USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: The Company operates outpatient physical and occupational therapy clinics providing pre- and post-operative care, rehabilitation for injured workers, and treatment for neurological injuries. As of December 31, 2008, the Company operated 360 clinics in 42 states. The business model primarily utilizes "Clinic Partnerships" where the Company holds a majority interest alongside managing therapists, and to a lesser extent, wholly-owned facilities. In 2008, the Company launched a new venture, OsteoArthritis Centers of America (OA Centers), and acquired Rehab Management Group (RMG).

Key Financial Metrics

Cash Flow: Net cash provided by operating activities was $30.2 million in 2008, compared to $19.0 million in 2007. Net cash used in investing activities was $24.9 million, primarily due to business acquisitions ($19.6 million) and fixed asset purchases ($4.3 million).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 24% to $187.7 million, driven by a 20% increase in patient visits (1.87 million) and a $1.86 increase in net patient revenue per visit to $98.05.
• Profitability: Net income from continuing operations rose 14% to $10.0 million. Operating income increased 19% to $23.9 million.
• Acquisitions: The Company acquired 14 clinics in 2008, including a 65% interest in a Mid-Atlantic practice (9 clinics) and a San Antonio practice (4 clinics). It also acquired a 65% interest in RMG.
• Clinic Count: The Company opened 16 new clinics and closed 18, ending the year with 360 clinics (up from 349 in 2007).
• Debt Levels: Long-term debt increased significantly to $12.4 million (plus $1.4 million current portion) from $7.9 million in 2007, primarily due to borrowings under a revolving credit facility to fund acquisitions.
• Closure Costs: The Company incurred $432,000 in closure costs in 2008 related to the closure of 18 clinics, compared to no material closure costs in 2007.

Guidance, Outlook, Risks, and Contingencies

Outlook and Strategy: Management intends to continue developing new clinics, opening satellite clinics, and evaluating acquisition opportunities. The Company plans to focus on the OA Centers venture and RMG services. Management believes current cash and credit facility availability are sufficient to fund operations through at least December 2009.

Risks and Contingencies:

• Economic Conditions: The Company highlights the risk of deteriorating economic conditions, rising unemployment, and reduced discretionary spending potentially lowering patient visits and affecting receivables collection.
• Reimbursement Environment: Approximately 80% of revenue comes from third-party payors (managed care, commercial insurance, workers' comp). The Company faces risks related to reimbursement rate reductions and the Medicare Cap (limit of $1,810 per patient in 2008), which may result in lost revenue.
• Regulatory Compliance: The business is subject to extensive federal and state regulations, including the Fraud and Abuse Law, Stark Law, and HIPAA. Non-compliance could result in penalties or exclusion from government programs.
• Goodwill Impairment: The Company recorded a $49,000 goodwill impairment charge in 2008. Future market deterioration could require further write-downs.
• Contingent Consideration: Several acquisitions (Mid-Atlantic, RMG, Arizona) include earn-out provisions totaling up to $6.8 million in potential future payments based on operating results.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and integration status of the 2008 acquisitions (Mid-Atlantic, San Antonio, RMG) and the new OA Centers venture.
• Reimbursement Rates: Monitor changes in reimbursement rates from major payors and the impact of the Medicare Cap on revenue per visit.
• Debt Covenants: Review compliance with financial covenants under the $50 million revolving credit facility, particularly given the increased debt load.
• Clinic Closure Costs: Assess the trend of clinic closures and associated costs (lease obligations, severance) in light of economic pressures.
• Accounts Receivable Aging: Review the aging of accounts receivable, specifically the 120+ days category, to gauge collection risks in a tightening credit environment.
• Contingent Liabilities: Track the achievement of performance targets for earn-out payments on recent acquisitions.