USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company operates outpatient physical and occupational therapy clinics across 41 states. As of June 30, 2008, it operated 364 clinics. The Company primarily operates through subsidiary clinic partnerships where it holds a majority interest, with managing therapists owning the remaining interest. During the quarter, the Company launched a new venture, OsteoArthritis Centers of America (OA Centers), focusing on non-surgical treatment of osteoarthritis.

Key Financial Metrics

Margins (Six Months 2008 vs 2007):
- Operating Income Margin: 13.3% vs 13.6%
- Net Income Margin: 5.7% vs 5.9%
- Clinic Operating Costs as % of Net Revenues: 75.4% vs 74.3%

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 32.2% year-over-year for the six months ended June 30, 2008. This was driven by a 27.3% increase in patient visits (925,000 vs 727,000) and a $2.15 increase in net patient revenue per visit ($97.70 vs $95.55).
• Acquisitions: Significant growth was attributed to the inclusion of results from the STAR acquisition (Sept 2007), Oakland County Michigan acquisition (Jan 2008), and the Mid-Atlantic acquisition (June 2008). The Mid-Atlantic acquisition involved a 65% interest in a nine-clinic practice for approximately $9.5 million.
• Cost Increases: Salaries and related costs rose 35.9% to $48.9 million, primarily due to new clinics. Rent and supplies increased 29.1% to $19.4 million.
• Debt Expansion: Total debt increased significantly from $8.8 million to $17.2 million, largely due to increased utilization of the revolving credit facility (from $7.0M to $14.8M) to fund acquisitions and working capital.
• Unusual Items: Net income included a pre-tax gain of $193,000 from the formation of a joint venture involving two Texas partnerships. Conversely, the new OA Centers incurred a pre-tax operating loss of $207,000 for the six-month period.

Guidance, Outlook, and Risks

• Outlook: Management expects to incur initial operating losses from new clinics opened in late 2007 and 2008. They anticipate these clinics will begin to favorably impact results in late 2008. The Company plans to continue developing new clinics and evaluating acquisition opportunities.
• Liquidity: The Company increased its revolving credit facility commitment from $30 million to $50 million in June 2008. With $14.8 million outstanding, $35.2 million remains available. Management believes cash flow and credit availability are sufficient to fund operations through at least June 2009.
• Risks:
  • Medicare Cap: The Company is subject to the Medicare Cap on outpatient therapy services. While automatic exceptions are available, the cap may result in lost revenues if exceptions are not granted or patients do not pay out-of-pocket.
  • Reimbursement Rates: Changes in reimbursement rates or payment methods from third-party payors and government agencies pose a risk to revenue.
  • Integration: Risks associated with the successful integration of acquired businesses and the ability to maintain adequate internal controls.

Investor Verification Checklist

• Acquisition Valuation: Verify the final purchase price allocation for the Mid-Atlantic acquisition, as the preliminary allocation recorded $8.7 million in goodwill and is subject to adjustment within 12 months.
• Medicare Cap Impact: Monitor the Company's ability to secure automatic exceptions to the Medicare Cap and the resulting impact on net patient revenues.
• Debt Covenants: Review the financial covenants in the $50 million Credit Agreement to ensure compliance, particularly given the increased leverage.
• New Clinic Performance: Track the ramp-up period and profitability timeline for the 11 new clinics opened/acquired in the first half of 2008 and the new OA Centers.
• Minority Interest Purchases: Confirm the impact of ongoing purchases of minority interests in clinic partnerships on goodwill and cash flow.