Assisted in the Financial Analysis and mathematical modeling. My part consisted of calculating key financial ratios, DuPont Analysis, Monte Carlo, and projection analysis (Pro-Forma) for the Income Statement and Balance sheet for a 5-year time horizon.

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Outpatient Rehabilitation Sector, Healthcare Industry
New York Stock Exchange
U.S. Physical Therapy, Inc.
Date: 2/3/2017 Current Price: $71.45 Recommendation: Hold
Ticker – NYSE: USPH Headquarters: Houston, TX Target Price: $66.07 USD
Highlights________________________________________________
We initiate coverage of U.S. Physical Therapy, Inc. (NYSE: USPH) with
a HOLD recommendation based on a one-year target price of $66.07,
which will give us a downside of 7.52% on February 2nd, 2018. Our
recommendation is primarily driven by the following:
• Financial Performance: U.S. Physical Therapy, Inc. has shown a
Revenue Growth average of 9.47% since 2010. Revenue growth, Clinic
operating costs, and M&A strategy are key drivers for financial growth.
Operating costs are 75.51% of Revenue, in which Labor and Salary costs
make up 71.06% of Operating Costs. Furthermore, the Board of Directors
are very selective in any acquisition process, and how they play into the
M&A strategy of growth the Board of Directors is pushing.
• Valuation: Valuation methods show that there is an inherent value of
$66.07 per share. While the financials currently look good for U.S.
Physical Therapy, Inc., we feel there is no way that they can sustain their
current or projected growth rate. We achieved this result through a
mixture of Discounted Cash Flow analysis and relative multiple
valuations.
• Risks: The largest risk by far to U.S. Physical Therapy, Inc. is the
current political climate and how it will affect the ability of customers to
pay for the services through either insurance or Worker’s Compensation.
The second largest risk, but by no means any less damaging would be the
inherently fragmented nature of the industry and the possibility of many
new competitors and lack of new growth, with a main focus on M&A’s
to grow.
Recent News_______________________________________
• US Physical Therapy Completes First Acquisition of 2017 –
01/03/2017: U.S. Physical Therapy, Inc., a national operator of
outpatient physical therapy clinics, announced that the Company has
just completed the acquisition of a physical therapy practice that owns
and operates 17 clinics and manages an additional 8 clinics. Source:
Business wire
Stock Price vs Rebased S&P 500
52 Week Range $45.62 - 73.05
Avg Daily Vol (3 Mo) 81,913
Market Value (M) 885.9
Ent Value (M) 960.7
Shares Out (000) 12,522.00
Dividend Yield 0.947%
Float 96.00%
Institutional 98.42%
Top 10 Inst Hldrs 51.10%
Analyst Coverage 6
Target Price $66.07
LT Growth Rate 12.50%
Avg Rating Hold (1.83)
Market Statisitics

3. • U.S. Physical Therapy Announces 12 Clinic Group Acquisition –
12/01/2016 - U.S. Physical Therapy, Inc. USPH, +1.56% a national
operator of outpatient physical therapy clinics, announced that the
Company has just completed the acquisition of a 12 clinic group.
USPH acquired a 60% interest with the physical therapy practice’s
clinical owners retaining 40%. Source: U.S. Physical Therapy Press
Release
• New Strong Sell Stocks For November 14th – 11/14/2016: U.S.
Physical Therapy Inc., USPH, operates outpatient physical and
occupational therapy clinics. It has seen the Zacks Consensus
Estimate for its current year earnings being revised 4% downward
over the last 30 days. Source: www.nasdaq.com
Business Description_________________________________
U.S. Physical Therapy is the largest publicly-traded, pure-play operator of
outpatient physical and occupational therapy clinics, with approximately
510 Clinics in 42 States. U.S. Physical Therapy, Inc., incorporated on
April 1, 1992, and through its subsidiaries, operates outpatient physical
therapy clinics that provide pre-and post-operative care and treatment for
orthopedic-related disorders, sports-related injuries, preventative care,
rehabilitation of injured workers and neurological-related injuries. U.S.
Physical Therapy, Inc.’s segment is made up of various clinics within
different partnership agreements. U.S. Physical Therapy, Inc. primarily
operates through subsidiary clinic partnerships, in which it owns a general
partnership interest and a limited partnership interest, and the managing
therapists of the clinics own the remaining limited partnership interest in
the clinics.
Geography
U.S. Physical Therapy, Inc. (heretofore known as USPH) is headquartered
in Houston, TX and operates clinics all across the United States. There are
approximately 380 clinics operated under Clinic Partnerships and over
100 operated as USPH-owned Facilities. In addition to its owned clinics,
it also manages physical therapy facilities for third-parties, primarily
physicians, with over 20 third-party facilities under management. USPH
operates clinics in Tennessee, Texas, Michigan, Virginia, Washington,
Maryland, Georgia, Pennsylvania and Wisconsin, just to name a few.
Physical therapy is a need that is shared across the country and is not
limited to certain geographic areas. USPH has diversified itself across the
country to attempt to meet the needs of patients everywhere. While urban
centers have more of a necessity, this is due to a population disparity with
rural America, not an economic one. Where there are more people, there
tend to be more injuries and health problems that require rehabilitation.
Strategy
USPH originally made a name for itself by starting rehabilitation clinics
from the ground up, or as de novo (Latin: “of new”) start-ups. This led to
a very profitable venture which formed the foundation of the company.
Figure 1: Net Revenue (in Millions)
Source: FactSet, Team Estimate
Figure 2: Ownership Structure
Note: Institutional Includes
Mutual Funds
Source: Mornigstar
Source: FactSet
Figure 3: 2016 Valuation
P/E 36.10
Dividend Growth Rate 1.95
Dividend Yield (%) 0.947%
P/FCF 1.37
EV/EBITDA 17.2x
Valuation

