Post on 07-Apr-2017
CFA Institute Research Challenge
Hosted by CFA Societies Texas, Louisiana and Oklahoma
Local Challenge Southwest U.S.
University of Texas at Dallas
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
1 | P a g e
University of Texas at Dallas – Student Research Medical Care Industry, Healthcare Sector
New York Stock Exchange
U.S. Physical Therapy, Inc.
Date: 2/8/17 Current Price: $71.45 Recommendation: Sell Ticker - NYSE: USPH Headquarter: Houston, TX Target Price: $58.24
Highlights
We issue a sell recommendation on a price of $58.97: USPH is doing very well
financially, but the market has overvalued its growth. We see its current price as a reflection of
market sentiment rather than its fundamental valuation. Our DCF, DDM, comparable,
transactional and Monte Carlo simulation methods (Figure 1&3, Appendix 4) all project a price
range between $28 to $63 per share. We project that total clinic growth will continue to increase
at a linear rate through de novo clinics and acquisitions, with a heavier emphasis on acquisition
through 2017-2018.
Conservative growth and financing strategy is successful so far: Revenue has grown a
compounded annual rate of 9.1% since 2011. Dividend payout has doubled in the same time
frame even though net profit margin has decreased from 9.2% to 6.4%. This growth has been
financed mostly by the company’s own cash and the use of a revolving credit line. The interest
expense over the last 6 years is less than $5 million total. The total clinic number has nearly
doubled from 10 years ago.
Strong liquidity, solvency and operating ratios: Strong cash position every year results
in solid liquidity ratios, current ratio is 2.7 and cash ratio is 0.65. A revolving credit line is used
to give easy access to over $100 million in funds at minimal cost. Solvency and coverage ratios
are substantial at 53.8 EBITDA coverage and 0.39 L/E ratio. Accounts receivable is at a
comparable rate to the industry and its peers, and Account payable is less than $3 million every
year.
Recent News
USPH Breaks into New 52-Week High – 1/5/17: A new 52-week high was reached by
USPH at a peak per share price of $73.05. Shares closed for the day at $72.55 for a market cap
of $908.47 million and an intra-day move of 0.07%; the volume for the day was 59,562.
USPH Buys Majority Interest in 17 Clinics – 1/4/17: A 70% stake in a yet unnamed clinic
group was acquired for $11.4 million. The clinics generate $11 million in annual revenues with
just over 100,000 patient visits. They purchased 17 and 8 are under management.
USPH Announces 12 Clinic Group Acquisition – 12/1/16: Chris Reading, USPH CEO,
said they 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.” 60% interest was acquired by USPH for a purchase
price of $11.5 million. The clinic group generates more than $10 million in revenue per year and
sees 90,000 plus patients visits per year.
Market Data
Closing Price $71.45 52-Week Range $45.76 - $73.05 Average Daily Volume 53,545 Market Capitalization 899.17M Price/Earnings Ratio 36.89x Dividend yield 0.95 Earnings per Share $1.94 Share outstanding 12.52M Beta 0.99
Source: S&P Capital IQ, Yahoo finance, Team Calculation
Valuation date: December 31, 2016
$71.45
$0
$10
$20
$30
$40
$50
$60
$70
$80
Source: Yahoo finance
Figure 2: Historical USPH Stock Price
Figure 3:
Source: Team Calculation
Figure 1: Summary of Market, Valuation,
and Financial Data
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
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Business Description U.S. Physical Therapy, Inc. was founded in 1990 and is the largest publicly-traded, pure-play
operator of outpatient physical and occupational therapy clinics in the United States. Operating
over 500 outpatient clinics in 42 states, they specialize in pre and post-operative care for
orthopedic-related disorders, sports-related injuries, preventative care, injured worker
rehabilitation and other physical injuries. Their operative model for the clinics is a 1% general
partnership ownership, along with 49% to 94% stake as a limited partner. They partner with
licensed physical therapists who own the minority share of the clinics and manage their
location(s).
The primary sources of revenue for USPH are patient revenues via care and insurance plans. No
payor currently contributes more than 30% of overall revenue (Figure 4). Commercial Health
Insurance leads revenue streams for USPH at 28%. Managed care (Private) is 23% and is
combined with Other (6%) to provide a better comparison to the industry. Medicare/Medicaid
and Workers’ comp round out the rest of the payor group.
Company Strategy
USPH’s growth and success are built upon their business model and competitive strategy. They
seek physical therapists to partner with and build clinics that are operated, and partly owned, by
physicians. This method of growth is what they call ‘de novo’ clinic development. The location
is usually in the local area of the therapist in order to leverage the relationships and reputation of
the minority partner. These arrangements typically involve up to a 5-year employment agreement,
a non-compete addendum, and an increasing limited interest. The limited partner usually begins
with a 20% interest that increases 3% annually to a maximum of 35%. USPH has the right, but
not the obligation, to buy the non-controlling interest at the end of the period. This buyout is
usually at a predetermined EBIT multiple.
Each clinic has a local independent identity, and they are assisted by the various corporate support
services provided by USPH including marketing, national purchasing, negotiated third-party
payor contracts, site selection, construction, accounting and billing systems, training, and various
other business functions.
Acquisitions play an important role in the strategy of USPH. During the past 5 years, from
2011to 2015, USPH has bought 120 clinics (Figure 5). The de novo clinics typically lose money
for about a year before they become profitable, and so they are usually an early-stage drag on
earnings. By growing via acquisitions, USPH can quickly add profitable business in new
geographic areas. They do not follow a set M&A plan; but rather, they seek to find strong
business, with good partners and physical therapists, and then buy the clinics.
This conservative approach to growth is consistent throughout their business model (Figure 6).
They maintain manageable debt, low accounts payable, moderate growth, adequate cash on hand
and pay a reasonable dividend to their investors. We recognize this steady approach to their
business throughout our analysis.
Industry Overview and Competitive Positioning Physical therapy is a $30 billion plus industry. It is poised for continued growth in the next several
years due to several macroeconomic and demographic trends (Figure 7). The industry is highly
fragmented, with about 45% of the industry comprised of small independently owned clinics.
The largest 50 companies in the sector comprise less than 25% of the total market, and no single
participant captures more than a 5% market share1.
Growth and Demand-Side Drivers
Healthcare disbursements are expected to climb to over $5.6 trillion by 2025 (Figure 8). This
increase is due to an expanding patient population from an increase in the mean population age,
employment growth, and consumer emphasis on healthy lifestyles and activities. Changes in the
healthcare industry are driving increased numbers of patients to use physical therapy services.
Earlier patient discharges, surgery alternatives, and an emphasis on preventative care are all
focuses of the healthcare industry to reduce costs. Physical therapy’s clinical effectiveness
provides a solution to the rising costs of healthcare.
1
Year Total Price
Clinics & MI
2011 $29.9 20
2012 $10.2 14
2013 $48.5 45
2014 $17.8 20
2015 $26.0 21
2016 $26.2
24
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Projection
Historical
$29,528 $31,926
Source: Company 10-K, IBIS World
44%
37%
11%
8%
Medicare/
Medicaid
24%
Commercial
Health
28%
Private &
Other
29%
Worker's
Comp
19%
Figure 4: Revenue Source, Payor Mix
USPH – Outer Ring
Physical Therapy Industry – Inner Ring
Figure 6: Total Acquisition Costs & #
of Clinics Acquired
Figure 7: PT Industry Revenue (mil)
273
311
19
197
0
50
100
150
200
250
300
350
# o
f C
lin
ics
Developed
Acquired
Figure 6: Clinic Count
Source: Company 10-Ks, team estimates
Source: IBIS World
$1,370$2,024
$2,596$3,206
$4,249
$5,633
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Source: cms.gov
Source: Company 10-Ks, team estimates
Figure 8: National Healthcare
Expenditures ($B)
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
3 | P a g e
Increasing employment, especially in manufacturing, drives several factors that will increase the
need for physical therapists. Higher wages due to greater employment, result in more disposable
income, which increases the likelihood of using physical therapy and purchasing private
insurance plans that cover a greater range of physical therapy services. Higher employment will
also increase the number of workers’ injury claims.
An Aging Population The physical therapy industry is in the growth stage of its life cycle and is expected to continue
to grow at a rate of 1.3% over the next 5 years (Figure 9). This growth is partially driven by an
aging American population. As the US population ages, demand for physical therapists will
increase with more incidences of heart attacks, strokes, and other injuries that disproportionately
affect the health mobility of the elderly. The median age of the US population is expected to jump
from 37.8 to 38.5 by 2022; and the total population over age 65 is projected to increase 22% from
46 million to 56 million by 2020.
Growing awareness of physical rehabilitation benefits Physical therapy can be an alternative non-invasive solution for patients to avoid a costly,
invasive surgery, by providing preventative care which stops problems before they become
serious. To continue to manage reimbursement rates from Medicare, healthcare providers will
increasingly have to rely on preventive services and post-acute care such as physical therapy to
reduce readmission rates. Businesses and employers frequently look for cost savings in healthcare
services they provide to their employees. Physical therapy can be a cost-effective solution for
short-term disabilities and may eliminate the need for surgery in the future.
Supply-Side Drivers
The increasing demands of the healthcare industry drive insurance providers and hospitals to
decrease their costs by accessing the large market of physical therapists. Wages have been
increasing and clinics have started hiring assistants to ease their patient burden and reduce their
own cost. USPH has seen wages, as a percent of revenue, grow at their clinics by more than 1%
since 2011. In the industry, based on an estimated attrition rate of 3.5%, by 2025 there is projected
to be a shortage of physical therapists of approximately 18,350 workers (Figure 10), complicated
by the rapidly aging population and expanding healthcare coverage.
Most physical therapy practices are located in high population density areas. As the population
continues to age, the locations of retiring baby boomers will become an increasingly important
subject.
Barriers to Entry Physical Therapists face intense competition due to the relatively low barriers to entry. A physical
therapist can open a clinic and begin to achieve profitability within 6-12 months.
Regulation Healthcare service providers are heavily regulated and this trend is expected to continue into the
foreseeable future (Figure 11). Legislation and the possible repeal of the affordable care act are
the biggest challenges facing the healthcare industry. There is legislative uncertainty following
the election of President Trump, and the industry changes his administration and the republican
congress may implement. Physical therapy services are regulated and require operational
licenses, certifications, and have strenuous guidelines regarding billing, coding, and reporting.
Porter’s 5 Forces Analysis Rivalry – Low
Industry rivalry is considered low due to a highly fragmented market, wide geographical
distribution, and easy access to local physical therapists. Most of the business at physical therapy
clinics is brought in via referrals and word of mouth. Competition and referral of clients is often
determined by the contractual referral agreement between the clinic and the local facilities.
Bargaining Power of Suppliers – High
Almost all of the industry’s revenues come from the third-party payors, who hold the power to
negotiate payout rates with the clinics. These payors are increasingly pressured to lower costs
and subsequently pressure their providers to do the same. The payers set the reimbursement rates,
and providers either accept these price levels or risk losing their business. Due to the economy of
scale, these payors maintain a negotiable advantage from the large number of people subscribed
to their plans.
