS Computation Data | EPS Computation (Three Months Ended March 31) | 2020 (in thousands, except per share) | 2019 (in thousands, except per share) | | :-------------------------------------------- | :------------------------------------ | :------------------------------------ | | Net income attributable to USPH shareholders | $1,016 | $8,443 | | Revaluation of redeemable non-controlling interest | $2,129 | $(4,661) | | Tax effect at statutory rate (26.25%) | $(559) | $1,224 | | Total for EPS calculation | $2,586 | $5,006 | | Earnings per share (basic and diluted) | $0.20 | $0.39 | | Shares used in computation | 12,796 | 12,707 | 5. REDEEMABLE NON-CONTROLLING INTEREST This note explains redeemable non-controlling interests in clinic partnerships, their accounting treatment, and changes in carrying amount - Redeemable non-controlling interests are equity interests in acquired partnerships held by selling shareholders, subject to put/call rights based on a multiple of trailing twelve months earnings[122] - The revaluation of redeemable non-controlling interest, net of tax, is adjusted directly to retained earnings and included in EPS calculation, but not net income[54][117] Changes in Redeemable Non-Controlling Interests Data | Changes in Redeemable Non-Controlling Interests (in thousands) | Three Months Ended March 31, 2020 | Year Ended December 31, 2019 | | :----------------------------------------------------------- | :-------------------------------- | :--------------------------- | | Beginning balance | $137,750 | $133,943 | | Operating results allocated | $1,796 | $10,659 | | Distributions | $(1,611) | $(10,221) | | Changes in fair value | $(2,129) | $11,893 | | Purchases | $(1,852) | $(8,934) | | Acquired interest | $6,471 | $6,230 | | Ending balance | $140,498 | $137,750 | 6. GOODWILL This note details changes in goodwill, including acquisitions and a $1.9 million write-off for COVID-19 related clinic closures Changes in Goodwill Data | Changes in Goodwill (in thousands) | Three Months Ended March 31, 2020 | Year Ended December 31, 2019 | | :--------------------------------- | :-------------------------------- | :--------------------------- | | Beginning balance | $317,676 | $293,525 | | Goodwill acquired | $13,632 | $31,330 | | Goodwill write-off related to closed clinics | $(1,859) | - | | Goodwill adjustments | $1,320 | $146 | | Ending balance | $330,769 | $317,676 | - The Company derecognized (wrote-off) $1.9 million in goodwill related to permanently closed clinics due to COVID-19[50][126] - Despite current economic conditions and declining patient visits in March 2020 due to the COVID-19 pandemic, the Company determined that goodwill and tradenames of reporting units were not impaired as of March 31, 2020[47] 7. INTANGIBLE ASSETS, NET This note provides a breakdown of intangible assets, their amortization periods, and the amortization expense incurred for the quarter Intangible Assets Data | Intangible Assets (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------- | :------------- | :---------------- | | Tradenames | $33,549 | $32,049 | | Referral relationships, net | $19,354 | $18,367 | | Non-compete agreements, net | $2,745 | $2,172 | | Total | $55,648 | $52,588 | Amortization Expense Data | Amortization Expense (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Referral relationships | $613 | $533 | | Non-compete agreements | $177 | $169 | | Total | $790 | $702 | - Tradenames have an indefinite life and are tested annually for impairment; referral relationships are amortized over 6-16 years, and non-compete agreements over 5-6 years[127] 8. ACCRUED EXPENSES This note details accrued expenses, which significantly increased due to dividends payable and COVID-19 related closure costs Accrued Expenses Data | Accrued Expenses (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------ | :------------- | :---------------- | | Salaries and related costs | $19,230 | $19,340 | | Credit balances due to patients and payors | $5,115 | $4,303 | | Group health insurance claims | $2,499 | $2,277 | | Dividends payable | $4,110 | - | | Closure costs | $1,843 | - | | Federal income taxes payable | $1,891 | - | | Other | $5,957 | $4,935 | | Total | $40,645 | $30,855 | - Closure costs of $1.8 million are included, primarily for remaining lease commitments and write-off of leasehold improvements for 22 clinics closed in late March due to COVID-19[129] 9. NOTES PAYABLE AND AMENDED CREDIT AGREEMENT This note details the company's debt structure, increased borrowings, and ongoing discussions for credit agreement covenant amendments due to COVID-19 Notes Payable and Credit Agreement Data | Notes Payable & Credit Agreement (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------------------------- | :------------- | :---------------- | | Credit Agreement outstanding | $114,000 | $46,000 | | Various notes payable | $5,330 | $5,089 | | Total | $119,330 | $51,089 | | Less current portion | $(728) | $(728) | | Long term portion | $118,602 | $50,361 | - The Company has a $125.0 million revolving credit facility, with $114.0 million outstanding as of March 31, 2020, and has since drawn all available funds ($125.0 million)[132][182] - The Company was in compliance with all credit agreement covenants as of