4. Currently, about 60% of USPH’s clinics are from those start-ups, with the
rest being acquired through the purchase and partnerships of existing
rehabilitation centers.
• Focus: USPH focuses primarily in the areas of trauma, work-related,
and sports injuries, and pre- and post-op surgical cases. This allows USPH
to excel at their chosen areas of expertise, rather than attempting to
diversify out to the point of mediocrity in all areas of physical therapy. By
focusing on certain aspects of the physical therapy environment, USPH is
able to drive customers to their clinics through referrals with some help
from marketing representatives.
• Acquisitions: USPH has taken on a strategic bent of acquiring new
clinics instead of starting up new ones, but in such a way as to treat them
as partners instead of a straight take-over and rebranding. In most cases,
the original owners retain some control, and USPH takes over and
streamlines the running of the business while the existing therapists retain
their positions and continue to work with their patients. This acquisition
method has led to a rapid increase in USPH’s customer base and potential
client base.
Management and Governance_________________________
USPH’s executive team has been a key factor in the growth and success
of the firm. Chris Reading joined the firm in 2003 as COO but got
promoted to CEO and the Board of Directors in 2004. Larry McAfee and
Glenn McDowell both joined the company in 2003 and got promoted to
the team that is mainly responsible for finding new potential clinics for
acquisitions. USPH has established an effective way of carefully vetting
potential clinics and only making acquisitions if the top management team
believes that a number of factors, both financially and in terms of their
opinion on the therapist’s line up with the company’s philosophy
(Appendix B shows an example).
In terms of corporate governance, the firm is separating the CEO and
Director of the Board positions. 73% of the Board members are
independent and the average tenure of the Board members is 11 years.
Two Board members have been on the Board for 25 years and skew the
average tenure.
• Audit and Oversight: There has been no problem in this area and the
results indicate that USPH has an efficient oversight and auditing process.
• Shareholder Rights: USPH has started to pay a dividend in 2012 but
this dividend is only paying a low amount of earnings back to
shareholders, in order to keep enough cash available for future
acquisitions. This growing dividend along with the ability to call special
meetings and annually elect directors gives shareholders a strong power
base.
• Consistency in Management: Having consistency in the top
management positions has given USPH a comparative advantage in
finding new groups of clinics. As long as the top management stays in
place, this advantage will continue to help USPH grow.
Figure 4: 2016 Analyst P/E Est
Source: Nasdaq.com
Figure 5: Stock Value
Source: USPH
Source: FactSet, Team
Figure 6: ROIC vs WACC

5. Source: IBISWorld
Industry Overview and Competitive Positioning__________
Industry Overview
The healthcare sector has always been an attractive place for the money,
and within that sector, one cannot ignore the physical and occupational
therapy industry. The physical and occupational therapy industry (referred
to as “the industry” hereafter) boasts a market of $29.6 billion, with an
expected CAGR of 7%. The industry is divided into IRF’s (inpatient
rehabilitation facilities) and ORF’s (outpatient rehabilitation facilities)
with ORF’s accounting for about $19 billion market. The highest part of
the outpatient rehabilitation expenses goes to orthopedic physical therapy
consisting of 40% of the total expenditure.
• Demand: The largest demand for this industry is to be found in the
changing demographics of the country as a whole. As the population at
large gets older, there will need to be more pre- and post-operative care as
well as an ability to deal with the problems of an aging and increasingly
less active society.
• Ageing Population and the need to maintain an active lifestyle:
The average age of the American population is increasing and the number
of people above the age of 65 are predicted to increase significantly and
their need to maintain an active lifestyle arising out of personal or
economic reasons leads to the creation of demand for physical therapy
services.
• Increasing obesity : Obesity is one of the major health issues in the
United States and is ever increasing. Obesity leads to a lot of additional
health problems and issues and a great deal of them will create a need for
physical and occupational therapy.
• Worker’s Comp: While the demand for this type of treatment only
represents about 17% of USPH’s current patient revenue, through the
Company’s focused worker’s comp business, USPH is trying to drive up
demand by focusing on industrial areas of the work sector and bring other
services to them than just physical therapy and rehabilitation.
Competitive Positioning
As previously stated, the industry is worth $29.6 billion with an expected
CAGR of 7%. However USPH finds itself in a complex competitive
environment. The industry is highly fragmented with no market player
having a market share of greater than 10% and is largely dominated by
small and medium clinics with regional footprints and with revenues up to
$1 million per center. This leads us to an important conclusion; growth is
possible and can be highly stimulated through M&A activities, and
pushing for organic growth will be expensive and ineffective. Spending
on acquisitions to attempt to consolidate the industry will be a better way
of driving growth.
Source: NCHS
Source: NCHS
Figure 7: Health trends
Figure 8: Population Age
Figure 9: Competitive Market