Bargaining Power of Customers – Moderate
1965 Medicare/Medicaid
1974 ERISA
1985 COBRA
1997 The Balanced Budget Act of
1997
2000 BIPA
2003 MMA
2010 PPACA
2015 MACRA
Source: census.gov
0%
5%
10%
15%
20%
25%Historical Projected
Figure 9: Age 65+ Percentage of
Total Population
175
195
215
235
255
275
Lic
ense
d P
T's
3.5% Attrition Rate - Shortage of 18.35 (k)
Supply of FTE's Demand
Source: apta.org
Figure 10: Licensed Physical Therapist
Supply & Demand
Figure 12: Porter’s 5 Forces
Source: Team estimates
1
5
2.52
4.5012345Rivalry
Suppliers'
Power
Customers'
Power
Substitution
Threat
New Entrants
Figure 11: Major Healthcare Reform
Source: en.wikipedia.org
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
4 | P a g e
There are many local clinics to choose from for customers to receive treatment. Although
customers may be limited to businesses that accept their insurance, they still have reasonable
bargaining power. Customers can also negotiate prices or payment plans on their own with
clinics. Healthcare providers know that allowing a bill to go unpaid will substantially lessen their
ability to be reimbursed, and will often accept a lower fee instead.
Threat of Substitutes- Moderate
The customers of physical therapy clinics have several options available when it comes to solving
healthcare issues. Physical therapy is a cheaper and less invasive solution than surgery, so it is
often suggested first by doctors as a means to lower costs. Patients may also choose medication
as an alternative to both physical therapy and surgery. Threat of new entrants – High
There are approximately 27,700 physical therapy centers in the US, as estimated by IBIS World,
so there are not significant barriers to enter the market. The healthcare industry is complex, but
the fragmentation of the market shows that this is not a substantial hurdle.
Investment Summary Outlook and Assumption Rationale
USPH is pursuing a two dimensional strategy to grow the company. They generated an immediate
growth to their top-line by engaging in acquisitions, and they add organic growth through the
development of the de novo clinics. As USPH acquires new clinics, its revenue grows leading to
a boost in net income and a larger line of credit (Figure 14). In 2018, they will have to renew
their credit facility and will likely be forced into a higher interest rate obligation due to increasing
rates. For this reason, we anticipate a more aggressive growth in the acquisitions and a slower
growth rate for de novo clinics in 2017 and 2018. After they renew of their revolving credit
facility, they will continue their growth cycle as shown in (Figure 15).
Resilient Earnings and Growth
Despite a tumultuous last 10 years in the economy and market, USPH has continued to grow,
expand and profit. An earnings analysis of our comparable group shows how much even the big
players in the healthcare space struggle (Figure 16). Net patient revenue has climbed every year
since 2006, and does not show noticeable volatility from market shocks or regulatory policy.
Conservative management and smart strategy are the reasons for this resiliency. Because of this,
we do not foresee any upcoming regulatory or market moving impacts to materially impact
USPH’s ability to grow and generate positive earnings or dividends. The only impact these will
have is on risk.
Management’s Consistent and Conservative Approach While market risk and the healthcare industry might change, management has proven their ability
to persist, profit and expand regularly and through M&A. The acquisition strategy is clear from
the geographic distribution of USPH’s clinics and the price they consistently pay. They look to
make additions to the clinic group, but only if the price and local physical therapy team is right
(Figure 17). There are numerous statements in the 10-K and earnings calls about finding qualified
physical therapists to work with them. The recent acquisition in December 2016 was an award-
winning clinic group, and the press release claims several accomplished clinics have joined
USPH as well. They also look to build relationships with physical therapists in areas where they
Source: 10-Ks and team estimates
0.4m
0.6m
1.1m
0.6m
1.0m 1.0m
0.0m
0.2m
0.4m
0.6m
0.8m
1.0m
1.2m
2011 2012 2013 2014 2015 2016
Cost per clinic acq Average
Figure 17: Cost per Acquired Clinic
Figure 14: Investment Thesis:
Growth Cycle
Source: Team estimates
Source: Company filings, Team Research
14%
9%
6%
4% 4% 4%5%
7% 7%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2013 2014 2015
NI Margins
Tenent Healthcare Kindred Heathcare
Healthsouth Select Medical
USPH
Source: Capital IQ and Company filings
Figure 16: Comparable Company
Profit Margins (NI)
Figure 15: USPH Share Price, Amendment to Credit Agreement & Major Acquisition Events
_
Figure 13: SWOT Analysis
Source: Team research
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
5 | P a g e
can establish de novo clinics. While they have done an average job historically at building de
novo clinics, they need to improve this process to drive further growth. Relationships in the
medical industry are very important, as most clients are referrals. Thus, building a network and a
reputation is very important. This is also why management has chosen to record referral
relationships in their balance sheet and amortize them. This also helps them write-off portions of
acquisitions since goodwill, usually the account which absorbs most of the cost of the acquisition,
cannot be amortized and has inflated their balance sheet.
Possible Investment Risks
Overall, risks for USPH are relatively low. They are sound financially, have a good management
team, and operate in an industry poised for continued growth. There are no impending risks that
would materially change our outlook on USPH’s strategy, but there are several micro and
macroeconomic factors that should be taken into consideration. These are detailed in the
Investment Risks section of our report.
Valuation Approach and Methodology
We use a DCF model and a DDM model for our fundamental valuation analysis tools. We
estimated market multiples to arrive at a comparable valuation, and also used transaction
multiples to value the going multiples at sale.
Revenue and Growth Rate
We used the following formula to project revenue growth rates across a 5-year horizon (Figure
18).
Revenue = Net Rate per Visit * Total Patient Visits per Clinic * Total Number of Clinics
Net patient revenue (rate) per visit is projected at the historical flat rate
Total patient visits per clinic will increase slightly over the horizon period
Total clinic number: acquired clinics & developed clinics
Small changes in the net rate per visit and the number of patient visits contribute only
incrementally to annual revenue growth, but these changes capture the macroeconomic factors
such as the increasing population age and change in disposable personal income.
The most substantial driver of revenue is the growth in clinics. We found that the next years’
revenue growth had a 90% correlation with newly acquired clinics (Figure 19). We assume that
acquired clinics are they key drivers of annual revenue growth. This acquisition behavior
determines the future trend of annual revenue growth. New de novo clinics do not appear to
have significant impact on future revenue growth rates. We attempted several econometric
regressions, but were not able to derive a functional model. The only correlation that was
partially useful was that de novo clinics, once developed, contribute to revenue growth in later
years.
Based on our assumptions and investment summary, revenue growth in 2016 will decrease to
7.8%. An aggressive acquisition plan, aging population and disposable personal income will
increase revenue growth beyond 2017. After 2018, a steady revenue growth rate will result
from additional clinic acquisitions balanced with de novo clinic growth.
Cost of Goods Sold – Salaries, Rent and Operating Expenses
The gross profit margin has decreased 6% since 2014 due primarily to rising salaries, but also
because of the cost of opening de novo clinics. They contribute little to revenue and normally
lose money in the first year, due to start-up costs and wages. USPH has been inefficient in the
operation of de novo clinics. De novo clinics need 3- 5 years to contribute to revenue growth
based upon the change in the correlation translation from negative to positive in 3 years (Figure
19). This has been stated in several earnings calls, however, the data shows the analysis takes
longer than the 1 or 2 years the company claims to offset the start-up costs of a new clinic. De
novo clinics also create an immediate drag on COGS. We found a correlation of 0.81 with new
de novo clinics and COGS growth (Figure 20). We project a decreasing de novo clinic growth
and a corresponding decrease in COGS until 2018, which should improve profitability. After
2018, COGS should begin to trend upwards again with the resumption of normal de novo
growth and the associated inefficiency.
Source: Capital IQ, 10-Ks and team estimates
-2%
0%
2%
4%
ρ = 0.81
Growth Rate of COGS
Growth Rate of Developed
Figure 20: COGS & De Novo g-rates
Source: 10-Ks and team estimates
Figure 18: Drivers of Revenue Growth
Figure 19: Growth Correlation per
clinic type
Source: 10-Ks and team estimates
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
6 | P a g e
DCF Model
The DCF (Discounted Cash Flow) is our primary valuation model. The implied equity value was
estimated at $58 per share and represents an 18.82% downside from 02/03/2017’s close. The
model was limited to a five-year horizon due to the sensitivity of exogenous variables during
President Trump’s term. The base case used for the model was formulated using guidance from
historical performance, competitive positioning, industry trends, and company guidance. In
addition, the following inputs were assessed to formulate our valuation (Appendix 2).
Capital Expenditures, Acquisitions, Depreciation and Amortization
Capital expenditures (CAPEX) will be driven by the clinics’ needs for furniture, equipment and
leasehold improvement for acquisitions but especially de novo growth. Each CAPEX was
forecasted as a function of the expected total revenue due to Company’s expansion strategy which
was 1.9% in the current fiscal year (Figure 21). More cash acquisitions will happen in 2017-2018
based on our assumption cycle. Depreciation and amortization was calculated on the straight-line
method according to the Company (Appendix 1).
Weighted Average Cost of Capital (“WACC”)
The WACC was split into two tiers in the year 2018 to adjust for the new lease accounting
guidance. Since the Company leases all but one of its clinic facilities, we believe that the new
right-to-use asset and its offsetting lease liability will have an impact on the Company’s current
consolidated leverage ratios, thus affecting their loan covenants for the Credit Agreement. The
adjusted cost of debt was calculated at the weighted average effective interest rate of two debt
sources from revolving credit and notes payable. The cost of equity was calculated using CAPM
model. The risk-free rate was based on the 10-year US treasury and market consensus as of the
valuation date. Linear regressions of USPH’s stock price were run against the S&P 500 a weekly
base for three years to calculate beta. The market risk premium is based on the KPMG market
estimates (Figure 22).
The company will keep pursuing its acquisition strategy. We use the current debt capital structure
of 5% debt and 95% equity for a target capital structure of 10% debt and 90% equity which is
utilized in the second tier from 2018-2020 (Appendix 2).
Terminal Value:
For the terminal growth rate, two scenarios were utilized in valuing USPH’s long-term target
price based on our assumptions (Figure 23):
Acquisition growth scenario: USPH will be aggressively shifting their business to an
acquisition-based strategy and actively pursuing efficient de novo clinics growth. An
EV/EBITDA multiple of 10.5x was chosen as our best projected multiple in 2020 and used
to arrive at a terminal value of $ 1,022.7 million, which derives an implied highest terminal
growth rate of 4% in 2020 based on the Gordon Growth Model. (Appendix 5) Thus, the 4%
terminal growth was applied in the first scenario of terminal value calculation.
De novo growth scenario: USPH will be focusing on the de novo-based plan and
conservatively developing satellite clinic networks through investing. The de novo clinics
effect on COGS still exists, which results in a lower 3.0% terminal growth floor. We choose
the floor rate in consideration of the annualized Physical Therapy Rehabilitation Centers
industry growth of 3.0%.
