USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: The Company operates outpatient physical and occupational therapy clinics. As of September 30, 2007, it operated 346 clinics in 42 states. The Company primarily operates through subsidiary clinic partnerships where it holds a majority interest, with managing therapists holding minority interests.

Key Financial Metrics

Operating Margins: Operating income from continuing operations represented approximately 12.8% of net revenues for the three months ended September 30, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 13.1% for the three months ended September 30, 2007, compared to the same period in 2006. This was driven by a 12.1% increase in patient visits (381,452 vs. 340,335) and a slight increase in revenue per visit.
• Profitability: Net income for the three months ended September 30, 2007, was $2.12 million, a significant increase from $0.55 million in the prior year period. This improvement is largely due to the absence of significant losses from discontinued operations in the current quarter compared to the prior year.
• Acquisition Impact: The Company acquired STAR Physical Therapy, LP (51 clinics) effective September 1, 2007. The results of STAR are included in the current period's financials, contributing approximately $4.3 million to net patient revenues in the quarter.
• Discontinued Operations: The prior year period included a loss of $1.32 million from discontinued operations (31 clinics closed in 2006). The current period loss from discontinued operations was only $12,000.
• Debt Levels: Total debt increased significantly due to the utilization of a new $30 million revolving credit facility. The Company drew $12 million in September 2007 to fund the STAR acquisition.

Guidance, Outlook, and Risks

Management Commentary:

• Expansion Strategy: The Company intends to continue developing new clinics and evaluating acquisition opportunities. It opened 11 new clinics and closed 9 during the nine months ended September 30, 2007.
• Liquidity: Management believes cash flow from operations and the revolving credit facility are sufficient to fund working capital, clinic development, and investments through at least September 2008. Significant future acquisitions would likely require additional financing.
• Reimbursement Environment: The Company notes that Medicare reimbursement rates and caps (Adjusted Medicare Limit of $1,780 for 2007) impact revenue. While exception processes exist, the cap may result in lost revenues.

Risks and Contingencies:

• Regulatory Risk: Changes in Medicare guidelines, reimbursement rates, or failure to maintain certification could materially affect results.
• Integration Risk: Successful integration of acquired businesses (specifically STAR) is critical to realizing projected benefits.
• Market Conditions: Competitive conditions or economic downturns may require clinic closures, potentially leading to goodwill write-downs.
• Interest Rate Risk: The Company has variable-rate debt; a 1% change in interest rates would impact annual interest expense by approximately $120,000.

Investor Verification Checklist

• Acquisition Integration: Verify the performance of the newly acquired STAR clinics (51 locations) to ensure they meet pro forma revenue and margin expectations.
• Debt Covenants: Review the terms of the new $30 million Credit Agreement to ensure compliance with financial covenants, especially given the increased leverage.
• Discontinued Operations: Confirm that the remaining closure costs associated with the 31 clinics closed in 2006 are fully accrued and that no further material charges are expected.
• Reimbursement Trends: Monitor the impact of the Medicare cap and any changes in third-party payer contracts on the "net patient revenue per visit" metric, which declined slightly on a year-to-date basis.
• Goodwill Valuation: Assess the $18.3 million in goodwill recorded from the STAR acquisition and the total goodwill balance of $39.8 million for potential impairment risks if clinic performance lags.