USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company operates outpatient physical and occupational therapy clinics, primarily through subsidiary clinic partnerships where it holds a majority interest. As of September 30, 2009, the Company operated 367 clinics in 42 states. During the nine months ended September 30, 2009, the Company opened 14 new clinics and closed seven. The Company also manages facilities for third parties and operates a venture called OsteoArthritis Centers of America.

Key Financial Metrics

Note: Debt includes Current portion of notes payable ($1,086), Notes payable ($280), and Revolving line of credit ($3,400). Working Capital is Total Current Assets ($36,007) less Total Current Liabilities ($15,776).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 8.1% for the three months ended September 30, 2009, compared to the same period in 2008 ($51.0M vs. $47.2M). For the nine months, revenues increased 8.0% ($151.0M vs. $139.9M). Growth was driven by a 2.0% increase in patient visits (quarterly) and a $5.31 increase in net patient revenue per visit.
• Profitability: Net income attributable to common shareholders increased 22.5% for the quarter ($3.1M vs. $2.5M) and 22.0% for the nine months ($9.5M vs. $7.8M). Operating margins improved as clinic operating costs as a percentage of net revenues decreased to 74.6% (quarterly) and 74.0% (nine months) from 77.5% and 76.1% respectively in 2008.
• Cost Management: Salaries and related costs as a percentage of net revenues decreased to 52.6% (quarterly) from 54.3% in 2008. Rent and other clinic costs remained flat in absolute dollars but decreased as a percentage of revenue due to cost containment efforts at mature clinics.
• Acquisitions: There were no new acquisitions during the nine months ended September 30, 2009. Results include full-year impact from 2008 acquisitions (Mid-Atlantic, San Antonio, and Rehab Management Group).

Guidance, Outlook, and Risks

• Outlook: Management expects to incur initial operating losses from new clinics opened in late 2008 and 2009. The Company plans to continue developing new clinics and evaluating acquisition opportunities. Cash and credit facility availability are deemed sufficient to fund operations through at least September 2010.
• Capital Allocation: The Company repurchased 518,335 shares of common stock for $5.6 million during the nine months ended September 30, 2009. No shares were repurchased in the third quarter. The Board has authorized the repurchase of up to 1.2 million shares.
• Liquidity: The Company has a $50.0 million revolving credit facility. As of September 30, 2009, $3.4 million was outstanding, leaving $46.6 million in availability. The Company is in compliance with all covenants.
• Risks:
  • Economic Conditions: The current economic environment may lead to reduced patient visits due to unemployment and reduced discretionary spending.
  • Reimbursement: Changes in Medicare guidelines, reimbursement rates, or the Medicare Cap could materially affect revenues. The Company relies on third-party payors and government programs.
  • Clinic Closures: Competitive or economic conditions may require the closure of certain clinics, resulting in closure costs and potential write-downs of goodwill.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the $5.31 increase in net patient revenue per visit and the impact of the Medicare Cap on future collections.
• Debt Covenants: Confirm continued compliance with the consolidated leverage ratio covenant (must be less than 1.0 to 1.0) to maintain the ability to repurchase stock.
• Acquisition Earn-outs: Monitor the operating results of the Rehab Management Group (RMG) and Mid-Atlantic acquisitions to determine if contingent consideration (up to $3.8M and $1.5M respectively) will be triggered in the fourth quarter of 2009.
• Bad Debt Trends: Review the provision for doubtful accounts, which increased to 2.0% of net patient revenues for the quarter, and the days sales outstanding (reduced to 45 days).
• Noncontrolling Interests: Understand the impact of the new accounting standard (effective Jan 1, 2009) on the allocation of net income to noncontrolling interests, which increased net income attributable to common shareholders by $111,000 for the nine-month period.