Dividend Discount Method USPH was returning cash to shareholders through a stable dividends payout ratios of
approximately 33.2% for the past 3 years. Additionally, the company has been able to increase
dividend payments since 2013 at a 3-year CAGR of 25%. The sustainable growth rate is
forecasted at the historically constant payout ratio and projected ROE for 2020. The DDM
calculates an intrinsic value of $58.85, which reaffirms our Sell recommendation (Figure 24 &
Appendix 5).
Comparable Trading Valuation
In order to conduct a relative valuation, we identified four peers, as listed below (Figure 25),
who compete against U.S Physical Therapy, Inc. This multiples valuation yielded an extremely
low value for USPH, about a third of its current market value. We believe that USPH is
overvalued, but not to this extent. This demonstrates the market premium placed on USPH, which
2016-2017 2018-2020
Risk-free rate 2.47% 3.05%
Adjusted Beta 0.99 0.99
Market risk
premium
6.00% 6.50%
Cost of Equity 8.41% 9.49%
Adjusted Cost of
Debt
2.60% 3.10%
Corporate tax rate 31.60% 31.6%
Total Debt/Total
Capital
5.00% 10.0%
Total Equity/Total
Capital
95.0% 90.0%
WACC 8.10% 8.74%
Figure 21: CapEx and Depreciation
0
2.0
4.0
6.0
8.0
10.0
12.0
Depreciation Capital Expenditure
Source: Capital IQ, 10-Ks and team estimates
Figure 22 WACC Analysis
Source: Capital IQ, 10-Ks and team estimates
Figure 23: Terminal Value
Source: Capital IQ, 10-Ks and team estimates
Dividend Discount Method
Cost of Equity 9.5%
Net present value of dividend cash flow (b) $39.9
Growth Rate of Dividend 7.9%
Terminal Value 1031.3
Present value of the terminal value (c) 717.8
Enterprise Value $757.65
LESS: Net Debt (d) (e) (22.0)
Equity Value $735.6
Diluted shares: 12.5
Equity Value Per Share (e) $58.85
Source: Capital IQ, 10-Ks and team estimates
Figure 24: DDM
Dividend Payout Ratio 33.20%
Retention rate 66.80%
Proj. ROE 2020 12%
SGR 7.9%
Sustainable Growth Rate
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
7 | P a g e
is not as bullish for the rest of the physical therapy and healthcare centers industry (Appendix
3).
Comparable Transactions Valuation
Within the physical therapy rehabilitation centers industry, there are very few large transactions.
We were only able to choose one transaction, Remgro Limited’s purchase of Spire Healthcare
Group, Plc. This transaction value multiple for USPH results in a value at just under $50 per
share, which is between our valuation of the comparable multiple analysis and the DCF analysis.
This gives further support of our investment assertion that USPH is over-valued, and should receive a sell recommendation (Figure 26 & 28).
Monte Carlo Simulation In addition to our DCF valuation, we performed Mote Carlo Simulation to analyze the implied
risks from variables including long-term growth rate, WACC, and tax rate. The result shows a
mean value of $60.02 for the target price, which is near our valuation.
100,000 simulations were run and the results indicate a 67% probability to support the sell
recommendation, 27% supports a hold recommendation, and about 6% supports a buy
recommendation (Figure 29 & Appendix 15).
Price Target
Our price target of $58.24 was calculated using a weighted average from the discounted cash
flow and discounted dividend model. We attached a weight of 80% to the discounted cash flow,
as we believe it as the primary determinant of intrinsic value. A weight of 20% was applied to
the discounted dividend model. We placed no weighting on the results of comparable valuations
due to the capital structure differences, and limited number of similar-sized transaction. (Figure
30).
Risks to Your Price Target
Debt Obligation: Our models assume that the revolving credit agreement will be extended in
2018 and the company will maintain its business acquisition activities into the forecasted future.
However, the inability to pay back their obligations in full may cause a solvency crisis in extreme
situations.
Uncertainty of tax reduction and regulations: The projected effective tax rate at 31.6% was
applied in DCF model. We believe that on the one hand, a tax reduction policy would ease
company’s tax burden, boost the economy, and favor the industry. On the other hand, there is
always a concern about a debt ceiling crisis as a result of the tax reduction projections that might
ultimately have a negative effect upon Medicare and Medicaid reimbursements that would impact
the company’s revenues.
As-Of Date: Feb-03-2017
Company Name
TEV /
EBITDA
LTM
TEV /
EBITDA
NTM
TEV /
EBIT
LTM
TEV /
EBIT
NTM
P / E
NTM
PEG
Ratio
NTM
U.S. Physical Therapy, Inc. 16.2 16.5 18.9 17.69 34.09 2.41
Select Medical Holdings Corp. 9.9 8.94 14.1 12.94 16.86 1.35
HealthSouth Corporation 8.2 8.48 10.4 10.63 15.26 1.2
Tenet Healthcare Corp. 7.7 7.52 11.8 11.35 11.68 0.96
Kindred Healthcare, Inc. 7.1 4.5 10.1 10.91 17.01 2.13
Announced
Date Target Buyer Seller
Target
TEV
(USD
mm)
Size
(USD
mm)
TEV/
LTM
Revenue
TEV/
LTM EBITDA
Jun-22-2015 Spire
Healthcare
Group Plc
Remgro
Limited
Cinven Group
Ltd., Cinven
Capital
Management,
Cinven S.A.
2,064 683 2.1x 11.7
Source: Team estimates
Figure 29: Monte Carlo Simulation
Figure 25: Comparable Trading Company Valuation
Figure 26: Comparable Transaction Valuation
Valuation Est. Price Weights
Acquisition Growth
Scenario $63.00
De novo Growth
Scenario $53.18
Average of DCF Price $58.09
DDM Price 58.85 20%
Target Price $58.24
80%
Figure 30: Target price
Source: Team calculation
Figure 27: Physical therapy companies
Figure 28: Monte Carlo Simulation
Source: Team estimates
Source: Team research
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
8 | P a g e
Financial Analysis A consistent and steady business model is a hard thing to accomplish in today’s markets. USPH
has been able to stay level in their control of several aspects of their financial strength and
efficiency.
Trends
From Q4 2008 to Q3 2016, the company experienced a noticeable seasonality in their revenue
and earnings. Revenue tends to increase the most from Q1 - Q2 (Figure 31) for an average
increase of 6.3%, and Q2 has the largest average revenue over a 31 quarter reported period of
65.7 million. Revenue will typically trend upwards in the last quarter of the year as well, for an
average quarterly increase of 1.7%.
Earnings
Trending in a similar pattern to revenue, earnings are increasing overall at a healthy and
consistent compounded growth rate of 4.8% (NI before adjustments for discontinued operations).
In 2011 and 2013 however, there were abnormal returns due to discontinued operations. USPH
will close clinics when they are unprofitable, which will occasionally contribute to earnings
volatility. They incur clinic closure costs every year of about $184k, less than .015% of clinic
operating costs. These are eliminated from our analysis and recorded as restructuring expenses.
Earnings are reduced further because of the importance from USPH on partnerships and the
limited partner ownership structure (Figure 32). Non-controlling interests are typically around
30% of earnings after discontinued operations, and are about 3% of total revenue. Despite these
issues, USPH delivers positive EPS every year at an average of $1.61.
Cash Flow
Another consistency in USPH’s business model is its ability to generate a strong amount of cash.
Capital expenditures are low; they are only used to purchase inexpensive therapy equipment,
furniture and make leasehold improvements. The income they generate is more than enough to
cover operating liabilities and pay dividends. Working capital requirements are more demanding
due to the nature of the healthcare industry (Figure 33). Days receivable for USPH is 48 on
average, but has decreased 21% since 2011. Accounts receivable is responsible for about 17% to
20% of total assets, but has also been decreasing as a percentage during the last 5 years. Inventory
for the clinics is non-material, and accounts payable is less than 5 million per year. Accruals
fluctuate around $10 to $20 million per year, but will likely increase as revenue and salaries
increase in the future. Unlevered free cash flows are strong, over $20 million per year. They have
experienced positive cash flow growth during the last 5 years except for 2015 when it decreased
approximately $5 million.
Balance Sheet & Financing
USPH primarily finances itself with its own cash flow and a revolving line of credit which they
can draw for acquisitions, working capital, capital expenditures or other business needs. Several
years ago, the company used their revolving credit for facility to purchase treasury stock,
demonstrating their good relationship with their banks. Boasting a liabilities-to-total equity ratio
of less than .45 in the last 6 years and a BV D/E ratio that is less than .27 in 2016, USPH clearly
demonstrates they are capable of self-funding (in the form of retained earnings) operations.
(Figure 34).
Liquidity is another strength of the physical therapy provider. Their current ratio is at 2.6 and was
as high as 3.2 in 2015. Their quick ratio is similar due to a lack of material inventory. There is
plenty of cash liquidity to cover short term liabilities. USPH has a cash ratio at .65 and it has
been as high as .83 in 2015. The strong liquidity and balance sheet of USPH supports their credit
rating and helps to keep interest rates low. They paid less than $1.3 million in interest in 2016,
giving them a EBITDA coverage ratio of 112x.
The majority of their assets are represented by goodwill and intangible assets, with a combined
weight of more than 70% of total assets. Intangible assets are primarily tradenames, referral
relationships, and non-compete agreements. These assets are generated through acquisitions, and
are a result of the physical therapy group’s emphasis on growth through acquisition. The large
liabilities in retained earnings, minority interest and revolving debt further reflect the company’s
strategy.
Source: Capital IQ, 10-Ks and team estimates
Source: Capital IQ, 10-Ks and team estimates
61.8
65.7 65.2
61.4
-2%
0%
2%
4%
6%
8%
$58
$60
$62
$64
$66
Q1 Q2 Q3 Q4
Revenue Growth
$0
$5
$10
$15
$20
$25
$30
$35
2011 2012 2013 2014 2015 2016E
NI before Adjustments for NCI & DCO NI
$18.9m
$17.2m
$13.9m
$15.9m
$26.2m
$28.3m
$3.2m
$4.2m
$4.6m
$5.2m
$6.3m
$7.5m
$0m $10m $20m $30m
2011
2012
2013
2014
2015
2016
CapEx NWC
Source: Capital IQ, 10-Ks and team estimates
Figure 31: Quarterly Averages
Figure 32: Yearly Earnings
Figure 33: Operating Expenditures
10% 10% 7% 8%
20% 18% 21% 20%
57% 60% 58% 56%
12% 12% 14% 16%
0%
20%
40%
60%
80%
100%
2013 2014 2015 2016MINORITY INTERESTS TOTAL EQUITY
TOTAL L-T LIABILITIES TOTAL CURRENT LIABILITIES
Source: Capital IQ, 10-Ks and team estimates
Figure 34: Balance Sheet Breakout
Source: Capital IQ, 10-Ks and team estimates
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
9 | P a g e
Operating Margins
We see consistency in USPH’s business over time with regards to operations (Figure 35). They
have a gross margin range between that 24% to 25%, for all years. This margin has decreased in
the last couple of years due to salary increases which now account for almost 60% of revenue.
The EBITDA margin over the last 5 years has been consistent at 17%, but in 2016 it touched its
second lowest level since 2011. Lastly, the net margins of USPH have experienced some
fluctuation due to discontinued operations, but remain relatively stable, averaging 7% since 2011.
