U.S. Physical Therapy, Inc. (USPH) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to turn the call over to Chris Reading, Chairman and CEO. Please go ahead, sir.

Thank you. Good morning, and welcome, everyone, to our U.S. Physical Therapy Second Quarter 2026 Earnings Call. With me on the line include Eric Williams, our President and Chief Operating Officer, East; Jason Curtis, our Interim CFO, also serving as our Senior Vice President of Finance and Accounting; Rick Binstein, our Executive Vice President and General Counsel; Graham Reeve, our Chief Operating Officer, West; and Kate Ventin, our Vice President of Accounting and our Controller. Before we make some prepared remarks on the quarter as well as the year, we need to cover a brief disclosure statement. Kate, if you would, please.

Thank you, Chris. This presentation includes forward-looking statements, which involve certain risks and uncertainties. The forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information. This presentation also contains certain non-GAAP measures as defined in Regulation G, and the related reconciliations can be found in the company's earnings release and the company's presentation on its website. Back to you, Chris.

Thanks, Kate. So this morning, I'm going to spend a little time talking about where we are going with a heavy concentration around these hospital affiliation arrangements and try to dovetail that into our results for the quarter as well as look forward because it's all intertwined. For starters, volumes across the company are and have been very strong. This includes our Metro partnership, now part of our long-term NYU Langone affiliation. For some perspective, visits per clinic per day were at an all-time high this quarter at 33.5 per day. For the past 24 consecutive months and 37 out of the last 42 months, we have set visit per clinic per day record volumes, including those at our hospital-affiliated clinics. They're all very strong. This is important because part of our cost equation in Q2 is related to upfront hiring with the expectation of referral and volume translation within these partnerships. In short, the transition of our NYU-affiliated clinics has gone very well. By the end of this month, we will have transitioned all 60 of our metro clinics and will benefit from approximately 50 clinicians hired in advance, which will drive the opportunity for growth going forward. That was at the expense of some short-term cost absorption. However, once those facilities are transitioned, that creates nothing but upside opportunity with no cost downside based on how these agreements work with our hospital partners. And just another point of perspective, I talked to Michael earlier this morning. Our year-over-year growth at Metro from a volume perspective significantly exceeds 100,000 visits, and that was before we had the support of our NYU Langone affiliated partners. So we're looking forward to a great year ahead. We had an opportunity to hire clinicians coming out of school who were available, and we know we're going to be in a position to grow this business, so we jumped on that. Another indicator of building strength was demonstrated in our best ever net rate this quarter, finishing the quarter at $107.59, up $2.26 from the year ago quarter and trending solidly within the quarter itself. Once these hospital clinics are fully onboarded, that will provide additional lift as we finish the year and head into 2027. Embedded in that rate lift are increases across commercial, Medicare and workers' comp in addition to the lift provided by the limited number of clinics transitioned inside of the quarter into our hospital affiliations. That clinic number will grow significantly in quarter 3 with approximately half of the busiest metro clinics transitioning in the current period as well as the Gulf Coast partnership, which is expected to go forward by the end of this month. One of the areas dragging against us a bit so far this year has to do with our self-insured health care costs. Due to a small number of very significant claims across our employee base, we're running well ahead of our usual cost and our claims experience this year, and it's against a much better-than-average experience in 2025 when claim volume was lighter than normal. That swing from last year to this year above the average is an approximately $3.2 million difference between the years so far, and that we have factored into our decision to guide as we have for the remainder of the year. PT revenue growth supported by visit strength and record net rate grew by 8.4% with industrial injury prevention revenue growing by over 9% year-over-year. Same-store revenue growth for PT was north of 3% for the quarter with a nice progression since early last year back to a historically strong average. Margins for our IIP business were steady, slightly above 20%, while PT margins were pressured on a combination of our internal benefits-related health care costs and some front-loading of those hospital implementation costs that I just mentioned. With continued WelcomeWare rollout and expected takeouts there, and strong performance from our hospital-affiliated clinics, we expect that we can influence or offset some of these headwinds between now and year-end. On the development front, we have just very recently announced 12 clinic partnership acquisition in a great new state, some young hungry partners who know how to deliver great care. And that follows several earlier announced acquisitions in the PT as well as IIP areas. We continue to pursue good accretive opportunities where care is superior and the forward trajectory looks good in both the PT and the injury prevention spaces. On the hospital development front, our pipeline of opportunities continues to grow, and we expect further relationships like the one with NYU, which will positively impact 2027 our 2027 outlook in a meaningful way. Finally, we are working on our own digital and hybrid opportunities for 2027 and have recently hired a very accomplished well-known to our senior leader to work with our team to identify the right partners around which to make that happen. Our primary focus at this time is to build the foundation that we need in order to accelerate our opportunity later this year and into 2027 and forward. With the help of an increased Medicare rate projected for 2027 in combination with continued commercial rate lift and the extraordinary lift associated with our hospital affiliations, we expect very good things in the coming year and beyond. So that concludes my prepared comments. I'll ask Jason to cover the financials in a little bit more granular detail before we open things up for questions. Jason, go ahead.