6. • Growth Opportunities: There are barriers to entry in this industry
which are created by the huge initial outlay required to set up clinics and
the long start up period. Thus, smaller independent clinics are unable to
move out of their local areas due to poor referral mechanisms and
investment constraints. This is why most small clinics are operating as
partnerships among multiple practitioners. Also, though not a major issue,
the anti-POPT (physician owned physical therapy practices) sometimes
create barriers, though POPTs provide great opportunities for physicians.
• Business Model: All of this further supports the conclusion that as
a large, national level, publicly owned company with access to resources,
both monetary and human, USPH can benefit greatly by continuing and
expanding their M&A activities as market consolidation helps them drive
the revenues their way. Acquired new clinics also benefit from the
resources that come from the acquirer in terms of administrative and
accounting help and becoming a part of a greater referral network. USPH
seems to have a sound mechanism for that. The problem, however, arises
with a few big players in the industry being on an acquisition spree for the
smaller clinics, and so the terms of an acquisition may not always be
favorable to USPH. When the industry growth stagnates, the large
capacity developed through acquisitions will be a huge burden on the
bottom line if the leverage ratio is too high. Slow and steady is a better
option than all-encompassing and fast.
Investment Summary________________________________
Merits
• Capacity and Growing Customer Base: USPH has the capacity to
deal with a large and growing customer base, as discussed in the industry
overview. The ageing population and the increasing need for surgical care
in a large population will provide a robust potential customer base for the
foreseeable future.
• Growth Strategy: At its heart, USPH has a good growth strategy
through an aggressive M&A program to allow them to take over existing
small therapy operations and give themselves a built in customer base.
• Increasing Dividend: As you can see from Figure 12 and Figure 13,
the dividend decreased in 2013 to $0.40 from $0.76 in 2012 and the yield
decreased from 2.76% in 2012 to 1.13% in 2013. While a decrease in the
dividend yield is usually considered a good thing, we feel that the drop in
dividend amounts and the attempts to regain it are signs that the company
may be moving too aggressively at the moment.
Concerns
• Highly Fragmented Industry: The Physical Therapy (PT) and
Outpatient Therapy (OT) industry is a highly fragmented industry that can
pose potential problems when trying to acquire and work with a large
name brand. There are many other companies that are doing the same
strategy as USPH and at some point there won’t be any other
opportunities to grow as the market is such a specialized one that there
will come a time when the market reaches full saturation.
Source: USPH, IBISWorld
Figure 10: Porters 5 Forces
Figure 11: SWOT Analysis
Figure 12: Dividend Pay Out
Source: FactSet
Source: Team Estimate

7. • Over-Leveraged: While USPH currently is not too leveraged, the
need and desire to keep up the current growth rate and to keep investors
happy will cause the company to have to pay more and more for existing
companies and restructuring and branding. This will lead to the need for
more debt and could potentially cause an issue if the payouts from
insurers and Medicare/Medicaid are reduced or extended.
Financial Analysis___________________________________
Overview
USPH has seen a remarkable increase in revenue with an average growth
of 9.47% annually from 2010 to 2015. This has allowed the company to
reach the #3 slot in the top market share of the industry. USPH had a total
free cash flow of $51.347 million for 2016, which has allowed it expand
its business through M&A.
Ratio Analysis
Source: FactSet, Team Estimates
As we can see from the above ratios, there can be no doubt that USPH has
had solid growth the last two years, and has a predicted growth that is
fairly robust.
The Gross Margin for 2016 was 83.65% which exceeded both the 2015
margin and the 5 year average. Notice that both the ROA and ROE have
declined for 2016 from 2015. This trend is expected to continue on
through the next 5 years. While the decline is not that great, it is still a
significant indicator. The decline in ROA from 2015 to 2016 was only
0.08%, but over the next 5 years, that decline will be a cumulative 2.22%.
As for the ROE, the decline of 0.75% is larger, but the total decline over
the next five years of 2.78% is approximately the same. We estimate that
the Return on Invested Capital will increase for 2017, but then start a slow
decline back down to more manageable levels due to the industry
saturation and lack of potentially good acquisitions in the market.
As pertains to Liquidity, while there is an existing trend of both the
Current Ratio and Cash Ratio to increase, we feel that with the political
landscape and fewer expected acquisitions will hamper growth. This may
Financial Conditions 2015 2016 2017 E 2018 E 2019 E 2020 E 2021 E
Profitability %
Gross Margin 78.36 83.65 83.05 87.35 92.19 94.57 96.86
Return on Assets 8.5 8.42 8.7 8.02 7.56 6.94 6.2
Return on Equity 11.54% 10.80% 7.15% 5.85% 4.54% 3.08% 1.50%
Return on Invested Capital 10.55 10.99 11.05 10.46 10.23 9.74 9.25
Liquidity (X)
Current Ratio 3.17 3.2 3.23 3.55 3.98 4.21 4.49
Cash Ratio 0.83 0.87 0.88 0.98 1.11 1.19 1.28
Financial Leverage (%)
Long-Term Debt To Equity 30.53 18 16.35 15.73 13.53 11.73 9.19
Total Debt to Equity 40.3 27.38 25.06 23.34 19.43 17.45 14.08
Interest Coverage 45.87 34.23 28.95 23.37 18.04 15 11.95
Shareholder Ratios
FCF per Share ($) 2.82 3.55 3.47 3.67 3.66 3.90 3.76
Dividend Yield (%) 1.12 1.02 0.95 0.91 0.87 0.81 0.77
Figure 13: Dividend Yield
Source: FactSet
Figure 14: Operating & Profit Margin
Source: FactSet, Team
Figure 15: # of OPT Clinics
Source: USPH