This margin decreased slightly in 2016, which can be contributed to several factors, such as taxes.
Investment Risks
USPH faces a number of market risks as a result of the healthcare industry. The regulatory
changes and reforms are dependent upon the political and economic climate in the US. USPH
faces some operational risks as well.
Market Risk
The healthcare industry has a vast amount of legislation, and physical therapy is no exception.
Virtually all of USPH’s revenue comes from third party payors. Any changes to reimbursement
rates, cost controls, or spending limits would have an immediate and material effect on their
business model. [MR-RB]
In addition to legislative changes or reform, there are significant reporting, confidentiality, and
certification guidelines that must be met with strict adherence. Failure to comply by USPH or its
clinics could result in serious disruption to their business from enforcement agencies. This
includes cyber-attacks, which are happening with increasing frequency to healthcare businesses.
[MR-RG]
Medicare disbursements carry additional risks since it is administered by the federal government.
Congressional bodies have developed many pieces of legislation to amend Medicare and
Medicaid. Government funds are also subject to audits that could result in retroactive reduction
of payments to the physical therapy group. These audits themselves could pose a financial burden
on the company. Delay of payments could cause USPH to shift their attention from clinic growth
to facilitating an investigation and would be costly for the company. [MR-MD]
The fragmented industry could be primed for a large platform investment company. Private
equity firms have significant untapped capital commitments from last year, and the small number
of potential investments has driven up valuations. The physical therapy market presents an
attractive investment opportunity to a patient and diligent firm. A couple of large players in the
industry could quickly create an intense field of national PT clinic operators. USPH has proven
the viability of this business model. A smart, heavily capitalized company could repeat the
process and directly compete within a few years (Appendix 13). [MR-PE]
Operational Risk
The ability of USPH to continue to attract and retain experienced physical therapists is crucial to
long-term growth. There are several clinics closed each year, so the addition of clinics through
acquisition and their own development is important to sustain growth. The attrition rate of
physical therapists is an important factor, as some estimates believe that just a 1% change could
be the difference between a surplus or shortage of therapists by 2025. Certification changes or
additional requirements of physical therapists are also factors that could negatively impact USPH.
[OP-PT]
Weather can affect financial results as well. Q1 and Q4, typically very cold quarters, are the
slowest revenue quarters for USPH. There are a lot of clinics in the northern part of the US that
shut down as a result of extreme weather conditions. [OP-WT]
Liquidity could pose a problem for USPH in adverse financial markets similar to the 2008
financial crisis. As USPH grows, they will require more leverage, and will likely continue to use
a revolving credit line. If they draw down a sizable amount and cannot roll the balance due to
systemic credit tightening, they could have considerable liquidity issues. [OP-LQ]
Economic Risk
Unemployment is a macro concern for the physical therapy industry. Employment, particularly
manufacturing, provides insurance, increased discretionary income and worker’s compensation
claims that together compose a majority of USPH’s revenue. If employment drops the impact on
revenue would be material. [EC-UN]
Source: Capital IQ, 10-Ks and team estimates
Figure 36: Risk Matrix
0%
5%
10%
15%
20%
25%
30%
Gross Profit EBITDA EBT NI
Figure 35: Operating Margins
Source: Capital IQ, 10-Ks and team estimates
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
10 | P a g e
Corporate Governance
Management team operates with relative independence from the board of directors.
Stock incentive plan in place to encourage management performance.
Seven of the ten members of the board nominated for re-election, are considered
independent.
Compliance committee and audit committees guarantees quality of operations.
Christopher J. Reading, the Chief Executive Officer, has more than 26 years’ experience in
healthcare management, and also is a physical therapist.
All certain beneficial holders are institutional investors, among which BlackRock, Inc. has
10.2% common stocks with sole voting power over 1,248,176 of the shares and sole
dispositive power over 1,275,109 of the shares. No one person’s interest in common stock
is more than five percent of the total outstanding common stock. (Figure 28).
Figure 28: Investor composition
Other - >1%
Hedge Fund Managers - 6%
Government - 1%
Family Offices & Banks -4%
BlackRock -11%
Neuberger Berman - 9%
RBC - 6%
The Vanguard Group- 5%
Renaissance
Technologies - 5%
Tradiational Investment Managers -
91%
% of Total Shares Outstanding
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
11 | P a g e
Appendix 1 Financial Statements
Income Statement for U.S. Physical Therapy, Inc.Dollars in Millions, except per share
Historical Year Ending December 31, Projected Year Ending December 31,
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Net Patient Revenue $258.3 $299.0 $324.3 $349.6 $378.5 $435.2 $470.1 $507.7
Provision for doubtful accounts ($4.4) ($4.1) ($4.2) ($5.0) ($5.5) ($6.3) ($6.8) ($7.3)
Other revenue $5.8 $6.1 $7.0 $7.5 $8.0 $9.3 $10.0 $10.8
Total Revenue $259.7 $301.0 $327.1 $352.0 $381.0 $438.3 $473.3 $511.1
Cost of goods sold, excluding depreciation, amortization (1) 189.2 217.9 240.6 258.9 281.0 324.1 346.2 373.9
Gross profit 70.5 83.1 86.5 93.1 100.0 114.2 127.1 137.2
73.2% 72.9% 74.2% 74.1% 74.2% 74.5% 73.7% 73.6%
SG&A expenses 25.9 30.4 31.1 33.4 35.8 40.7 43.5 46.5
Other operating (income) / expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
EBITDA 44.6 52.7 55.5 59.7 64.2 73.4 83.5 90.7
Depreciation (1) 4.7 5.2 6.2 6.6 7.1 8.1 8.6 9.8
Amortization 0.9 1.5 1.7 2.0 2.2 2.4 2.6 2.8
EBIT (2) 39.0 45.9 47.5 51.1 54.9 63.0 72.3 78.2
Interest expense 0.5 1.1 1.0 1.1 0.9 1.0 0.7 0.2
Interest (income) (0.0) (0.0) (0.1) (0.2) (0.2) (0.2) (0.1) (0.2)
Other non-operating (income) / expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
EBI Excel.Unusual Items 38.5 44.9 46.6 50.1 54.2 62.1 71.8 78.1
Restructuring Charges 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Impairment of Goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Unusual Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Pretax income 38.2 44.7 46.3 49.9 54.0 61.9 71.6 77.9
Income taxes (3) 12.2 14.3 14.7 12.5 13.8 16.2 19.0 21.1
Earnings from Cont. Ops. 26.0 30.4 31.7 37.4 40.2 45.8 52.5 56.8
Earnings of Discontinued Ops.(loss) (5.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Income to Company 21.0 30.4 31.7 37.4 40.2 45.8 52.5 56.8
Minority Int. in Earnings 8.3 9.6 9.4 10.4 10.3 10.9 11.4 11.2
Net income (4) $12.7 $20.9 $22.3 $27.0 $29.9 $34.9 $41.1 $45.6
Diluted weighted average shares in millions 12.1 12.2 12.4 12.5 12.5 12.5 12.5 12.5
Earnings per share $1.03 $1.71 $1.80 $2.16 $2.39 $2.79 $3.29 $3.65
Ratios & assumptions Historical Year Ending December 31, Projected Year Ending December 31,
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Net Patient Revenue growth rate 6.1% 15.8% 8.5% 7.8% 8.3% 15.0% 8.0% 8.0%
Provision for doubtful accounts (as a % of sales) 1.7% 1.4% 1.3% 1.4% 1.4% 1.4% 1.4% 1.4%
Other Revenue (as a % of sales) 2.2% 2.0% 2.2% 2.1% 2.1% 2.1% 2.1% 2.1%
Gross margin 27.2% 27.6% 26.4% 26.4% 26.2% 26.0% 26.8% 26.8%
SG&A expenses (as a % of sales) 10.0% 10.1% 9.5% 9.5% 9.4% 9.3% 9.2% 9.1%
Other operating (income) / expenses ($ amount) $0.0 $0.0 $0.0 0.0% 0.0% 0.0% 0.0% 0.0%
Other non-operating (income) / expense ($ amount) 0.0 0.0 0.0 0.0% 0.0% 0.0% 0.0% 0.0%
Restructuring Charges 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Impairment of Goodwill 0.0 0.0 0.0 0.0% 0.0% 0.0% 0.0% 0.0%
Other Unusual Items 0.0 0.0 0.0 0.0% 0.0% 0.0% 0.0% 0.0%
Effective tax rate 32.0% 31.9% 31.6% 31.6% 31.6% 31.6% 31.6% 31.6%
Effective tax rate Exclusing Minority Income 40.8% 40.6% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7%
Minority Int. (as a % to Net Income to Company) 39.4% 31.5% 29.7% 27.7% 25.7% 23.7% 21.7% 19.7%
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
12 | P a g e
Balance Sheet for U.S. Physical Therapy, Inc.Dollars in Millions, except per share
Historical Year Ending December 31, Projected Year Ending December 31,
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Cash $12.9 $14.3 $15.8 $15.0 $15.0 $15.0 $15.0 $25.6
Accounts Receivable, net 34.9 38.7 42.0 45.9 49.7 57.1 61.7 66.7
Deferred Tax Assets, Curr. 0.5 0.1 - 0.2 0.2 0.2 0.2 0.2
Other Current Assets 1.4 1.8 2.4 2.6 2.8 3.2 3.5 3.7
Total Current Assets: 49.7 54.9 60.2 63.7 67.7 75.5 80.4 96.2
PP&E, net 15.0 15.8 16.7 16.7 16.8 17.0 17.4 17.3
Definite Life Intangibles,net 14.5 24.9 30.3 35.6 40.9 56.9 64.2 71.5
Goodwill, net 144.0 147.9 171.5 177.6 184.6 221.1 229.3 237.4
Other Long-term Assets 1.1 1.1 1.2 1.2 1.2 1.2 1.2 1.2
Total Assets: $224.1 $244.6 $279.9 $294.8 $311.2 $371.8 $392.4 $423.6
Accounts Payable $1.7 $1.8 $1.6 $1.8 $1.9 $2.2 $2.4 $2.6
Accrued Exp. 18.3 21.0 15.1 $16.3 $17.7 $20.4 $21.8 $23.6
Curr. Note Payable 0.8 0.9 0.8 $0.6 $1.9 $1.8 $0.0 $0.0
Other(Credit balance and overpayment due to patients and payors) 2.4 1.8 1.5 $2.2 $2.4 $2.8 $3.0 $3.2
Total Current Liabilities: 23.2 25.5 19.0 20.9 24.0 27.3 27.2 29.3
