USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: The Company operates outpatient physical and occupational therapy clinics providing preventive and post-operative care. As of March 31, 2009, the Company operated 365 clinics in 42 states. During the quarter, the Company opened six new clinics and closed one. The Company also manages 11 third-party facilities.

Key Financial Metrics

Margins: Operating margin was approximately 13.4% for Q1 2009 compared to 12.7% for Q1 2008. Clinic operating costs as a percentage of net revenues decreased to 75.4% from 76.1%.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 6.5% to $48.2 million, driven by a 1.9% increase in patient visits (463,000 vs. 455,000) and a $3.55 increase in net patient revenue per visit ($100.80 vs. $97.25). Growth was supported by new clinics and acquisitions from 2008 (Mid-Atlantic, RMG, San Antonio).
• Profitability: Net income attributable to common shareholders increased 15.5% to $2.8 million. Operating income rose 12.6% to $6.5 million.
• Cash Flow: Net cash provided by operating activities increased significantly to $6.4 million from $3.9 million, aided by improved collection efficiency (Days Sales Outstanding decreased to 48 days from 51 days).
• Capital Allocation: The Company repurchased 257,598 shares of common stock for $2.6 million during the quarter. Distributions to noncontrolling interests totaled $2.4 million.
• Debt: Borrowings under the revolving credit facility increased by $1.2 million to $12.6 million. Interest expense decreased to $88,000 from $149,000 due to lower average interest rates.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects to incur initial operating losses from new clinics opened in late 2008 and during 2009. The Company plans to continue developing new clinics and evaluating acquisition opportunities.
• Stock Repurchase Program: In March 2009, the Board authorized the repurchase of up to 1.2 million shares (10% of outstanding stock). The Company amended its credit agreement to permit these repurchases, subject to a consolidated leverage ratio of less than 1.0 to 1.0.
• Risks:
  • Economic Conditions: Deteriorating economic conditions and rising unemployment may reduce patient visits and discretionary spending.
  • Reimbursement: Changes in Medicare guidelines, reimbursement rates, or the "Medicare Cap" could impact revenues. The 2009 Medicare Cap is $1,840.
  • Contingent Consideration: Several 2008 acquisitions include earn-out provisions totaling up to $5.28 million payable if operating results targets are met within three years.
• Accounting Changes: The Company adopted SFAS 160 effective January 1, 2009, changing the reporting of noncontrolling interests. This resulted in a $40,000 net increase to income attributable to common shareholders for the quarter due to the allocation of operating losses to noncontrolling interests.

Investor Verification Checklist

• Credit Facility Covenants: Verify compliance with the amended leverage ratio covenant (must be < 1.0) required for the new stock repurchase program.
• Acquisition Earn-outs: Monitor the performance of the Mid-Atlantic, San Antonio, and RMG acquisitions to assess potential future cash outflows for contingent consideration.
• Medicare Cap Impact: Review the effectiveness of the automatic exception process for the 2009 Medicare Cap ($1,840) and its impact on revenue recognition.
• Days Sales Outstanding (DSO): Confirm the sustainability of the improved DSO (48 days) in the context of the broader economic downturn and potential credit tightening.
• Stock Repurchase Execution: Track the pace of share repurchases under the new $15 million authorization and its impact on cash reserves.