8. be evident in the next year or two and therefore USPH may not have the
resources to pay its debts.
The Financial Leverage looks very good when you consider the current
trends and the numbers by themselves. Long Term Debt to Equity
especially is nicely lowered from a current 18% to 9.19 % in 5 years,
assuming the company stays the course with its current investment plan
and does not have to borrow to pay higher and higher acquisition costs for
the few remaining available sectors of the current industry. As well, the
massive drop in Interest Coverage indicates that the company is spending
money to pay off debt, which is good for the shareholders in the long run,
however, this does leave them open to acquiring more debt without too
much in the way of trouble and could become a detriment for a long term
investor.
DuPont Analysis
As we can see, utilizing a DuPont analysis shows us that the declining
ROE has some significantly interesting trigger warnings for any future
investor in USPH. The Net Margin decreasing from 2017 onwards shows
a potential for an inability to pay for future debt coverage. While this is a
worrisome factor, the lowering of the Asset Turnover ratio is actually a
good sign. As the asset turnover ratio lowers, we are seeing that the
company should have a higher profit margin overall. As USPH is
primarily a service based company, this may not hold true since their total
assets may not change as much, and thus, a lower ratio means lower sales
revenues. A decreasing equity multiplier is generally seen as a good thing
as that means the equity is growing faster than the assets. For a service
based industry this can be a good thing, as it means your existing assets
(facilities, technicians, therapists) are generating higher income without
the necessary need to expand. However, a change from 1.45 to 1.14 over
6 years is not necessarily a large enough change over that time period to
warrant too much concern.
Valuation__________________________________________
Valuation Target Price: $66.07 Recommendation: HOLD
In the valuation part we use a variety of methods to attempt to derive a
target price for USPH, including a Discounted Free Cash Flow Model,
Dividend Discount Model, Residual Income Model, and Relative
Multiples Valuation.
Discounted Free Cash Flow Model
By utilizing a Discounted Free Cash Flow Model, we can estimate the
attractiveness of an investment opportunity. We will use this method to
ROE Decomposition 2015 2016 2017 E 2018 E 2019 E 2020 E 2021 E
Net Margin (%) 6.72 6.46 6.52 6.26 6.03 5.71 5.39
Asset Turnover (X) 1.18 1.31 1.24 1.2 1.17 1.13 1.06
Equity Muliplier (X) 1.45 1.27 1.25 1.23 1.19 1.17 1.14
ROE (%) 11.54% 10.80% 7.15% 5.85% 4.54% 3.08% 1.50%
Figure 16: ROE Decomposition
Source: FactSet, Team
Source: FactSet, Team
Source: FactSet, Team
Figure 17: DuPont vs Profit Margin
Figure 18: DuPont Analysis

9. estimate out 5-year projections of the free cash flows to analyze our target
price of USPH.
• Weighted Average Cost of Capital (WACC): The risk free rate that
we utilize for our calculations is the 10 year treasury rate which is 2.48%
as of February 2017. The Beta that we use is generated by a regression of
the 5-year historical daily return of the S&P 500 and USPH stock price,
for which we get a Beta of 0.69. The cost of equity is derived from the
CAPM model and the cost of debt is derived from USPH’s current long
term debt structure. Using the 5-year historical long term debt structure
we generate a cost of debt of 21.08%. The effective tax rate for USPH is
30.46%. The capital structure is laid out as 78.5% of equity and 21.5% of
debt using the market value of each. Overall, we can estimate the WACC
to be 8.44%.
• Revenue Growth: USPH has a good history of growth, and the
current long term growth trend is at 12.50% with a Sustained Growth
Rate(SGR) of 12.37%. Utilizing such a large growth rate however will not
be sustainable. At some point there will come a market saturation point,
which could be 2 years from now or 10. The annual growth rate will be
declining based on our calculations to the terminal rate of 12.37%.
Dividend Discount Model
USPH pays dividends regularly, with an occasional year-end special
dividend. Dividend per share has increased from $0.40 in 2013 to $0.68 in
2016. The average dividend yield for the past 5 years has been 1.42%.
Residual Income Model
Residual income is the difference between projected comprehensive
income available to common and required earnings. Required earnings is
calculated as the equity cost of capital times the beginning of the year
book value of common shareholders’ equity. The Residual Income Model
uses the cost of equity as the discounting factor, rather than the Weighted
Average Cost of Capital (WACC). The cost of equity was estimated based
on the Capital Asset Pricing Model (CAPM) as seen above.
Relative Multiples Valuation
We used a myriad of multiples to calculate our target price of $66.07,
which helps to bolster our HOLD recommendation. We used as a guide,
but not limited to, Price/Earning, Price/Free Cash Flow, Price/Sales,
Price/Book, EV/EBIT, EV/EBITDA, and EV/Sales. The price that we
generated is a 7.52% reduction of the current price.
There are no comparable companies with which to compare to USPH.
The top competitors are Private Equity backed and thus have no public
information available. As well, trading comps are useless in this type of
comparison as the market is so highly fragmented as to be untenable for
any sort of accurate comparison. In the future, USPH will be competing
with the top two in the market for saturation of acquisition targets in the
market. This will create value for the acquisition target but will lower the
profitability index from acquisition activities. The major driving factor for
Figure 19: WACC Figures
Figure 20: WACC Analysis
Source: FactSet, Team
Figure 21: Executive Compensation
Source: Morningstar
Source: FactSet, Team
WACC Analysis
Total Debt 59.43
Total Equity 217.04
CAPM 1.14%
Tax Rate 30.46%
Risk Free Rate 2.48%
Cost of Equity 3.62%
Cost of Debt 21.08%
WACC (%) 8.44%