Revolver 40.0 34.5 44.0 32.7 26.1 32.2 13.8 0.0
Note Payable 0.7 0.2 4.3 4.3 3.8 1.8 0.0 0.0
Deferred Income Taxes 3.5 8.0 8.4 8.4 8.4 8.4 8.4 8.4
Other Long-term Liabilities 1.7 1.7 2.3 2.3 2.3 2.3 2.3 2.3
Total Liabilities: 69.0 70.0 78.0 68.5 64.5 72.0 51.6 40.0
Total Common Equity 128.3 146.3 162.8 185.3 209.8 237.6 269.6 304.6
Minorty Int. 26.8 28.3 39.2 40.9 36.9 62.3 71.2 79.0
Total Equity: 155.1 174.6 202.0 226.3 246.7 299.9 340.8 383.6
Total Liabilities and Equity: $224.1 $244.6 $279.9 $294.8 $311.2 $371.8 $392.4 $423.6
Cash Flow Statement for U.S. Physical Therapy, Inc.Dollars in Millions, except per share
Historical Year Ending December 31, Projected Year Ending December 31,
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Operating activities
Net income including Minority Interest 37.4 40.2 45.8 52.5 56.8
Depreciation 6.6 7.1 8.1 8.6 9.8
Amortization 2.0 2.2 2.4 2.6 2.8
Deferred Income Tax 0.0 0.0 0.0 0.0 0.0
Stock-based compensation expense 4.5 4.5 4.5 4.5 4.5
Provision & Write-off of Bad debts 5.0 5.5 6.3 6.8 7.3
(Gain)/Loss on Sale of business & Fixed Asset 0.1 0.1 0.1 0.1 0.1
Impairment of Goodwill (Write-offs-closed clinic) 0.0 0.0 0.0 0.0 0.0
Tax Benefit from Stock Options (0.9) (0.9) (0.9) (0.9) (0.9)
(Increase) / decrease in working capital (2.0) (2.3) (4.5) (3.1) (3.0)
Change in other long-term assets and liabilities 0.0 0.0 0.0 0.0 0.0
Cash Flow from Operating Activities: 44.8 45.2 41.2 52.8 56.4 61.7 71.2 77.4
Investing activities
Capital expenditures (4.6) (5.2) (6.3) (6.7) (7.3) (8.4) (9.1) (9.8)
Cash Acquisition Exclude Addition to intangible (37.6) (15.6) (18.9) (18.4) (24.5) (27.5) (18.4) (17.9)
Proceeds on sale of business and fixed asset,net 0.5 0.0 0.1 0.0 0.0 0.0 0.0 0.0
Additions to definite life intangibles (10.9) (2.2) (7.1) (7.3) (7.5) (18.4) (9.8) (10.1)
Cash Flow from Investing Activities: (52.7) (22.9) (32.2) (32.5) (39.3) (54.3) (37.3) (37.8)
Cash flow available for financing activities ($7.9) $22.3 $9.0 $20.3 $17.1 $7.4 $33.9 $39.6
Financing activities
Issuance / (repayment) of revolver (11.3) (6.6) 6.1 (18.4) (13.8)
Issuance of long-term debt 0.0 0.0 0.0 0.0 0.0
(Repayment) of long-term debt (0.8) (0.6) (1.9) (1.8) 0.0
Repurchase of equity 0.0 0.0 0.0 0.0 0.0
Dividends (9.0) (9.9) (11.6) (13.7) (15.2)
Option proceeds 0.0 0.0 0.0 0.0 0.0
Cash Flow from Financing Activities: (21.1) (17.1) (7.4) (33.9) (29.0)
Net change in cash (0.8) 0.0 0.0 (0.0) 10.6
Beginning cash balance 15.8 15.0 15.0 15.0 15.0
Ending cash balance $15.0 $15.0 $15.0 $15.0 $25.6
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
13 | P a g e
Appendix 2 Free Cash Flow projection from 2016 to 2020
Weighted Average Cost of Debt & 2-tier WACC Analysis
Terminal Value (a) Projections based on internal estimates.
(b) Present values calculated as of Proj. 2016.
(c) Discounted 2020 years; based on Proj 2020 unlevered free cash flow of $43.1 million.
(d) Balances as of Proj. 2016 as a training simplification. "Net debt" includes total debt less cash & cash equivalents, and also
include minority interest and preferred stock as well.
(e) Based on 12.500 million diluted shares outstanding as of Proj. 2016. Theoretically, the shares should be as of the PV date to
match the timing of the balance sheet items.
(f) Growth rate cap was calculated by Golden Growth Rate Model. Using 10.5x EBITDA Multiple representing a reseasonable
stage in 2020, we were able to calculated the terminal value of the company based on our acquistion growth scenario under:
Terminal Value=EBITDA2020*EBITDA Muitiple=FCF(1+g)/(r-g) here r=8.7% representing our long-term WACC
(g) Then we can get our long-term grow rate cap = 4%
(e) The estimated price was calculated at a 50% probability of each scenario.
Sensitivity Analysis
Terminal
Growth
$53.18 7.45% 7.70% 7.95% 8.20% 8.45% 8.70% 8.95% 9.20% 9.45%
2.0% $55.15 $53.12 $51.27 $49.56 $47.99 $46.54 $45.19 $43.93 $42.76
2.2% $57.00 $54.82 $52.83 $51.00 $49.32 $47.77 $46.33 $45.00 $43.76
2.4% $59.00 $56.64 $54.50 $52.53 $50.73 $49.08 $47.55 $46.13 $44.81
2.6% $61.17 $58.61 $56.29 $54.18 $52.25 $50.47 $48.84 $47.33 $45.93
2.8% $63.52 $60.73 $58.22 $55.94 $53.86 $51.96 $50.22 $48.60 $47.12
3.0% $66.08 $63.04 $60.31 $57.84 $55.60 $53.56 $51.68 $49.96 $48.37
3.2% $68.88 $65.55 $62.58 $59.90 $57.47 $55.27 $53.26 $51.41 $49.71
3.4% $71.96 $68.30 $65.04 $62.12 $59.49 $57.11 $54.94 $52.96 $51.14
3.6% $75.36 $71.31 $67.73 $64.54 $61.67 $59.09 $56.75 $54.62 $52.67
3.8% $79.13 $74.64 $70.68 $67.18 $64.05 $61.24 $58.70 $56.40 $54.30
4.0% $83.34 $78.32 $73.93 $70.06 $66.63 $63.57 $60.81 $58.32 $56.05
4.2% $88.07 $82.42 $77.53 $73.24 $69.46 $66.10 $63.10 $60.39 $57.94
4.4% $93.42 $87.02 $81.53 $76.75 $72.57 $68.87 $65.58 $62.63 $59.98
4.6% $99.52 $92.22 $86.00 $80.66 $76.00 $71.91 $68.30 $65.07 $62.18
Equity Value Per Share (Perpetuity Growth Method)
Weighted average cost of capital
EBITDA
Multiple
$63.48 8.00% 8.25% 8.50% 8.75% 9.00% 9.25% 9.50% 9.75% 10.00%
9.0x $57.00 $56.56 $56.12 $55.69 $55.27 $54.84 $54.43 $54.01 $53.61
9.3x $58.34 $57.88 $57.43 $56.99 $56.55 $56.12 $55.69 $55.26 $54.85
9.5x $59.67 $59.21 $58.74 $58.29 $57.84 $57.39 $56.95 $56.52 $56.08
9.8x $61.01 $60.53 $60.05 $59.59 $59.12 $58.67 $58.21 $57.77 $57.32
10.0x $62.34 $61.85 $61.36 $60.88 $60.41 $59.94 $59.48 $59.02 $58.56
10.3x $63.67 $63.17 $62.67 $62.18 $61.69 $61.21 $60.74 $60.27 $59.80
10.5x $65.01 $64.49 $63.98 $63.48 $62.98 $62.49 $62.00 $61.52 $61.04
10.8x $66.34 $65.81 $65.29 $64.78 $64.27 $63.76 $63.26 $62.77 $62.28
11.0x $67.68 $67.14 $66.60 $66.07 $65.55 $65.03 $64.52 $64.02 $63.52
11.3x $69.01 $68.46 $67.91 $67.37 $66.84 $66.31 $65.79 $65.27 $64.76
11.5x $70.34 $69.78 $69.22 $68.67 $68.12 $67.58 $67.05 $66.52 $66.00
11.8x $71.68 $71.10 $70.53 $69.97 $69.41 $68.86 $68.31 $67.77 $67.24
12.0x $73.01 $72.42 $71.84 $71.26 $70.69 $70.13 $69.57 $69.02 $68.48
12.3x $74.34 $73.74 $73.15 $72.56 $71.98 $71.40 $70.84 $70.27 $69.72
Equity Value Per Share (EBITDA Multiple Method Growth Method)
Weighted average cost of capital
Source: Capital IQ, 10-Ks and team estimates
2016-2017 2018-2020
Interest rate of Revolving credit 2.50% 3.00%
Interest rate of Notes payable 3.50% 4.00%
Weights in Revolving Credit 89.60% 89.60%
Weights in Notes payable 10.40% 10.40%
Adjusted Cost of Debt 2.60% 3.10%
2016-2017 2018-2020 After 2020
Risk-free rate 2.47% 3.05% 3.05%
Adjusted Beta 0.99 0.99 0.990
Market risk premium 6.00% 6.50% 6.50%
Cost of Equity 8.41% 9.49% 9.49%
Adjusted Cost of Debt 2.60% 3.10% 3.00%
Corporate tax rate 31.60% 31.60% 31.60%
Total Debt/Total Capital 5.00% 10.00% 10.00%
Total Equity/Totoal Capital 95.0% 90.00% 90.00%
WACC 8.1% 8.75% 8.7%
Target Capital Ratio D/E D/(D+E)
10.72% 9.39%
Discounted Cash Flow Analysis for U.S. Physical Therapy, Inc.Dollars in Millions, except per share
Historical Year Ending December 31, Projected Year Ending December 31, 2020 Year
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020 CAGR
Sales $259.7 $301.0 $327.1 $352.0 $381.0 $438.3 $473.3 $511.1 9.3%
EBITDA 44.6 52.7 55.5 59.7 64.2 73.4 83.5 90.7 10.3%
Less: Depreciation (4.7) (5.2) (6.2) (6.6) (7.1) (8.1) (8.6) (9.8)
Less: Amortization (0.9) (1.5) (1.7) (2.0) (2.2) (2.4) (2.6) (2.8)
EBIT 39.0 45.9 47.5 51.1 54.9 63.0 72.3 78.2 10.5%
Less: Taxes @ 31.6% (12.3) (14.5) (15.0) (16.1) (17.4) (19.9) (22.9) (24.7)
Tax-effected EBIT 26.7 31.4 32.5 34.9 37.6 43.1 49.5 53.5
Plus: Depreciation 6.6 7.1 8.1 8.6 9.8
Plus: Amortization 2.0 2.2 2.4 2.6 2.8
Less: Capital expenditures (6.7) (7.3) (8.4) (9.1) (9.8)
Less: Additions to definite life intangibles (7.3) (7.5) (18.4) (9.8) (10.1)
+ / - Changes in working capital (2.0) (2.3) (4.5) (3.1) (3.0)
Unlevered Free Cash Flow $27.5 $29.8 $22.2 $38.7 $43.1
Unlevered Free Cash Flow Growth Rate 8.2% (25.4%) 74.4% 11.4%
EBITDA Multiple Method
WACC 2016-2018: 8.1%
WACC 2018- 2020 8.7%
Net present value of free cash flow (b) $134.3
Exit multiple 10.5x
Terminal value $952.8
Present value of the terminal value (c) 681.2
Enterprise Value $815.5
LESS: Net Debt (d) (e) (22.0)
Equity Value $793.5
Diluted shares: 12.5
Equity Value Per Share (e) $63.48
Perpetuity Growth Method
WACC 2016-2018: 8.1%
WACC 2018-2020: 8.7%
Net present value of free cash flow (b) $134.3
WACC after 2020 8.7%
Growth rate of FCF after 2020 4.0%
Terminal value $944.4
Present value of the terminal value (c) 675.3
Enterprise Value $809.6
LESS: Net Debt (d) (e) (22.0)
Equity Value $787.6
Diluted shares: 12.5
Equity Value Per Share (f) $63.00
Perpetuity Growth Method
WACC 2016-2018: 8.1%
WACC 2018-2020: 8.7%
Net present value of free cash flow (b) $134.3
WACC after 2020 8.7%
Growth rate of FCF after 2020 3.0%
Terminal value $772.7
Present value of the terminal value (c) 552.4
Enterprise Value $686.7
LESS: Net Debt (d) (e) (22.0)
Equity Value $664.7
Diluted shares: 12.5
Equity Value Per Share (f) $53.18
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Appendix 3 Comparable Multiple Valuation
As-Of Date: Feb-03-2017
Company Name Source: S&P Capital IQ
TEV /
EBITDA
LTM
TEV /
EBITDA
NTM
TEV /
EBIT
LTM
TEV / EBIT
NTM
P / E
NTM
PEG Ratio
NTM
U.S. Physical Therapy, Inc. 16.2 16.5 18.9 17.69 34.09 2.41
Select Medical Holdings Corp. 9.9 8.94 14.1 12.94 16.86 1.35
HealthSouth Corporation 8.2 8.48 10.4 10.63 15.26 1.2
Tenet Healthcare Corp. 7.7 7.52 11.8 11.35 11.68 0.96
Kindred Healthcare, Inc. 7.1 4.5 10.1 10.91 17.01 2.13
All operate with similar physical therapy rehabilitation services, similar market caps, and similar potential growth. However, they
differ dramatically in terms of capital structure, depreciation and amortization. For that reason, we chose EBITDA Multiples to
implement relative trading valuation. But no matter which multiple we choose, the USPH is the highest one and extremely
overvalued among its competitors.
