USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company operates outpatient physical and occupational therapy clinics, primarily through subsidiary clinic partnerships where it holds a majority interest. As of June 30, 2010, the Company operated 369 clinics in 42 states and managed 13 third-party facilities.

Key Financial Metrics

Note: Debt figures include current portion of notes payable ($637), long-term notes payable ($100), and revolving line of credit ($3,600) as of June 30, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 4.6% year-over-year for the six-month period, driven by a 1.7% increase in patient visits and a $2.59 increase in net patient revenue per visit.
• Profitability: Net income attributable to common shareholders rose 19.6% to $7.6 million. Operating margins improved slightly as clinic operating costs as a percentage of net revenues decreased from 73.8% to 73.2%.
• Acquisitions and Divestitures: The Company acquired a 70% interest in five clinics in the Northeast for $9.0 million (February 2010) and sold its 51% interest in a five-clinic Texas joint venture for $974,000 (March 2010), recording a pre-tax gain of $578,000.
• Cash Flow: Net cash provided by operating activities decreased by $2.1 million compared to the prior year, primarily due to increases in accounts receivable and decreases in accounts payable/accrued expenses.
• Debt Utilization: Borrowings under the revolving credit facility increased to $3.6 million from $400,000 at the end of 2009 to fund acquisitions and working capital.

Guidance, Outlook, and Risks

Management Commentary: Management expects to continue developing new clinics and evaluating acquisition opportunities. The Company believes current cash and credit facility availability ($46.4 million) are sufficient to fund operations and growth through at least June 2011.

Regulatory Risks (Medicare):

• Medicare Cap: The Patient Protection and Affordable Care Act (PPACA) extended the therapy cap exceptions process through December 31, 2010. The cap for 2010 is $1,860.
• Reimbursement Changes: A proposed Medicare Physician Fee Schedule (MPFS) for 2011 suggests a 50% reduction in reimbursement for practice expenses for secondary procedures, potentially resulting in a 10-12% net rate reduction for Medicare patients in 2011.
• Recent Increase: The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act (PACMBPRA) increased reimbursement by 2.2% effective June 1, 2010, through November 30, 2010.

Other Risks: Dependence on third-party payors (approx. 80% private/commercial, 20% Medicare/Medicaid), economic conditions affecting patient volume, and the ability to recruit and retain therapists.

Investor Verification Checklist

• Medicare Policy Impact: Verify the final implementation details of the proposed 2011 MPFS fee schedule changes and their potential impact on the 20% of revenue derived from Medicare.
• Acquisition Integration: Monitor the performance of the five clinics acquired in February 2010 to ensure they meet projected visit and revenue targets.
• Credit Facility Covenants: Confirm continued compliance with the consolidated leverage ratio (must be less than 1.0 to 1.0) and fixed charge coverage ratio under the $50 million credit agreement.
• Accounts Receivable Aging: Review the increase in days sales outstanding (46 days at June 30, 2010 vs. 45 days at Dec 31, 2009) and the allowance for doubtful accounts (8.7% of total patient AR).
• Noncontrolling Interests: Assess the impact of distributions to noncontrolling interest partners ($4.8 million for the six months) on cash flow available to common shareholders.