Thanks, Chris, and good morning, everyone. Total revenue for Q2 2026 was $214 million, an 8.5% increase over last year. Physical therapy revenue for Q2 2026 was $182 million, an 8.4% increase over last year, including a nice 3.5% increase in mature clinics. Q2 2026 physical therapy revenue includes $5.6 million from the initial phases of our hospital affiliation rollout. Q2 2026 visits were 1,662,000, a 6.6% increase, inclusive of hospital affiliation visits. Average daily visits per clinic was 33.5 in Q2 2026 compared to 32.7 in Q2 2025. Q2 2026 physical therapy revenue per visit, inclusive of hospital affiliation revenue and visits was $107.59, a $2.26 increase versus last year. Medicare revenue per visit increased 3.7% in Q2 2026. Year-to-date 2026 Medicare revenue per visit compared to full year 2025, which provides for a longer measurement period to smooth quarterly variability is approximately in line with our expectations. As a reminder, the 2026 guidance includes a 1.75% increase in Medicare, which equates to a 1.1% increase after taking into account the mix of Medicare Advantage plans. The expected revenue lift for Medicare increases in full year 2026 is $2.5 million, equating to a $0.35 in revenue per visit lift. Commercial payers and workers' compensation revenue per visit also delivered healthy increases in Q2 2026 of 1.2% and 2.0%, respectively. Q2 2026 adjusted salaries and related costs as a percent of revenue was 57.5% compared to 56.4% in Q2 2025. This increase is largely attributable to higher-than-average medical costs in the current quarter compared to lower-than-average medical costs in Q2 2025. Reporting salaries and related costs as a percent of revenue replaces the company's previous methodology of reporting salaries and related costs per visit. For clinics operating in hospital affiliations, salaries and related costs of licensed staff are fully reimbursed by the hospital systems with the reimbursement recognized as revenue for USPH. This structure allows USPH to invest in additional staffing without the risk of negatively impacting bottom line profitability. As a result, utilizing a percentage of revenue is a more meaningful metric. Adjusted physical therapy gross profit margin in Q2 2026 was 19.9% compared to 21.4% in Q2 2025. As noted, employee medical costs in Q2 2026 compared to Q2 2025 were a headwind. During Q2 2026, the company integrated 31 existing clinics into hospital affiliations. The remaining 39 existing clinics are expected to integrate during the third quarter. IIP revenue for Q2 2026 was $32 million, a 9.1% increase over last year, including a 3.6% increase in comparable partnerships. IIP margin was 20.4% in Q2 2026 compared to 20.3% in Q2 2025. Adjusted corporate expense as a percent of revenue was 8.4% in Q2 2026 compared to 8.7% in Q2 2025. The company is continuing its effort to upgrade its finance and HR systems with an expected go-live at the beginning of 2027. This upgrade will improve efficiency throughout the organization and position USPH for future growth. Interest expense was $3.2 million in Q2 2026 compared to $2.4 million in Q2 2025. In Q2 2026, the all-in effective interest rate, including all associated costs, was 5.3%. Income tax rate in Q2 2026 was 29.6%. Year-to-date 2026 income tax rate is 30.5%, approximately in line with full year 2026 expectations. Adjusted EBITDA for Q2 2026 was $27.0 million compared to $26.9 million in Q2 2025. Adjusted operating results were $11.3 million for Q2 2026 compared to $12.4 million for Q2 2025. Adjusted operating results per share were $0.75 in Q2 2026 compared to $0.81 in Q2 2025. Net income attributable to USPA shareholders was $9.9 million in Q2 2026 compared to $12.4 million in Q2 2025. Included in net income was a loss on change in fair value of contingent earn-out considerations of $992,000 in Q2 2026 compared to a gain of $790,000 in Q2 2025. Improving results in recent acquisitions with contingent earn-outs increases the associated liability, resulting in a charge to the P&L. As such, a loss on change in fair value of earn-out consideration reflects improving underlying performance of impacted acquisitions. Earnings per share were $0.25 in Q2 2026 compared to $0.58 in Q2 2025. Under GAAP, changes in the value of redeemable noncontrolling interests are excluded from net income but are included in the earnings per share calculation. Improving performance in partnerships with redeemable noncontrolling interest has a dilutive impact on earnings per share. Turning to the balance sheet. Cash and cash equivalents were $25 million at the end of Q2 2026 compared to $36 million at the end of year 2025. Credit facility borrowings were $221 million at the end of Q2 2026 compared to $162 million at the end of year 2025. Reflecting the impact of the previously announced upsized $450 million credit facility, revolver availability at the end of Q2 2026 was $229 million compared to $145 million prior year. In addition to increasing revolver availability, the new credit facility also contains $125 million accordion, providing sufficient liquidity to fund sizable future acquisitions. During the quarter, the company repurchased 306,000 shares on the open market for a total consideration of $19.2 million at an average share price of $62.80. Including share repurchases made in 2025, the company has materially concluded repurchases under its current $25 million authorization. Year-to-date Q2 2026 operating cash flow was $38 million compared to $30 million for year-to-date Q2 2025. As Chris mentioned, subsequent to the end of the second quarter, the company completed the acquisition of a 12-clinic physical therapy practice for a purchase price of $16.4 million. This practice currently generates $12 million in annual revenue and 112,000 annual visits. Including the 2 previously announced Q1 2026 acquisitions, the cumulative purchase price of our 3 announced 2026 acquisitions is $38 million with a combined annualized revenue of $27 million. Taking into account the year-to-date 2026 results and the expected increasing benefit of hospital affiliations in the back half of the year, we are reaffirming our full year 2026 adjusted EBITDA guidance of $102 million to $106 million. With that, I will turn the call back to Chris.