Appendix 4 Comparable Transaction Valuation
Appendix 5 Dividend Discount Model
Historical Year Ending December 31, Projected Year Ending December 31,
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Dividend assumptions
Dividends $4.8 $5.9 $7.4 $8.98 $9.93 $11.73 $13.76 $15.15
Net income $12.7 $20.9 $22.3 $27.0 $29.9 $35.3 $41.4 $45.6
Dividend payout ratio 37.7% 28.3% 33.2% 33.2% 33.2% 33.2% 33.2% 33.2%
Dividend growth rate 11.6% 22.9% 25.4% 21.4% 10.6% 18.0% 17.4% 10.1%
CAGR 25%
Source: Capital IQ, 10-Ks and team estimates
All #'s except per share in millions Shares Outstanding 12.52
High Mean Low High Mean Low
EV to EBITDA NTM Multiple 8.94 7.36 4.5 EV to EBITDA LTM Multiple 9.9 8.2 7.1
Enterprise Value 525.04 432.46 264.22 Enterprise Value 592.02 490.36 424.58
+ Total Cash & ST Investments 15 15 15 + Total Cash & ST Investments 15 15 15
- Total Debt 41.5 41.5 41.5 - Total Debt 41.5 41.5 41.5
- Total Pref. Equity - - - - Total Pref. Equity - - -
- Minority Interest 48.3 48.3 48.3 - Minority Interest 48.3 48.3 48.3
Equity Value 450.23 189.41 357.65 Equity Value 517.22 349.78 415.56
Price per Share 35.96 15.13 28.56 Price per Share 41.31 27.94 33.19
EV to EBITDA NTM Valution EV to EBITDA LTM Valution
Source: Capital IQ, 10-Ks and team estimates
Source: Capital IQ, 10-Ks and team estimates
Dividend Discount Method
Cost of Equity 9.5%
Net present value of dividend cash flow (b) $39.9
Growth Rate of Dividend 7.9%
Terminal Value 1031.3
Present value of the terminal value (c) 717.8
Enterprise Value $757.65
LESS: Net Debt (d) (e) (22.0)
Equity Value $735.6
Diluted shares: 12.5
Equity Value Per Share (e) $58.85 Source:Team Reasearch
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Appendix 6 Ratio Analysis
U.S. Physical Therapy, Inc.Dollars in Millions, except per share
Historical Year Ending December 31, Projected Year Ending December 31,
Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Profitability Ratios
Sales $259.7 $301.0 $327.1 $352.0 $381.0 $438.3 $473.3 $511.1
% growth 15.9% 8.7% 7.6% 8.2% 15.0% 8.0% 8.0%
Gross profit $70.5 $83.1 $86.5 $93.1 $100.0 $114.2 $127.1 $137.2
% margin 27.2% 27.6% 26.4% 26.4% 26.2% 26.0% 26.8% 26.8%
EBITDA $44.6 $52.7 $55.5 $59.7 $64.2 $73.4 $83.5 $90.7
% margin 17.2% 17.5% 17.0% 17.0% 16.9% 16.8% 17.7% 17.8%
% growth 18.2% 5.3% 7.6% 7.6% 14.3% 13.8% 8.6%
EBIT $39.0 $45.9 $47.5 $51.1 $54.9 $63.0 $72.3 $78.2
% margin 15.0% 15.3% 14.5% 14.5% 14.4% 14.4% 15.3% 15.3%
% growth 17.7% 3.4% 7.5% 7.6% 14.6% 14.9% 8.0%
Net income $12.7 $20.9 $22.3 $27.0 $29.9 $35.3 $41.4 $45.6
% margin 4.9% 6.9% 6.8% 7.7% 7.9% 8.1% 8.8% 8.9%
% growth 63.8% 6.8% 21.4% 10.6% 18.0% 17.4% 10.1%
Interest Coverage
Memo Items: Interest expense $0.5 $1.1 $1.0 $1.1 $0.8 $0.0 ($0.1) $0.3
Capital expenditures 4.6 5.2 6.3 6.7 7.3 8.4 9.1 9.8
EBIT / Interest expense 72.5x 42.2x 46.1x 45.4x 69.2x 2,811.7x -849.7x 311.9x
EBITDA / Interest expense 82.9x 48.4x 53.8x 53.1x 80.9x 3,278.7x -981.4x 362.1x
EBITDA - Capital expenditures / Interest expense 74.2x 43.7x 47.7x 47.1x 71.7x 2,904.0x -875.0x 323.1x
Capitalization*
Memo items: EBIT $39.0 $45.9 $47.5 $51.1 $54.9 $63.0 $72.3 $78.2
Taxes 12.2 14.3 14.7 12.5 13.8 16.3 19.2 21.1
Total debt $40.7 $34.7 $48.3 $37.0 $23.2 ($22.7) $16.7 $0.0
Total stockholders' equity 155.1 174.6 202.0 226.1 252.9 295.9 336.5 377.8
Total capitalization 195.8 209.3 250.3 263.1 276.2 273.2 353.2 377.8
Return on Invested Capital 13.7% 15.1% 13.1% 14.7% 14.9% 17.1% 15.1% 15.1%
*all recorded at book value
Leverage*
Total debt / Total capitalization 0.2x 0.2x 0.2x 0.1x 0.1x -0.1x 0.0x 0.0x
Total debt / EBITDA 0.9x 0.7x 0.9x 0.6x 0.4x -0.3x 0.2x 0.0x
*all recorded at book value
Historical Year Ending December 31, Projected Year Ending December 31,
Liquidity Hist 2013 Hist 2014 Hist 2015 Proj 2016 Proj 2017 Proj 2018 Proj 2019 Proj 2020
Memo Items: Cash $12.9 $14.3 $15.8 $15.0 $15.0 ($44.8) $15.0 $22.7
Accounts receivable 34.9 38.7 42.0 45.9 49.7 57.1 61.7 66.7
Quick assets 47.8 53.0 57.8 60.9 64.7 12.3 76.7 89.4Current assets 49.7 54.9 60.2 63.7 67.7 15.7 80.4 93.3
PP&E, net $15.0 $15.8 $16.7 $16.7 $16.8 $17.0 $17.4 $17.3
Total assets 224.1 244.6 279.9 294.8 311.2 312.0 392.4 420.6
Accounts payable $1.7 $1.8 $1.6 $1.8 $1.9 $2.2 $2.4 $2.6
Current liabilities 23.2 25.5 19.0 20.9 24.0 27.3 27.2 29.3
Working capital $26.5 $29.3 $41.2 $42.8 $43.7 ($11.6) $53.2 $64.0
Current ratio 2.1x 2.2x 3.2x 3.0x 2.8x 0.6x 3.0x 3.2x
Quick ratio 2.1x 2.1x 3.0x 2.9x 2.7x 0.5x 2.8x 3.0x
Activity
Accounts receivable (collection period) 49.0 46.9 46.9 47.6 47.6 47.6 47.6 47.6
Inventories (days outstanding) 0.5 0.1 - 0.2 0.2 0.2 0.2 0.2
Accounts payable (days outstanding) 3.3 3.0 2.5 2.5 2.5 2.5 2.5 2.5
Net fixed asset turnover 17.4x 19.1x 19.6x 21.1x 22.7x 25.7x 27.2x 29.6x
Asset turnover 1.2x 1.2x 1.2x 1.2x 1.2x 1.4x 1.2x 1.2x
DuPont Analysis
Return on sales 4.9% 6.9% 6.8% 7.7% 7.9% 8.1% 8.8% 8.9%
Asset turnover 1.2x 1.2x 1.2x 1.2x 1.2x 1.4x 1.2x 1.2x
Asset leverage 1.4x 1.4x 1.4x 1.3x 1.2x 1.1x 1.2x 1.1x
Return on equity 8.2% 11.9% 11.0% 12.0% 11.8% 11.9% 12.3% 12.1%
Source: Capital IQ, 10-Ks and team estimates
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Appendix 7 Supply and Demand of Physical Therapists 2010-2025
In 2011, APTA developed a model to project the estimated number of physical therapists to meet the increasing healthcare demands
of the population. The parsimonious model was based on the advice of APTA’s Workforce Task Force that was constituted in 2010.
Continuous updates were made after significant events such as the Supreme Court’s upholding of the Affordable Care Act in March
of 2012 and demographic updates. The input that continued to show variance in the estimates was the attrition rate of physical
therapists. Attrition rate was derived using studies from the Healthcare Association of New York State (HANYS) nursing study,
physician assistants’ attrition by the Lewin Group and the Conference Board’s analysis of health care workers. Three attrition rates
were used in the model: 3.5%, 2.5% and 1.5%.
The 3.5% attrition rate model projects a shortage of 18,350 physical therapists by 2025. While 2.5% and 1.5% continue to show a
surplus after several updates. All numbers in the charts below are in thousands, except dates and percentages. The legend in the left
graph applies to all the others to the right.
