USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company operates outpatient physical and occupational therapy clinics providing preventive and post-operative care. As of March 31, 2011, it operated 397 clinics in 42 states. The Company primarily operates through subsidiary clinic partnerships, owning a majority interest, and manages third-party facilities.

Key Financial Metrics

Margins: Clinic operating costs were 73.3% of net revenues in Q1 2011, compared to 75.3% in Q1 2010. The effective tax rate was 39.3%.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12.6% to $56.7 million, driven by a 10.4% increase in patient visits (515,161 vs. 468,651) and a slight increase in revenue per visit ($104.57 vs. $104.08). Growth was primarily attributed to 25 clinics acquired in late 2010 and new clinic openings.
• Profitability: Net income attributable to common shareholders rose 18.1% to $3.7 million. Operating income increased to $8.7 million from $6.7 million.
• Cost Management: Salaries and related costs increased 10.7% but decreased as a percentage of revenue (52.2% vs. 53.1%). The provision for doubtful accounts decreased significantly to $0.6 million (1.2% of revenue) from $1.0 million (2.1% of revenue).
• Liquidity: Cash increased by $1.5 million from the prior year-end balance, despite dividend payments and capital expenditures, due to strong operating cash flow.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Strategy: Management intends to continue developing new clinics, opening satellites, and evaluating acquisitions. The Company believes current cash and its $50 million revolving credit facility (with $45.2 million available as of March 31, 2011) are sufficient to fund operations through at least March 2012.

Unusual Items and Transactions:

• Acquisition of Non-Controlling Interest: On February 28, 2011, the Company purchased 16.3% of the non-controlling interest in STAR Physical Therapy, LP for $12.3 million. This payable was recorded in accrued expenses and paid in April 2011 using funds from the revolving credit facility.
• Dividends: The Company declared a cash dividend of $0.08 per share ($0.94 million total) in Q1 2011, whereas no dividend was declared in Q1 2010.
• Medicare Reimbursement Risks: The filing highlights a 5% to 7% estimated rate reduction for Medicare patients in 2011 due to the Multiple Procedure Payment Reduction (MPPR) rules effective January 1, 2011.

Risks: Key risks include dependence on third-party payors (Medicare/Medicaid), potential adverse impacts from healthcare reform legislation, economic conditions affecting patient volume, and the ability to recruit and retain therapists.

Investor Verification Checklist

• Medicare Rate Impact: Verify the actual financial impact of the 5-7% Medicare rate reduction (MPPR) on Q2 and Q3 2011 results.
• Days Sales Outstanding (DSO): Monitor the increase in DSO to 50 days (from 45 days) attributed to CMS processing issues to ensure it does not indicate broader collection difficulties.
• Debt Utilization: Track the utilization of the revolving credit facility, which increased from $4.8 million to $21.8 million by April 30, 2011, following the $12.3 million non-controlling interest purchase.
• Acquisition Integration: Assess the performance of the 25 clinics acquired in late 2010, which drove the majority of visit growth in Q1 2011.
• Dividend Sustainability: Confirm the Company's ability to maintain the new quarterly dividend policy amidst potential reimbursement headwinds.