10. revenue growth is acquisition activities. U.S. Physical Therapy only exists
in outpatient clinics, and an increase to the number of outpatient clinics
due to a shift away from hospitals will allow organic growth for physical
therapy.
Investment Risks____________________________________
Regulatory Risk
Audit Risk(RR1)
The practice of physical therapy is subject to a huge amount of regulation
that the practitioners need to adhere to and for USPH, it’s no different.
Tight scrutiny and frequent audits occur, which if they result in an adverse
finding, could very badly affect revenue and reputation and recovery from
which maybe hard or even impossible.
Lawsuits(RR2)
USPH Has so far been lucky in that there have not been any major
lawsuits that have been filed against them. The largest potential downside
here is if an audit uncovers any collusion with insurance companies or
Medicare/Medicaid fraud. This is not to say that this is going on at USPH,
and there are no indicators of it, but as with all ongoing operations in the
medical industry, there is always the potential for it, and it must be
considered as a risk, albeit a low one at the moment.
Market Risk
Population Needs (MR1)
As the ageing population requires more and more medical care, there is
the possibility that a wave of common sense could overtake the
population and a new health craze could cause the company to lose some
of its market share. As well, the constant advent of new herbal and New
Age/ Holistic remedies for physical ailments could cause a reduction in
the available market for consumers. While this is not likely, since the base
is the population as a whole, it must at least be noted.
Competition (MR2)
In this highly fragmented market, there is a constant risk of competition.
Currently, USPH is ranked 3rd
in its industry for number of clinics, with
their largest competitor having almost 3 times the number of clinics. As
the ability to create new clinics in the de novo style (new from the ground
up) is greatly decreasing due to the saturation of the market, there will
only be avenues available through growth by Mergers and Acquisitions.
As the competitive landscape grows, and the major players have deeper
pockets, the ability to acquire the existing clinics and add to their existing
portfolio will diminish, and those that are available will become more
expensive through simple supply and demand.
Source: Team – Utilizing a
Monte Carlo Simulation
Source: WS Journal
Figure 23: Current Analyst Ratings
Figure 24: OT Expenditures
Source: seekingalpha.com
Figure 22: Predicted Stock Price

11. Source: USPH 10-K
Economic Risk
Payor Risk (ER1)
There are many different avenues of revenue for USPH, however, from the above exhibit, it is visible
that Medicare/Medicaid and commercial health insurance together account for 52.8%. Given the current
political scenario where tightening state budgets are leading various states to cut down on the
Medicare/Medicaid budget and commercial health insurance premiums are going higher, this is leading
to a lot of people being uninsured. Any drastic adverse impact to these 2 elements can create a huge
negative impact on the revenues
Operational Risk
Salaries/Therapists (OR1)
As has been mentioned, the current landscape of the physical therapy sector is highly fragmented. The
need for talented and reliable help can lead to salary disputes and disparity which can cause existing
employees to migrate to a competitors operation that is willing or able to pay more.
Political Risk
Reduction of Benefits (PR1)
The current political climate, especially as it relates to healthcare, is a minefield of unknowns. The
potential for a large reduction in the number of insured persons, and the potential for a reduction of the
amount that federally funded programs, such as Medicare, are allowed to pay for specific procedures, or
the number of visits covered can greatly affect USPH’s bottom line. As of February 2017, no one can
predict exactly how the current political administration will ultimately affect this particular industry but
if even half of the promises that have been made along the way are brought to fruition, it will be a bad
hit for revenues for USPH.
Table 1: Risk Matrix
Catastrophic
(5)
Major
(4)
Moderate
(3)
Minor
(2)
Insignificant
(1)
Almost Certain
(5)
Likely
(4)
ER1
Possible
(3)
PR1 OR1, MR2 RR1
Unlikely
(2)
RR2
Rare
(1)
MR1
IMPACT
LIKELIHOOD
RISK MATRIX