Supply: Base year number of licensed physical therapists = the number of licensed physical therapists in 2010 as reported by the Federation of State Boards of Physical
Therapy
Licensed Physical Therapists = the number of licensed physical therapists in the previous year, plus the number of new graduates from US physical therapy
programs, minus the number of US graduates who never pass (subsequent to 3 attempts) the National Physical Therapy Exam (NPTE) (3% in 2010; 2% in 2011-2020), plus
the number of international PTs (535) who pass the NPTE, minus the attrition. For this model, the number of international physical therapists who passed the NPTE will be
held constant through 2025
Licensed PTs2 = Licensed PTs1 + new grads – number of grads never passing exam + international PTs – attrition
The 2015 update of the model uses the actual number of licensed physical therapists for years 2010 2015 as reported by the Federation of State Boards of Physical
Therapy
PT Graduates = the number of graduates from US physical therapist professional programs as projected through 2019 by the Commission on Accreditation in
Physical Therapy Education. The estimated growth rate for graduates from 2020 to 2025 was calculated at 4%
Number of Graduates Not Passing the Exam = number of US graduates who never pass the NPTE (1%) as reported in 2015 by the Federation of State Boards of
Physical Therapy (https://www.fsbpt.org/FreeResources/NPTEPassRateReports/NPTEGraduationYearReports.aspx, accessed March 24, 2016). For the 2010 base year, the
failure rate was 3%, as reported in 2011
International Physical Therapists = number of international physical therapists who passed the National Physical Therapist Exam in 2010 (n=535) as reported by
the Federation of State Boards of Physical Therapy. It is assumed this number will remain constant
Attrition/Retirement = the number of licensed physical therapists permanently leaving the profession. Attrition rates of 3.5%, 2.5% and 1.5% were estimated based
on three different sources: Conference Board, the Healthcare Association of New York State, and the Lewin Group (http://www.healthleadersmedia.com/page-1/TEC-
266573/Healthcare-Workers-Delaying-Retirement; http://www.hanys.org/workforce/data/docs/2011-06-10-workforce_survey_results_2011.pdf;
http://www.ncbi.nlm.nih.gov/pubmed/21886331; accessed March 24, 2016)
Supply of FTE Physical Therapists = (Licensed PTs *.85) + (Licensed PTs *.15 *.69). According to the 2010 Practice Profile , the workforce for physical therapists
is not comprised solely of full-time PTs, but of part-time PTs as well, therefore, full-time personnel was calculated at 85% and part-time personnel was calculated at 15% x
69%, with part-time personnel working a mean of 24 hours a week out of a 35 hour work week. (http://www.apta.org/WorkforceData/, accessed March 24, 2016)
Demand:
U S Population = US Census Bureau annual population estimates & projections (http://www.census.gov/topics/population.html, accessed March 24, 2016)
US Population with Insurance = the annual population multiplied by the percentage of the US population who has health insurance (83.7% in 2010; 84.3% in
2011, 84.6% in 2012; 86.6% in 2013; 89.6% in 2014-2025) as reported in the US Census Bureau’s Income, Poverty, and Health Insurance Coverage in the United States:
2012 report, (http://www.census.gov/hhes/www/hlthins/,accessed March 24, 2016). In order to factor in the increase in the population with insurance after the Affordable
Care Act was implemented in 2014, the Congressional Budget Office’s estimates of the millions of Americans expected to gain insurance coverage were added in
2014-2025 (http://www.cbo.gov/publication/43900, accessed March 24, 2016)
Demand Ratio = the demand ratio is a constant that is calculated based on the 2010 supply of FTE physical therapists, plus the 2010 vacancy rate reported in
three settings in which physical therapists practice, calculated at 1.11, divided by the US population insured in 2010 (.00075173). The 1.11% reflects the vacancy rate
reported in vacancy rate studies conducted by the APTA in 2010 (http://www.apta.org/WorkforceData/, accessed March 24, 2016)
Demand = the US population with health insurance multiplied by the demand ratio
Shortage = demand minus supply of full time equivalent physical therapists
Source: apta.org, American Physical Therapy Association (APTA), Updated 4/11/16
175
195
215
235
255
275
295
1.5% Attr i t ion Rate
- Surplus of 21,494
Supply of FTE's Demand
175
185
195
205
215
225
235
245
255
265
2.5% Attrition Rate -
Surplus of 736
175
185
195
205
215
225
235
245
255
265
3.5% Attrition Rate -
Shortage of 18,350
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Appendix 8 Estimation of Clinics Added, Acquired and Closed
A key part of forecasting the predicted revenue growth and balance sheet for USPH is in the clinic count. The different clinics follow different
patterns of revenue and costs, and so in order to make these projections as accurate as possible, we must have more information for each type of clinic.
USPH only specifies all clinic information between 2009 – 2011, where they detail how many clinics are built, bought and closed. Subsequent to
that, they only report total acquisitions, total de novo clinics, total acquired clinics, total clinics and closure costs.
First, we evaluated the change of number of developed, acquired and total clinics. Taking the difference of current year minus previous, we can
see the total number of acquired clinics doesn’t match the actual number of acquired clinics for that year. This means some clinics that were previously acquired had been closed, and the same for de novo clinics. We have to estimate how many clinics were closed.
Next, the number of clinics closed are estimated based on closing costs and the number of closed clinics each year during the reported years. An
average is taken to approximate the cost to close one clinic, which is estimated at about $12,000. This is extrapolated based on the closing costs in future years to roughly estimate the number of clinics closed.
Now that we have the number of clinics that are expected to close each year, we can simply calculate de novo clinic additions. Using the formula
Total Added Clinics + Closed/Sold Clinics – Acquired Clinics, we arrive at a number of added clinics each year.
We can also us this to estimate the number of acquired and de novo clinics closed each year, to help in forecasting the future closing rate of clinics.
Appendix 9
Geographical Trends and Expansion Plans
In an attempt to determine where USPH was planning to
grow geographically, we mapped out all USPH clinic
locations against two variables: population growth and age
demographics. While we determined that USPH is primarily
located in areas of high forecasted population growth, it
doesn’t appear that they are actively seeking areas of aging
Americans. In fact, most of their locations are in the younger
demographic region areas. The geographic dispersion also
does not give any insight into the direction of USPH’s
expansion plans. The consistency in acquisition prices per
clinic and varied locations indicate that the primary goal of
acquisitions is finding good groups to work with at fair
value.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Clinic Count (#) 292 349 360 368 392 416 431 472 489 508 540
Developed (De Novo) Clinics (#) 273 279 277 287 287 293 294 298 302 311 325
Acquired Clinics (#) 19 70 83 81 105 123 137 174 187 197 215
De Novo 30 17 16 18 19 21 19 17 15 12 19
Acquired 8 51 14 - 25 20 14 45 20 21 24
Closed 31 12 18 10 15 17 18 21 18 14 11
Sold 1 1 5
Closure Costs ($) 1,900,000 - 432,000 91,000 163,000 59,000 211,000 246,000 211,000 169,000 74,000
Closing Cost per Clinic ($) 61,290 - 24,000 9,100 10,867 3,471 Average = 11,859
De Novo Clinic Δ 6 (2) 10 - 6 1 4 4 9 14
Acquired Clinic Δ 51 13 (2) 24 18 14 37 13 10 18
Total Clinic Δ - 57 11 8 24 24 15 41 17 19 32
Estimated De Novo Clinics 18 16 18 19 21 19 17 15 12 19
Estimated De Novo Clinics Closed (11) (18) (8) (19) (15) (18) (13) (11) (3) (5)
Estimated Acquired Clinics Closed - (1) (2) (1) (2) - (8) (7) (11) (6)
Total Clinics Added per Year 68 30 18 44 41 33 62 35 33 43
Developed Clinics Closed/Sold 19 15 18 13 11 8
Acq. Clinics Closed/Sold 1 2 - 8 7 11
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Appendix 10 Dupont Analysis of Internally Generated Growth
In order to approximate how much growth USPH generates before acquisitions, and to see if their business is outperforming its
fundamentals, we used a Dupont Analysis and projected the internally generated growth rate and compared it to the realized growth.
Internal growth is a function of ROE x (1 – Payout Ratio).
The second step was to make some conservative assumptions about acquisitions to model what impact M&A had on growth. The
assumptions were as follows:
Total Assets increase by the full amount of acquisitions
Total Equity increases by 35% of acquisitions to account for debt financing and minority interest
Acquisitions are purchased at 80% of revenue, that amount is added directly into Total Revenue
Acquisitions offset the de novo clinic impact to Net Income; so we assume de novo clinics drag down the profit margin by 1%
USPH is outperforming internally
generated growth in almost every year
since 2011, and overall is returning
170 basis points on average more than
the fundamental Dupont analysis
would project. Circulating the average of
the Equity Multiplier and Return on
Assets starting from 2011 into a model, we
end up with a much smaller balance
sheet and less revenue and income.
This indicates that while growth has been
quite good, the company hasn’t been as efficient with its balance sheet. This is likely a result of growth through acquisitions,
which heavily impact the assets on the books. Still, the performance is impressive.
Proforma Calculations:
NI = Prior Year TAssets x Average ROA
Equity = NI – Actual Dividends Paid
TAssets = Average Equity Multiplier x Equity
L = TA – E | Revenue = NI x Profit Margin
DUPONT EQUATIONS 2011 2012 2013 2014 2015 2016 Average
ROE 0.17 0.13 0.08 0.12 0.11 0.10 0.12
EM 1.34 1.27 1.44 1.40 1.39 1.39 1.37
ROA 0.13 0.10 0.06 0.09 0.08 0.07 0.09
AT 1.40 1.43 1.16 1.23 1.17 1.10 1.25
PM 0.09 0.07 0.05 0.07 0.07 0.06 0.07
Payout Ratio % 18.1% 23.8% 38.0% 28.2% 33.4% 37.5% 29.8%
Internally Generated Growth 14.2% 10.1% 5.1% 8.6% 7.4% 6.2% 7.5%
Sales Growth - 7.5% 6.1% 15.9% 8.7% 7.8% 9.2%
Difference -2.6% 1.0% 7.3% 1.3% 1.6% 1.7%
Revenue $308 $214 $233 $252 $272 $291 Actual Δ
NI $21 $15 $16 $17 $19 $20 Rev $353 -$61
Div $4 $4 $5 $6 $7 $9 A $320 -$77
Equity $122 $132 $143 $154 $165 $177 L $90 -$24
TA $167 $181 $196 $212 $227 $243 E $230 -$53
L $45 $49 $53 $58 $62 $66 NI $23 -$3
Debt Increase $4 $4 $4 $4 $4
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Activating our assumptions, we can see that the internal growth rate has substantially dropped to 5.8% for a decrease of 23%.
Additionally, the projected balance sheet is over a third smaller than the actual, while net income is projected to be $8 million less.
We can see that acquisitions are contributing to growth of the balance sheet as well as income and revenue. This brief model also
shows that the companies own growth via de novo clinics
is greater than what additions can provide long term.
This model does not consider an important factor: closing
clinics. As prior analysis shows, most of the clinics that
close are the de novo clinics. So while growth is greater
with the de novo clinics, the risk is also greater.
Acquisitions allow USPH to balance this risk, albeit at
the expense of an expanding balance sheet.
