USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company operates outpatient physical and occupational therapy clinics across 42 states. As of September 30, 2008, it operated 364 clinics. The Company primarily operates through subsidiary clinic partnerships where it holds a majority interest, with managing therapists holding minority interests. In 2008, the Company launched a new venture, OsteoArthritis Centers of America ("OA Centers"), and acquired a 65% interest in Rehab Management Group ("RMG") in October 2008.

Key Financial Metrics

Margins (Nine Months 2008):
- Operating Income Margin: 13.0% ($18,228 / $139,872)
- Net Income Margin: 5.6% ($7,771 / $139,872)

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 26.1% for the nine months ended September 30, 2008, compared to the same period in 2007. This was driven by a 25.9% increase in patient visits (1.4 million vs. 1.1 million) and a $1.88 increase in net patient revenue per visit.
• Profitability: Net income rose 24.3% to $7.8 million for the nine-month period, compared to $6.3 million in 2007. Diluted EPS increased from $0.54 to $0.65.
• Acquisitions: Significant growth was attributed to the inclusion of the STAR acquisition (completed Sept 2007), the Oakland County Michigan acquisition (Jan 2008), and the Mid-Atlantic acquisition (June 2008).
• Costs: Clinic operating costs increased to 76.1% of net revenues for the nine months ended September 30, 2008, up from 74.9% in the prior year period. Salaries and related costs increased 34.2% year-over-year.
• Discontinued Operations: The Company reported no income or loss from discontinued operations in the current period, whereas the prior year included a net loss of $81,000.

Guidance, Outlook, and Risks

Management Commentary:
- The Company expects to incur initial operating losses from new clinics opened in late 2007 and 2008, as is typical for start-up periods.
- The Company plans to continue developing new clinics and evaluating acquisition opportunities.
- Hurricane Ike in September 2008 affected 40 clinics, resulting in an estimated loss of 1,850 patient visits and $180,000 in revenue for the quarter.

Unusual Items:
- The nine-month net income included a pre-tax gain of $193,000 from the formation of a joint venture involving the sale of a 49% interest in two Texas partnerships.
- Net income included a pre-tax operating loss of $358,000 related to the start-up of the OA Centers.
- A goodwill impairment charge of $49,000 was recorded in the third quarter of 2008.

Risks and Contingencies:
- Medicare Cap: Reimbursement for outpatient therapy services is subject to a Medicare Cap ($1,810 for 2008). While automatic exceptions are available, the cap may result in lost revenues.
- Regulatory Compliance: The Company is subject to complex laws and regulations governing the Medicare program. Non-compliance could result in fines, penalties, or exclusion from the program.
- Reimbursement Rates: Changes in reimbursement rates or payment methods from third-party payors could materially affect results.
- Acquisition Integration: Risks associated with the successful integration of acquired businesses and the achievement of earn-out targets.

Investor Verification Checklist

• Acquisition Valuation: Verify the final purchase price allocation for the Mid-Atlantic and Oakland County acquisitions, as preliminary estimates may change within 12 months.
• Medicare Cap Impact: Assess the actual financial impact of the Medicare Cap and the success rate of automatic exception filings on revenue.
• Debt Covenants: Review the Company's compliance with financial covenants under the $50 million revolving credit facility, particularly given the increased debt load from acquisitions.
• New Clinic Performance: Monitor the ramp-up period and profitability timeline for the 14 new clinics opened and 10 acquired in the first nine months of 2008.
• Minority Interest Purchases: Track the impact of purchasing minority interests in clinic partnerships on goodwill and cash flow.