12. APPENDIX A
APPENDIX B
U.S. Physical Therapy Acquires 12-Clinic Group
Published on December 1, 2016
U.S. Physical Therapy (USPH) announces it has completed the acquisition of a 12-clinic group of
physical therapy providers.
A news release from USPH notes that the acquisition of the practice group, which sees more than
90,000 patients per year and generates more than $10 million in annual revenue, gives USPH a 60%
interest, with 40% interest remaining with the owners of the provider group. The group’s purchase price
was $11.5 million.
“We are extremely pleased to complete this transaction with a very talented and capable group of
partners. This practice has been recognized as National Physical Therapy Practice of the Year, similar to
several other award winning practices which have elected in recent years to join our large and growing
family of partnerships,” says Chris Reading, U.S. Physical Therapy CEO, in the release.
We look forward to continuing our growth by attracting high quality owner-operators who want to
maintain their identity and retain a significant ownership interest in their business, further supported by
a very capable team dedicated to helping them grow and scale their brand and culture within the local
communities they serve,” he adds.
USPH operates 540 outpatient physical therapy clinics in 42 states. In addition, it manages 21 physical
therapy facilities for unaffiliated third parties, including hospitals and physician groups.
[Source(s): U.S. Physical Therapy, Business Wire]
APPENDIX C
Top Management Team
Name Position Age Insider Holdings (%) Salary Total Comp.
David S. Chernow President & Chief Executive Officer 59 0.60% $740,000 $4,485,266
Martin F. Jackson Chief Financial Officer & Executive Vice President 62 1.35% $600,000 $3,109,436
Robert G. Breighner, Jr. Vice President-Compliance & Audit Services 48 0.02% - -
John A. Saich Chief Human Resources Officer & Executive VP 48 0.25% - -
Michael E. Tarvin, CPA Secretary, Executive VP & General Counsel 56 0.25% - -
Scott A. Romberger, CPA Chief Accounting Officer, Senior VP & Controller 56 0.13% - -
Joel T. Veit Treasurer & Senior Vice President -- --
Scott Nordlund, MBA EVP-Partnership Growth & Innovation -- --
Robert H. Brehm President-Inpatient Rehabilitation Hospital -- --

13. APPENDIX D
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
WACC 9.99% 8.26% 11.56% 10.52% 10.33% 8.44% 8.09% 7.81% 7.19% 6.73% 6.02%
Total Debt 41.672 37.055 69.014 69.961 77.96 59.43 64.01 68.30 67.89 69.07 67.25
Total Equity 121.58 134.659 151.017 167.214 193.11 217.04 255.35 292.63 340.44 395.69 477.43
CAPM 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.02 0.02
Cost of Debt 0.36 0.35 0.35 0.34 0.34 0.35 0.35 0.35 0.36 0.36 0.36
Tax Rate 27.15% 29.62% 32.00% 31.93% 31.62% 30.46% 31.13% 31.43% 31.31% 31.19% 31.10%
Risk Free Rate 1.87% 1.70% 3.00% 2.25% 2.30% 2.48% 3.02% 3.37% 3.75% 4.14% 4.54%
52 Week Range $45.62 - 73.05
Avg Daily Vol (3 Mo) 81,913
Market Value (M) 885.9
Ent Value (M) 960.7
Shares Out (000) 12,522.00
Dividend Yield 0.947%
Float 96.00%
Institutional 98.42%
Top 10 Inst Hldrs 51.10%
Analyst Coverage 6
Target Price $66.07
LT Growth Rate 12.50%
Avg Rating Hold (1.83)
Market Statisitics
Financial Leverage 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Long Term Debt to Equ 20.85% 15.41% 30.36% 26.59% 30.53% 18.00% 16.37% 15.73% 13.53% 11.72% 9.19%
Financial Leverage 34.28% 27.52% 45.70% 41.84% 40.37% 27.38% 25.07% 23.34% 19.94% 17.45% 14.09%
Operating Leverage -0.55 2.84 0.16 1.16 0.39 0.73 1.03 0.76 0.83 0.70 0.78
Interest Coverage 63.36 68.95 72.06 42.07 45.87 34.24 28.95 23.33 18.04 15.00 11.95
DuPont Analysis
Profit Margin 0.091 0.072 0.048 0.068 0.067 0.065 0.065 0.063 0.060 0.057 0.054
Asset Turnover 1.418 1.454 1.178 1.247 1.184 1.312 1.243 1.207 1.180 1.135 1.063
Equity Muliplier 1.343 1.275 1.484 1.463 1.450 1.274 1.251 1.233 1.199 1.175 1.141
DuPont Calculation for 17.25% 13.32% 8.42% 12.47% 11.54% 10.80% 10.14% 9.32% 8.54% 7.65% 6.55%
Fundamental Highlights 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Net Revenues 231.523 249.651 264.058 305.074 331.302 362.6673303 396.901857 435.6458353 481.6489498 527.7192051 579.21764
Operating Margin 13.57% 15.38% 14.68% 15.00% 14.28% 13.94% 12.05% 11.35% 10.64% 9.69% 8.70%
Return on Assets 12.85% 10.71% 6.43% 8.90% 8.50% 8.42% 6.13% 5.03% 4.02% 2.79% 1.42%
Return on Equity 17.25% 13.32% 8.42% 12.47% 11.54% 10.80% 7.15% 5.85% 4.54% 3.08% 1.50%
Profit Margin 9.06% 7.18% 4.82% 6.84% 6.72% 6.46% 4.60% 3.93% 3.21% 2.31% 1.24%
Return on Invested Capital 16.03% 13.29% 7.53% 11.52% 10.55% 11.00% 7.78% 6.56% 5.44% 3.92% 2.12%
Weighted Average Cost of Capital 9.99% 8.26% 11.56% 10.52% 10.33% 8.44% 8.09% 7.81% 7.19% 6.73% 6.02%
Financial Liquidty 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Current Ratio 2.80 2.78 2.14 2.15 3.17 3.20 3.24 3.55 3.98 4.21 4.50
Quick Ratio 2.80 2.78 2.14 2.15 3.17 3.20 3.24 3.55 3.98 4.21 4.50
Cash Ratio 0.61 0.72 0.56 0.56 0.83 0.87 0.88 0.98 1.11 1.19 1.28
Profitability
Return on Assets 12.85% 10.71% 6.43% 8.90% 8.50% 8.42% 6.13% 5.03% 4.02% 2.79% 1.42%
Return on Equity 17.25% 13.32% 8.42% 12.47% 11.54% 10.80% 7.15% 5.85% 4.54% 3.08% 1.50%
Net Revenues 231.52 249.65 264.06 305.07 331.30 362.67 396.90 435.65 481.65 527.72 579.22
Operating Margin 13.57% 15.38% 14.68% 15.00% 14.28% 13.94% 13.98% 13.69% 13.47% 13.12% 12.86%

