USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: The Company operates outpatient physical and occupational therapy clinics providing pre- and post-operative care, sports injury treatment, and rehabilitation. As of December 31, 2005, the Company operated 286 clinics in 37 states, primarily through subsidiary clinic partnerships where the Company holds a majority interest and managing therapists hold minority interests. The Company also manages 7 third-party facilities.

Key Financial Metrics

Key Operational Metrics: Total patient visits increased 12% to 1.35 million. Average visits per day per clinic were 19.2. Net patient revenue per visit was $96.50.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12% to $132.1 million, driven by a 12% increase in patient visits and a slight increase in revenue per visit. New clinics (28 developed, 5 acquired) contributed approximately 45% of the revenue increase.
• Profitability: Net income rose 32% to $8.8 million. Operating income increased 18% to $18.9 million. Diluted earnings per share increased 35% to $0.73, aided by a reduction in diluted shares due to stock repurchases.
• Cost Structure: Clinic operating costs rose to 73% of net revenues (from 72% in 2004). Salaries and related costs increased 14% to $67.6 million. Corporate office costs decreased 2% to $16.4 million, excluding one-time CEO resignation charges incurred in 2004.
• Liquidity: Cash and cash equivalents decreased 27% to $15.0 million. This decline was primarily due to $12.2 million used in investing activities (acquisitions and fixed assets) and $11.6 million used in financing activities (stock repurchases and minority interest distributions).
• Acquisitions: The Company acquired Hamilton Physical Therapy Services (3 clinics) and Excel Physical Therapy (2 clinics) in 2005, resulting in approximately $6.9 million of new goodwill.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Strategy: Management intends to continue developing new clinics and opening satellite locations. The Company plans to evaluate acquisition opportunities in select markets. It expects existing funds and a $5.0 million credit facility (undrawn as of year-end) to be sufficient to meet needs through March 2007.

Material Risks:

• Medicare Therapy Caps: Effective January 1, 2006, the Medicare therapy cap was reinstated at $1,740 per patient. Management anticipates this could result in lost revenues unless mitigated by marketing to non-Medicare sources or staffing reductions.
• Reimbursement Rates: Approximately 78% of revenue comes from private payors and 22% from Medicare/Medicaid. Continued pressure on reimbursement rates from managed care and government programs poses a risk to margins.
• Regulatory Compliance: The business is subject to extensive federal and state regulations, including the Fraud and Abuse Law and Stark Law. Non-compliance could result in penalties or exclusion from government programs.
• Accounting Changes: The Company will adopt SFAS 123R (Share-Based Payment) effective January 1, 2006. Management estimates this will reduce 2006 net earnings by approximately $500,000.

Unusual Items:

• Closure Costs: The Company incurred $369,000 in closure costs in 2005 related to clinics closed in late 2004 and late 2005.
• Goodwill Impairment: A $145,000 goodwill impairment charge was recorded in 2005.
• Stock Repurchases: The Company repurchased 489,282 shares of common stock for $8.0 million during 2005.

Investor Verification Checklist

• Medicare Cap Impact: Verify the actual financial impact of the reinstated $1,740 Medicare therapy cap on 2006 revenues and margins.
• Stock-Based Compensation: Confirm the adoption of SFAS 123R and the resulting reduction in 2006 net income (estimated at $500,000).
• Acquisition Integration: Monitor the performance of the Hamilton and Excel acquisitions to ensure they meet the operating results required for contingent consideration payments.
• Reimbursement Trends: Track changes in reimbursement rates from major managed care payors and Medicare to assess margin sustainability.
• Cash Flow Management: Review the utilization of the $5.0 million credit facility and the sustainability of cash burn related to new clinic development and stock buybacks.