In part two of our series on free cash flow for serial acquirers; today we examine US Physical Therapy. U.S. Physical Therapy, Inc. operates outpatient physical and occupational therapy clinics that provide pre- and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Selective acquisitions are clearly part of the company’s ongoing business strategy. The following is from their most recent 10K;
In 2010, we intend to continue to focus on developing new clinics and on opening satellite clinics where appropriate along with increasing our patient volume through marketing and new programs. In addition, we will evaluate acquisition opportunities.
Acquisitions in this type of business can be tricky. It is crucial to not only make adjustments to the free cash calculation, one must also be sure the company can maintain a sufficiently high return on capital. In other words, are the acquisitions creating or destroying shareholder value via these acquisitions.
Recalling that our calculation for free cash is as follows;
+ Non cash charges (depreciation/amortization)
+/- Changes in working capital
- Capital expenditures (some prefer to use maintenance cap exp)
= Free Cash Flow.
Let’s take a look at the statement of cash flows for USPH.
Period End Date
Stmt Source Date
Stmt Update Type
Net Income/Starting Line
Changes in Working Capital
Cash from Operating Activities
Other Investing Cash Flow Items, Total
Cash from Investing Activities
Financing Cash Flow Items
Issuance (Retirement) of Stock, Net
Issuance (Retirement) of Debt, Net
Cash from Financing Activities
Similar to our previous example, the free cash flow generation appears to be quite robust. Indeed this is legitimate cash flow. Capital expenditures appear to be modest and consistent while Cash from Operations has expanded nicely. Once again “other cash flow from investing items” reveals the frequency of acquisitions. In both 2007 and 2008, it appeared as though FCF exceeded $15 and $25 million respectfully. But adjusting for acquired businesses decreases that amount by approximately $19million in both years. In reality, there was negative FCF in 2007.
In 2009, the company held off purchases, most likely due to the economic climate. It’s interesting to note that as the acquisitions slowed, so did overall growth. There may be no significant organic growth for USPH. As the opportunity to find attractive clinics to takeover grinds to a halt, growth may stall completely. An even worse scenario is that management attempts to force growth by lowering buyout standards. This type of situation almost always turns out poorly for the shareholder. Something to bear in mind.