14. APPENDIX E
Balance Sheet - As Reported 31 Dec '15 (Ann) 31 Dec '16 (Ann) 31 Dec '17E (Ann) 31 Dec '18E (Ann) 31 Dec '19E (Ann) 31 Dec '20E (Ann) 31 Dec '21E (Ann)
USD USD
10-K 10-K
Total assets 279.91 276.47 319.36 360.94 408.34 464.75 544.68
Total current assets 60.18 65.14 71.86 79.08 86.96 95.46 105.17
Cash and cash equivalents 15.78 17.70 19.64 21.81 24.25 27.01 30.02
Patient accounts receivable, less allowance for doubtful accounts 36.23 38.70 42.79 46.46 50.65 55.08 60.16
Accounts receivable - other, less allowance for doubtful accounts 2.39 2.71 3.13 3.68 4.65 5.49 6.56
Other current assets 5.79 6.03 6.30 7.13 7.41 7.88 8.43
Fixed assets, net 16.65 19.95 22.52 26.08 30.17 35.14 40.25
Fixed assets 69.91 74.08 79.05 84.40 90.17 96.10 102.56
Furniture and equipment 44.75 47.56 50.87 54.38 58.01 61.89 66.11
Leasehold improvements 25.16 26.53 28.18 30.02 32.17 34.20 36.45
Accumulated depreciation and amortization -53.26 -54.13 -56.53 -58.32 -60.00 -60.96 -62.31
Goodwill 171.55 149.40 167.89 175.52 184.29 188.44 199.83
Other identifiable intangible assets, net 30.30 40.85 55.93 79.07 105.70 144.50 198.20
Other assets 1.23 1.14 1.16 1.19 1.21 1.21 1.22
Total liabilities and shareholders' equity 279.91 276.47 319.36 360.94 408.34 464.75 544.68
Total liabilities 77.96 59.43 64.01 68.30 67.89 69.07 67.25
Total current liabilities 19.01 20.36 22.20 22.27 21.83 22.68 23.38
Accounts payable - trade 1.64 1.60 1.57 1.53 1.47 1.44 1.40
Accrued expenses 16.60 17.83 19.48 19.48 18.96 19.63 20.12
Current portion of notes payable 0.78 0.93 1.15 1.26 1.39 1.61 1.86
Notes payable 4.34 1.14 1.31 1.53 1.71 2.00 1.54
Revolving line of credit 44.00 31.88 33.56 36.79 36.14 36.47 34.97
Deferred rent 1.40 1.04 1.06 1.10 1.12 1.14 1.09
Deferred taxes and other long-term liabilities 9.22 5.01 5.89 6.61 7.09 6.76 6.27
Deferred taxes --
Other long-term liabilities --
Redeemable non-controlling interests 8.84
Total equity 193.11 217.04 255.35 292.63 340.44 395.69 477.43
Total U. S. Physical Therapy, Inc. shareholders’ equity 162.79 180.10 199.72 222.35 246.26 272.44 301.49
Preferred stock 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Common stock 0.15 0.15 0.15 0.15 0.15 0.15 0.16
Additional paid-in capital 45.25 47.88 50.90 53.88 56.82 60.14 63.67
Retained earnings 149.02 163.70 180.29 199.95 220.92 243.77 269.29
Treasury stock at cost -31.63 -31.63 -31.63 -31.63 -31.63 -31.63 -31.63
Non-controlling interests 30.33 36.95 45.25 54.45 69.36 85.31 105.19
Income Statement - As Reported 31 Dec '15 (Ann) 31 Dec '16 (Ann) 31 Dec '17E (Ann) 31 Dec '18E (Ann) 31 Dec '19E (Ann) 31 Dec '20E (Ann) 31 Dec '21E (Ann)
USD USD
10-K 10-K
Net revenues 331.3020 362.67 396.90 435.65 481.65 527.72 579.22
Total clinic operating costs -252.9410 -279.02 -306.20 -338.12 -375.86 -415.05 -458.26
Gross margin 78.3610 83.65 90.70 97.52 105.79 112.67 120.95
Corporate office costs -31.0670 -33.09 -35.21 -37.90 -40.93 -43.45 -46.47
Operating income 47.2940 50.55 55.49 59.62 64.86 69.22 74.49
Interest and other income, net 0.0810 0.10 0.02 0.04 0.04 0.04 0.06
Interest expense -1.0310 -1.48 -1.92 -2.56 -3.59 -4.61 -6.23
Income before taxes including non-controlling interests 46.3440 49.17 53.59 57.10 61.31 64.65 68.32
Provision for income taxes -14.6530 -16.23 -18.01 -19.81 -21.84 -23.78 -26.20
Net income from continuing operations including non-controlling interests 31.6910 32.95 35.59 37.29 39.47 40.87 42.11
Discontinued operations, net of tax benefit 0.0000 0.00 0.00 0.00 0.00 0.00 0.00
Net income including non-controlling interests 31.6910 32.95 35.59 37.29 39.47 40.87 42.11
Net income attributable to non-controlling interests -9.4120 -9.51 -9.68 -10.01 -10.41 -10.59 -10.84
Net income attributable to common shareholders 22.2790 23.44 25.90 27.29 29.06 30.28 31.27
Clinic Costs 2015 2016 2017E 2018E 2019E 2020E 2021E
Total clinic operating costs -252.94 -279.02 -306.20 -338.12 -375.86 -415.05 -458.26
Salaries and related costs -180.51 -199.10 -218.68 -242.11 -269.48 -297.84 -329.21
Rent, clinic supplies, contract labor and other -68.05 -75.38 -82.89 -91.71 -102.40 -113.50 -125.73
Provision for doubtful accounts -4.17 -4.42 -4.60 -4.56 -4.60 -4.71 -4.83
Closure costs -0.21 -0.30 -0.48 -0.59 -0.73 -0.98 -1.34
Salaries and related costs % 0.71 0.71 0.71 0.72 0.72 0.72 0.72
Rent, clinic supplies, contract labor and other % 0.27 0.27 0.27 0.27 0.27 0.27 0.27
Provision for doubtful accounts % 0.02 0.02 0.02 0.01 0.01 0.01 0.01
Closure costs % 0.00 0.00 0.00 0.00 0.00 0.00 0.00
∑ω 1.00 1.00 1.00 1.00 1.00 1.00 1.01