March 31, 2020, but is in discussions with its lender for an amendment to maintain compliance by the end of Q2 2020 due to COVID-19 uncertainties[134][185] - Subsequent aggregate annual payments of principal required for notes payable and the credit agreement are $728,000 for the 12 months ended March 31, 2021, and $118.6 million for the 12 months ended March 31, 2022[136] 10. LEASES This note details operating lease accounting under ASC 842, including right-of-use assets, liabilities, lease expenses, and future payment obligations Lease Expense Data | Lease Expense (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $7,812 | $7,587 | | Short-term lease cost | $294 | $371 | | Variable lease cost | $1,532 | $1,581 | | Total lease cost | $9,638 | $9,539 | Future Lease Payments Data | Future Lease Payments (in thousands) | Amount | | :----------------------------------- | :----- | | 2020 (excluding Q1) | $22,273 | | 2021 | $24,801 | | 2022 | $18,922 | | 2023 | $13,514 | | 2024 | $8,298 | | 2025 and therafter | $9,318 | | Total lease payments | $97,126 | | Less: imputed interest | $7,723 | | Total operating lease liabilities | $89,403 | - The weighted-average remaining lease term for operating leases was 4.25 years at March 31, 2020, with a weighted-average discount rate of 3.9%[142] 11. COMMON STOCK This note outlines the company's common stock repurchase program, detailing shares purchased and remaining available for repurchase - The Company has an authorized share repurchase program (March 2009 Authorization) for up to 1.2 million shares, with no expiration date[143] - As of March 31, 2020, 859,499 shares have been purchased, with an estimated 217,391 shares remaining for repurchase. No shares were purchased during the three months ended March 31, 2020[144][197] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results of operations, focusing on COVID-19 impacts, mitigation strategies, and Q1 2020 performance EXECUTIVE SUMMARY This summary highlights COVID-19's adverse impact on patient volumes and operations, detailing immediate mitigation strategies and cost-saving measures - The Company operates outpatient physical therapy clinics and an industrial injury prevention business[147][154] - COVID-19 caused significant and unpredictable reductions in patient visits, declining to as low as 45% of normal in April and currently slightly above 60% of normal[149][152] - Mitigation efforts include furloughing/terminating over 2,150 employees (40% of workforce), implementing salary reductions (20-25% for corporate, 35-40% for executives, 50% for Board), and pursuing telehealth solutions, lease renegotiations, and delayed acquisitions, with estimated annualized savings of $87 million[152] Operating Statistics Data | Operating Statistics (without sold clinics) | Feb 29, 2020 (2 months) | Feb 28, 2019 (2 months) | % Change | Mar 31, 2020 (1 month) | Mar 31, 2019 (1 month) | % Change | Mar 31, 2020 (3 months) | Mar 31, 2019 (3 months) | % Change | | :---------------------------------------- | :---------------------- | :---------------------- | :------- | :--------------------- | :--------------------- | :------- | :---------------------- | :---------------------- | :------- | | Net revenues (in thousands) | $78,193 | $72,232 | 8.3% | $34,524 | $38,314 | -9.9% | $112,717 | $110,546 | 2.0% | | Number of clinics, at end of period | 587 | 561 | | 567 | 559 | | 567 | 559 | | | Average visits per day per clinic | 27.7 | 26.5 | | 22.7 | 27.9 | | 26.2 | 27.0 | | | Total patient visits | 676,328 | 623,943 | | 294,695 | 328,288 | | 971,023 | 952,231 | | | Net patient revenue per visit | $103.06 | $105.89 | | $103.22 | $106.29 | | $103.11 | $106.02 | | RESULTS OF OPERATIONS Q1 2020 operating results show a significant decline in GAAP net income and diluted EPS due to COVID-19 and increased operating costs Operating Results Summary | Metric (Three Months Ended March 31) | 2020 (in thousands, except per share) | 2019 (in thousands, except per share) | | :----------------------------------- | :------------------------------------ | :------------------------------------ | | Net income attributable to USPH shareholders (GAAP) | $1,016 | $8,443 | | Diluted EPS (GAAP) | $0.20 | $0.39 | | Operating Results (Non-GAAP) | $3,881 | $8,443 | | Basic and diluted Operating Results per share (Non-GAAP) | $0.30 | $0.66 | - Net revenues for Q1 2020 were $112.7 million, a 2.0% increase from adjusted Q1 2019 revenues (excluding sold clinics), despite COVID-19 impacts[166] - Net patient revenues decreased by $6.5 million (6.1%) to $100.1 million, primarily due to $5.7 million lost from sold clinics and COVID-19 effects. Total patient visits were 971,000, down from 1,001,510 (including sold clinics) in Q1 2019[166] - Industrial injury prevention business revenue increased 43.1% to $9.9 million, driven by internal growth and a 2019 acquisition, despite an estimated $126,000 loss due to the COVID-19 pandemic[166] - Total operating costs (excluding closure costs) increased by $3.8 million to $93.3 million (82.7% of net revenues) in Q1 2020, up from $89.5 million (77.0%) in Q1 2019. Closure costs of $3.8 million were incurred in Q1 2020[167] - Operating income for Q1 2020 was $4.0 million, a significant decrease from $15.4 million in Q1 2019, with