US Physical Therapy (NYSE: USPH) reported Q2 EPS of $0.39, $0.20 worse than the analyst estimate of $0.59. Revenue for the quarter came in at $104.25 million versus the consensus estimate of $104.35 million.

Second Quarter 2017 Compared to Second Quarter 2016

• Net revenues increased $13.9 million or 15.3% from $90.4 million in the second quarter of 2016 to $104.3 million in the second quarter of 2017, primarily due to a 10.0% increase in net patient revenues from the physical therapy operations and a full quarter of revenues from the workforce performance solutions business acquired in March 2017.
• Net patient revenues from physical therapy operations increased approximately $9.3 million to $97.7 million in the 2017 period from $88.4 million in the 2016 period due to an increase in total patient visits of 10.0% from 840,000 to 923,700 plus an increase in average net patient revenue per visit to $105.73 from $105.27. Of the $9.3 million increase, $7.7 million related to clinics opened or acquired in the past 12 months. For the 2017 and the 2016 periods, revenues from management contracts was $1.6 million for each period. The revenues from the recently acquired workforce performance solutions business was $4.4 million for the second quarter 2017. Other revenue was $0.6 million for the 2017 period and $0.4 million for the 2016 period.
• Total clinic operating costs were $79.7 million, or 76.5% of net revenues, in the second quarter of 2017 as compared to $67.4 million, or 74.5% of net revenues, in the 2016 period. The increase was attributable to $6.7 million in operating costs related to new clinics opened or acquired in the past 12 months, $3.7 million related to the addition of the workforce performance solutions business and $1.9 million related to clinics opened or acquired prior to July 1, 2016. Total clinic salaries and related costs, including those from new clinics, were 56.4% of net revenues in the recent quarter 2017 versus 54.0% for the 2016 comparable period. Rent, clinic supplies, contract labor and other costs as a percentage of net revenues were 19.2% for recent quarter versus 19.4% for the 2016 period. The provision for doubtful accounts as a percentage of net revenues was 0.9% for the second quarter of 2017 as compared to 1.1% in the 2016 period.
• The gross margin for the second quarter of 2017 was $24.5 million, or 23.5% of revenue, as compared to $23.0 million, or 25.5% of revenue, for the 2016 quarter. The gross margin for the Company’s physical therapy clinics was 24.2% in the recent quarter as compared to 25.6% a year earlier. The gross margin on management contracts was 7.4% in the second quarter of 2017 as compared to 22.5% in the comparable period of 2016. The gross margin for the recently acquired workforce performance solutions business was 15.0%.
• Corporate office costs were $8.9 million in the second quarter of 2017 compared to $8.0 million in the 2016 second quarter. Corporate office costs were 8.5% of net revenues for the 2017 quarter compared to 8.9% of net revenues for the 2016 period.
• Operating income for the recent quarter increased 4.3% to $15.7 million as compared to $15.0 million in the second quarter 2016.
• Interest expense – mandatorily redeemable non-controlling interest – change in redemption value increased to $3.9 million in the second quarter 2017 from $1.9 million in the 2016 second quarter. The change in redemption value for acquired partnerships is based on the redemption amount (which is derived from a formula based on a specified multiple times the underlying business’ trailing twelve months of earnings before interest, taxes, depreciation, amortization and our internal management fee) at the end of the reporting period compared to the end of the previous period. This change is directly related to an increase in the profitability and underlying value of the Company’s partnerships.
• Interest expense – mandatorily redeemable non-controlling interest – earnings allocable, which represent the portion of earnings allocable to the holders of mandatorily redeemable non-controlling interest, increased to $1.8 million in the 2017 second quarter from $1.3 million in the 2016 period.
• Interest expense – debt and other was $0.5 million in the second quarter 2017 and $0.3 million in the 2016 period.
• The provision for income taxes for the 2017 second quarter was $3.1 million and for the 2016 second quarter was $3.8 million. The provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest was 38.4% in the 2017 second quarter and 38.7% in the 2016 second quarter. Included in both the second quarter of 2017 and the second quarter of 2016 was an excess tax benefit of $0.1 million related to accounting for stock compensation.
• Net income attributable to non-controlling interests was $1.4 million in the 2017 second quarter as compared to $1.7 million in the 2016 second quarter.
• Operating results, a non-GAAP measure, attributable to common shareholders for the three months ended June 30, 2017 rose 3.4% to $7.4 million as compared to $7.2 million for the 2016 period. Diluted earnings per share from operating results were $0.59 for the 2017 period and $0.57 for the 2016 period. For the quarter ended June 30, 2017, USPH’s net income attributable to its shareholders, in accordance with GAAP, was $4.9 million, or $0.39 per diluted share, as compared to $6.0 million, or $0.48 per diluted share, for the 2016 period. See schedule on page 11 for a reconciliation of net income attributable to USPH shareholders to operating results.
• Same store revenues increased 3.5%. Visits increased 2.6% for de novo and acquired clinics open for one year or more and the same store net rate increased by approximately 1%.

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