15. Excess Return Matrix (XT
X)
S&P500 USPH
S&P500 0.810965255 0.565807818
USPH 0.565807818 5.88160952
Var-Cov Matrix
S&P500 USPH
S&P500 0.000130717 9.12005E-05
USPH 9.12005E-05 0.000948035
Std. Dev.
S&P500 0.011433132
USPH 0.030790178
Std. Dev. Matrix SST
S&P500 USPH
S&P500 0.000130717 0.000352028
USPH 0.000352028 0.000948035
Correlation Matrix
S&P500 USPH
S&P500 1 0.259071552
USPH 0.259071552 1
Beta (Raw)
USPH 0.697696744
Sales DEC '15 DEC '14 DEC '13 DEC '12 DEC '11 DEC '10 DEC '09 DEC '08 DEC '07 DEC '06
365 Days 365 Days 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days 365 Days
Total 331 305 264 252 237 211 201 188 152 135
Outpatient Physical Therapy Clinics 331 305 264 252 237 211 201 188 152 135
Percent of Total (%)
DEC '15 DEC '14 DEC '13 DEC '12 DEC '11 DEC '10 DEC '09 DEC '08 DEC '07 DEC '06
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Outpatient Physical Therapy Clinics 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Growth (%)
DEC '15 DEC '14 DEC '13 DEC '12 DEC '11 DEC '10 DEC '09 DEC '08 DEC '07 DEC '06
Total 8.6 15.5 4.7 6.4 12.2 4.9 7.3 23.7 12.2 2.3
Outpatient Physical Therapy Clinics 8.6 15.5 4.7 6.4 12.2 4.9 7.3 23.7 12.2 2.3

16. Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information
is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment
advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by
any individual affiliated with CFA Societies of Texas, Louisiana, New Mexico, and Oklahoma, CFA Institute or the CFA Institute Research Challenge
with regard to this company’s stock.
CFA Institute Research Challenge