Thanks, Jason. Great job. Appreciate it. Operator, we're going to go ahead and open it up for questions.

[Operator Instructions] And we will take our first question from Benjamin Rossi with JPMorgan.

So just on the back half ramp implied for the remainder of the year, it sounds like that's going to be more weighted towards 4Q once those remaining facilities have been integrated in 3Q. You also mentioned the additional 50 hires being front-loaded. Can you just walk us through the specific initiatives that you're expecting to deliver margin lift during the back half of the year? And then how should we be thinking about the timing of associated costs and benefits during 3Q and 4Q?

Yes. So we have a number of things. I mean the WelcomeWare initiative we've talked about earlier that involves the semi-virtualization of our front desk and aggregation of certain functions to potentially remote site that we know results in our ability to take out headcount at the front desk. So that will continue to ramp. We're more than halfway through our expected ramp in there. And then the big impact then is just the impact from getting these hospital facilities fully loaded. As Jason mentioned, we have close to 40, 39, I believe, that will flow in this quarter. Some of those are already in the works. Many of them are with a few to remain here this next month. That's going to give us a good solid lift. And then the other things, like I said, we're working on for next year. But those are the big impact things between now and year-end.

Great. I appreciate the color there. I guess a couple of clarifications on that $5.6 million in revenue you reported from the hospital affiliation during 2Q. Can you just walk through the mechanics of the hospital affiliation revenue recognition, how flows through your P&L? And then is there any ballpark for how many visits those clinics are currently seeing? Like we're assuming those volumes are coming in at a slight premium to your consolidated revenue per visit. Is it fair to think of this group currently representing maybe 50,000 patient visits? Or is that overstating volumes?

Jason, do you want to take a swing at the revenue recognition part and the pieces parts associated with that? And then Eric, maybe we can touch base on the number of -- the visit number of this remaining group.