operating income as a percentage of net revenue falling from 13.3% to 3.6%[175] LIQUIDITY AND CAPITAL RESOURCES The company maintains strong liquidity with $89.5 million cash, supported by a fully drawn credit facility and CARES Act funds, managing debt and covenants - Cash and cash equivalents increased from $23.5 million at Dec 31, 2019, to $89.5 million at March 31, 2020, and further to approximately $110.0 million by the filing date[181][182] - The Company has fully drawn its $125.0 million revolving credit facility and received $12.4 million from MAAPP and $5.7 million from the Relief Fund under the CARES Act[182] - The Company was in compliance with credit agreement covenants as of March 31, 2020, but is discussing amendments with its lender to ensure continued compliance by the end of Q2 2020[185] - Major cash uses in Q1 2020 included $11.6 million for acquisitions, $2.3 million for non-controlling interest distributions, $2.7 million for fixed assets, and $1.9 million for redeemable non-controlling interest purchases[186] - The Company did not purchase any shares of its common stock during Q1 2020, with approximately 217,391 shares remaining available for repurchase under its program[197] FACTORS AFFECTING FUTURE RESULTS This section highlights risks from COVID-19, healthcare regulations, legal actions, economic conditions, and operational challenges affecting future results - The company is subject to significant risks from public health crises like COVID-19, which has an unquantifiable financial magnitude and could cause a global recession[202][216] - Key risks include changes in Medicare rules and reimbursement rates, governmental audits, compliance with privacy laws (HIPAA), legal actions, availability of qualified personnel, and competitive pressures[202] - The impact on business and cash reserves resulting from the retirement or resignation of key partners and the resulting purchase of their non-controlling interests is also a significant risk[202][219] Item 3. Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk exposure is interest rate changes on its variable-rate credit agreement, with a $1.14 million annual impact per 1% change - The primary market risk exposure is to changes in interest rates on the variable-rate Amended Credit Agreement[204] - A 1% change in the interest rate would result in an annual interest expense change of $1.14 million, based on $114.0 million outstanding at March 31, 2020[204] - The Company does not maintain any derivative instruments, interest rate swap arrangements, hedging contracts, or futures contracts[204] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2020[205] - No material changes in internal control over financial reporting occurred during Q1 2020[206] - The adoption of new accounting standards (CECL and goodwill impairment) on January 1, 2020, had no significant impact on internal control over financial reporting[206] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is defending a qui tam lawsuit alleging Medicare "upcoding" by a subsidiary, with the government declining to intervene - The Company is a party to various legal actions, proceedings, claims, and regulatory audits in the ordinary course of business[208] - A qui tam lawsuit, U.S. ex rel. Bonnie Elsdon, v. U.S. Physical Therapy, Inc., was filed in August 2019, alleging "upcoding" of Medicare billings by The Hale Hand Center, Limited Partnership[210][211] - The U.S. Government declined to intervene in the lawsuit, and the Company believes the allegations lack merit and intends to vigorously defend the action[210][213] Item 1A. RISK FACTORS. This section updates risk factors, emphasizing COVID-19's uncertain impact, Medicare changes, regulatory compliance, and personnel availability - The company is subject to risks associated with public health crises and epidemics/pandemics, such as COVID-19, which has caused disruption and volatility in global capital markets and an economic slowdown[216] - COVID-19 is adversely impacting operations through increased patient appointment cancellations and declines in new appointments, leading to significant and unpredictable reductions in patient visits[217] - The extent of COVID-19's impact on the business, financial condition, and results of operations remains uncertain[218] - The company faces risks related to changes in Medicare rules, governmental audits, legal actions, availability of qualified personnel, and the financial impact of purchasing non-controlling interests from retiring or resigning partners[202][219] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including certifications, incentive plans, and amendments to employment agreements - Exhibits include Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer, Chief Financial Officer, and Corporate Controller, as well as Certification Pursuant to 18 U.S.C 1350[221] - Long-term incentive plans and amendments to employment agreements for senior management are also filed as exhibits[221] Signatures The report was duly signed by the Chief Financial Officer and Corporate Controller on behalf of U.S. Physical Therapy, Inc. on May 21, 2020 - The report was signed by Lawrance W. McAfee, Chief Financial Officer, and Jon C. Bates, Vice President/Corporate Controller, on May 21, 2020[226]