USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 September 30, 2010, the Company operated 372 clinics in 42 states. During the nine-month period, the Company opened 13 new clinics, acquired five, sold five, and closed nine.

Key Financial Metrics

Margins (Nine Months 2010): Operating margin was approximately 16.1%. Net income margin attributable to common shareholders was approximately 7.3%.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 4.6% for the three months ended September 30, 2010, compared to the same period in 2009 ($53.4M vs. $51.0M). For the nine months, revenues increased 4.6% ($157.9M vs. $151.0M). Growth was driven by an increase in net patient revenue per visit ($107.11 vs. $103.42 in Q3) and a slight increase in total patient visits.
• Profitability: Net income attributable to common shareholders increased 25.0% in Q3 ($3.9M vs. $3.1M) and 21.3% for the nine-month period ($11.5M vs. $9.5M). Diluted EPS rose from $0.26 to $0.33 in Q3 and from $0.80 to $0.97 for the nine months.
• Acquisitions and Divestitures: The Company acquired a 70% interest in five clinics in the Northeast for $9.0 million in February 2010. Conversely, it sold its 51% interest in a five-clinic Texas joint venture in March 2010, recording a pre-tax gain of $578,000.
• Cost Management: Clinic operating costs as a percentage of net revenues improved to 72.8% in Q3 2010 from 74.6% in Q3 2009. The provision for doubtful accounts decreased as a percentage of net patient revenues to 1.3% in Q3 2010 from 2.0% in Q3 2009.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Capital Resources: Management believes cash flow from operations and the $50.0 million revolving credit facility (currently unutilized) are sufficient to fund operations and future clinic development through at least September 2011. The Company amended its credit agreement in October 2010 to extend the maturity date to August 2015.

Regulatory Risks and Medicare Cap: A significant risk factor is the Medicare Cap on outpatient therapy services. While the Patient Protection and Affordable Care Act (PPACA) extended the exception process through December 31, 2010, the Company notes that the cap continues to result in some lost revenues. Additionally, a new CMS ruling on Multiple Procedure Payment Reduction (MPPR) effective January 1, 2011, is estimated to result in a 7% rate reduction for Medicare therapy services, though potential mitigating changes to Relative Value Units (RVUs) are pending.

Unusual Items: The nine-month results included a one-time pre-tax gain of $578,000 from the sale of the Texas joint venture. The Company also incurred acquisition costs of $0.1 million related to the February 2010 acquisition.

Investor Verification Checklist

• Medicare Reimbursement Impact: Verify the actual financial impact of the upcoming 7% MPPR rate reduction effective January 1, 2011, and the status of any pending legislative changes to the Sustainable Growth Rate (SGR).
• Acquisition Integration: Monitor the performance of the five clinics acquired in February 2010 to ensure they meet projected revenue and profitability targets.
• Days Sales Outstanding (DSO): DSO increased to 47 days at September 30, 2010, from 45 days at year-end 2009. Investors should track if this trend continues, indicating potential collection issues.
• Share Repurchases: Confirm the Company's continued commitment to its share repurchase program, which had approximately 479,000 shares remaining available as of September 30, 2010.
• Noncontrolling Interests: Review the allocation of net income to noncontrolling interests (therapist partners), which accounted for approximately 37% of total net income in the nine-month period.