Sure.

So the $5.6 million comes from 2 components of the agreement with the hospitals. One is a per visit fee. So for every visit that we see -- every patient that we see, we receive a fee and income from the hospitals. And then additionally, as Chris mentioned, we receive a reimbursement for the licensed clinical staff who are treating those patients. So the sum of those 2 income streams is the $5.6 million. And that would, just for clarity, replace the net patient revenue that we would have previously seen when they were operating pre-hospital affiliations. So the $5.6 million is the hospital increase. there would be a reduction to net patient revenue, but it would be less than the increase we're seeing from the $5.6 million increase.

Yes. I appreciate the additional details there.

In terms of the volume going through those metro clinics, just the outpatient clinics, we're averaging about 45 visits per day per clinic in our New York market and expect that to continue to increase with our NYU relationship.

Just to provide a little perspective, prior to the NYU Lango opportunity, we were able to grow on a year-over-year basis about -- these are round numbers, but about 120,000 visits year-over-year. That was '25 to current period '26. That's without the support of that hospital. So those clinicians that we hired, we fully expect to get them very busy and to produce very significant growth between now and the same time next year, including additional clinics, potential tuck-ins and other things that we have in the works.

And we'll move next to Larry Solow with CJS Securities.

So just a follow-up on that one. So the 50 clinicians that you hired in advance essentially this quarter, and if I do the math, that -- I mean if they're making $100,000 a year, that would be like $2 million in the quarter or something like that. So maybe it's more than that. But does that -- will that be reimbursed under the alliance or essentially, it should be, right?

Yes, it doesn't -- it's not going to rise our Q2 expense. But as soon as those clinics are rolled in the arrangement, that cost gets picked up and effectively supplemented by NYU. So that's -- it was important for us to make that decision. Michael made a good decision, I think schools produce graduates at certain times of the year. And based on our confidence in our ability to grow, we kind of have to reap those opportunities when they're available. And so that hurt us a bit in Q2.

Right. And is my number, is that right, a couple of million dollars, plus or minus? Is that like a fair ballpark?

Well, I think the $100,000 per person is probably in the ballpark when you look at benefits and sign-on bonuses and other things, maybe a little bit more than that, but I think it's probably close enough.

Okay. And the year-to-date, you mentioned -- a little over $3 million higher insurance. Was that mostly felt this quarter? Or was it already running higher in Q1?

It was running -- was -- the bigger impact was Q2. Jason has the quarterly breakdown. We ran light all of '25, and we knew we were running light. We budgeted to a median number where we've averaged for '26, and we've pretty significantly exceeded that number on these handful of semi-catastrophic cases that we have.

About 80% of the $3 million that Chris referenced was the second quarter when you think about the spread between the higher-than-average experience in the second quarter of 2026 versus lower-than-average experience in the second quarter 2025.

Got you. So it's like a couple of million between that and the pre-hiring or the hiring in advance, that's probably could all in $2.5 million, $3 million in the quarter or something on your operating profit. Okay. No, that's -- I appreciate that clarification. And the volumes were nice, really strong, and it's good to see Medicare pricing finally coming through here. Just on the commercial side, a little bit light, a little over 1% increase. Anything have been running around 2%. Anything -- I don't want to split hairs on 1 quarter, but anything to call out there?

No, it could move around a little bit. It's going to depend on when deals went into effect and quarterly timing. And just like we talked about kind of the catch-up on the Medicare side, which gets us to a more normal average. We really look at it over the course of the year. So we're kind of where we expect it to be. And we have more to come, but it's a little bit lumpy here and there depending on the size of the contracts and the timing.

We were up 3.4% in the first quarter on commercial.

Okay. So year-to-date, you're still running over 2%. Okay. Great. And then just lastly, you mentioned you recently refinanced, increased the size of your credit facility. And then I think you also -- you mentioned the accordion you added. It sounds like you're pretty confident in terms of continuing to do acquisitions and potentially even increase that activity. Is that fair?

Yes, it's all fair. I mean we're going to use the same filter that we've always used. So we're not going to spend differently just because we have money available. We're not going to be imprudent, but it gives us the room to do some -- to do the things that are available if we feel like it's the right thing to do.