Appendix 11 Effects of Operating Leases
USPH mostly operates in leased locations and typically works on 5-year lease agreements. Because of the dependence on lease
agreements and recent upcoming accounting standards requirements, it is important to look at the financial impact on operating
leases to the balance sheet.
Because the company has great liquidity and coverage measures, the effects of interest do not impact their ratios at a level that could
significantly impact their ability to repay short term liabilities. The big impact is in their solvency measures. Debt-to-equity and
liabilities-to-total equity nearly double.
Their operating measures improve as a result of the
changing accounting treatment. Since rent is no longer an
expense and the extra depreciation is deducted, EBITDA to
net income percentages of revenue are increased.
Looking forward to the accounting change scheduled for
2018, we do not anticipate a drastic change to USPH’s cost
of debt. Since the fundamental nature of the business will
not change, it is unlikely banks or lenders will impose
unnecessary costs onto USPH. We anticipate a slight bump
in rates as banks and other lenders get accustomed to dealing
with the new accounting treatment and adjust their ratios
accordingly. We believe that there will be an initial minor
impact, but it should disappear within a couple years.
Appendix 12 Competitor Analysis
Competitors to USPH were selected through Capital IQ’s Quick Screen tool. The screen we used selected 8 companies, and we
narrowed it down to 4 based on further analysis of the company’s business. The filters were as follows:
Industry Classification: Hospitals & Health Care Centers
Company Type: Public
Industry Specific Metrics - Consolidated Hospitals & Facilities: “> 50”
Business Description: “Physical Therapy”
The 8 companies that were the result, and the reasons that 4 were excluded:
Kindred Healthcare, Inc.
Select Medical Holdings Corporation
Tenet Healthcare Corporation
DUPONT EQUATIONS 2011 2012 2013 2014 2015 2016 Average
ROE 0.15 0.11 0.06 0.09 0.08 0.07 0.09
EM 1.20 1.09 1.09 1.01 0.95 0.93 1.04
ROA 0.13 0.10 0.05 0.09 0.09 0.08 0.09
AT 1.53 1.62 1.39 1.56 1.50 1.39 1.50
PM 0.08 0.06 0.04 0.06 0.06 0.05 0.06
Payout Ratio % 18.1% 23.8% 38.0% 28.2% 33.4% 37.5% 29.8%
Internally Generated Growth 12.4% 8.5% 3.7% 6.7% 5.5% 4.4% 5.8%
Sales Growth - 7.5% 6.1% 15.9% 8.7% 7.8% 9.2%
Difference -1.0% 2.4% 9.2% 3.2% 3.4% 3.4%
Revenue $362 $196 $208 $219 $230 $240 Actual Δ
NI $21 $11 $12 $13 $13 $14 Rev $353 -$113
Div $4 $4 $5 $6 $7 $9 A $320 -$159
Equity $122 $129 $136 $143 $148 $154 L $90 -$83
TA $127 $134 $142 $149 $155 $161 E $230 -$76
L $5 $6 $6 $6 $7 $7 NI $23 -$9
Debt Increase $1 $0 $0 $0 $0
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HealthSouth Corporation
HCA Holdings, Inc. – Massive market capitalization, over 3x size of USPH and all selected comparable companies
combined
National HealthCare Corporation – Negative LTM EBITDA growth rate, and UFCF margin
Genesis Healthcare, Inc. – Too highly leveraged; about 140% higher Debt/Capital leverage than the highest accepted
business leverage, Tenet
Surgery Partners, Inc. – Primarily a surgery based business, not comparable
We can also evaluate USPH’s business and ratios, to get a better understanding of some of the market valuations.
Margins
USPH & Select Medical have the lowest gross margins, mainly because they are primarily rehab and post-acute care clinics, while
the other comps are more diversified in their business lines. USPH shows margin consistency similar to the comparable list.
EBITDA margins tell a different story, that USPH and HealthSouth are outperforming their peers. HealthSouth commands the
highest margins at 20-25%, while USPH hovers around the 17% range. Profit margins (Net Income Margin) shows that Tenet and
Kindred are negative, while HealthSouth is the most profitable. However, by 2015 HealthSouth’s profitability drops dramatically
and USPH becomes the most profitable.
Growth
2014 and 2015 are a tale of two years. The first year Tenet’s growth is 50% while the rest are under 20%. The following year,
Tenet drops to 10% while all other firms except USPH jump over 20%. USPH remains the most consistent in terms of growth.
The do not experience the same volatility as their peers, although the sample size is small.
Coverage Ratios
All companies have strong EBITDA and Times Interest Earned coverage ratios, above 2 and 1 respectively. HealthSouth and Select
Medical have about 2x and 150% better ratios that Kindred and Tenet respectively. USPH outperforms them all by a mile, with
ratios well over 10x even the best ratios of their peers. USPH was so far outside the range, it’s ratio made all others look near-zero,
it become necessary therefore to remove it in order to accurately look at its peers.
0%
10%
20%
30%
40%
50%
2013 2014 2015
Gross Margins
Tenent Healthcare Kindred HeathcareHealthsouth Select MedicalUSPH -6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2013 2014 2015
NI Margins
0%
5%
10%
15%
20%
25%
30%
2013 2014 2015
EBITDA Margins
0%
10%
20%
30%
40%
50%
2014 2015
Revenue Growth
Tenent
Healthcare
Kindred
Heathcare
Healthsouth
Select
Medical
USPH-$2
-$1
$0
$1
$2
$3
2013 2014 2015
Basic EPS
-$0.10
$0.10
$0.30
$0.50
$0.70
$0.90
2013 2014 2015
Dividends per Share
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Liquidity Ratios
UPSH outperforms all their peer group in terms of liquidity due to their low cost of debt and revolver-financing strategy. They
especially outperform in cash ratios, with between 1.5 - 4x better liquidity than the best performer in any given year.
Solvency Ratios
Tenet is by far the most leveraged company in the peer group, with Liabilities-to-Total Equity and Debt/Equity (book value) ratios
over 2x their peers in 2013-’14. In 2015 they pull it much closer in line with the other firms. USPH is the only firm with less than
1.0 ratios in all years for both measures. The healthcare industry is clearly primarily financed by debt and liabilities, so USPH’s
approach to company capital structure is certainly different. But since they are very patient and diligent with their growth, they don’t
need heavy leverage to achieve their ambitions.
Operational Ratios
Accounts Receivable Days (AR Days) are very consistent among all the comp group. Likely, all of these firms are primarily paid
through third-party payors, and have similar agreements and payment terms. The smaller companies in the group tend to have
smaller days’ receivables, but this could also be due to fewer business lines. In 2015 the dispersion is the smallest of the three
years, possible showing the industry is becoming more consolidated and more consistent in its reimbursement policy. Not
surprisingly, the smaller companies also have smaller Operating Cycles. This is primarily due to the fact that they do not have
inventory. Finally, looking at each firms Cash Cycle shows how the different companies deal with cash. Tenet, with the most debt,
has the best cash ratio due to a high level of accounts payable. This is probably to allow them to quickly turn AR and inventory
into cash to pay interest. The other firms, including USPH, have similar cash cycles at around the 40 days’ mark. HealthSouth
-
2
4
6
2013 2014 2015
EBITDA Coverage Ratios
Tenent Healthcare Kindred Heathcare
Healthsouth Select Medical
0
1
2
3
2013 2014 2015
Quick Ratio
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2013 2014 2015
Cash Ratio
0
1
2
3
4
2013 2014 2015
Current Ratio
Tenent Kindred HealthSouth
Select Medical USPH
-
2
4
6
8
10
12
2013 2014 2015
Book Value Debt/Equity Ratio
0
5
10
15
2013 2014 2015
Liabilites-to-Total Equity Ratio
Tenent Kindred HealthSouth Select Medical USPH
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experienced the biggest move over the three period horizon, shifting from about 23 to 35 days’ cash cycle due to a large jump in
AR Days and decrease in AP Days.
Operating Lease Effects
Most healthcare companies primarily use leases, and very few actually capitalize their leases obligations. Here is a
true comparison after the financial statements have been adjusted. The delta column indicates the change to the ratio
after the adjustment was applied.
Appendix 13 Healthcare Reform in the US the Past 40+ Years
1965 President Lyndon Johnson enacted legislation that introduced Medicare, covering both hospital (Part A) and supplemental medical
(Part B) insurance for senior citizens. The legislation also introduced Medicaid, which permitted the Federal government to partially
fund a program for the poor, with the program managed and co-financed by the individual states
1985 The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) amended the Employee Retirement Income Security Act
of 1974 (ERISA) to give some employees the ability to continue health insurance coverage after leaving employment
1996 The Health Insurance Portability and Accountability Act (HIPAA) not only protects health insurance coverage for workers and
their families when they change or lose their jobs, it also made health insurance companies cover pre-existing conditions. If such
condition had been diagnosed before purchasing insurance, insurance companies are required to cover it after patient has one year of
continuous coverage. If such condition was already covered on their current policy, new insurance policies due to changing jobs, etc...
have to cover the condition immediately
1997 The Balanced Budget Act of 1997 introduced two new major Federal healthcare insurance programs, Part C of Medicare and the
State Children's Health Insurance Program, or SCHIP. Part C formalized longstanding "Managed Medicare" (HMO, etc.) demonstration
projects and SCHIP was established to provide health insurance to children in families at or below 200 percent of the federal poverty
line. Many other "entitlement" changes and additions were made to Parts A and B of fee for service (FFS) Medicare and to Medicaid
within an omnibus law that also made changes to the Food Stamp and other Federal programs
2000 The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) effectively reversed some of the cuts to
the three named programs in the Balanced Budget Act of 1997 because of Congressional concern that providers would stop providing
services.
2003 The Medicare Prescription Drug, Improvement and Modernization Act (also known as the Medicare Modernization Act or MMA)
introduced supplementary optional coverage within Medicare for self-administered prescription drugs and as the name suggests also
changed the other three existing Parts of Medicare law
2010 The Patient Protection and Affordable Care Act, called PPACA or ACA but also known as Obamacare, was enacted, providing for
the phased introduction over multiple years of a comprehensive system of mandated health insurance reforms designed to eliminate
"some of the worst practices of the insurance companies"—pre-existing condition screening and premium loadings, policy cancellations
0
10
20
30
40
50
2013 2014 2015
Cash Cycle (Days)
0
10
20
30
40
50
60
70
80
2013 2014 2015
Operating Cycle (Days)
0
20
40
60
80
2013 2014 2015
AR Days
Tenent KindredHealthSouth Select MedicalUSPH
Δ Tenent Kindred Healthsouth Select Medical USPH
ROE -20% 6% 3% 6% 5%
ROA -3% 2% 0% 1% 2%
D/E 24.73% 80.20% 27.89% 64.92% 38%
EBITDA Coverage -0.15 -0.79 -0.54 -1.02 -93.92
True Comparison Tenent Kindred Healthsouth Select Medical USPH
ROE -25% 0% 23% 18% 16%
ROA -3% 0% 4% 4% 10%
D/E 470.85% 264.03% 376.04% 255.93% 68.53%
EBITDA Coverage 2.24 1.63 4.40 2.39 17.92
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on technicalities when illness seems imminent, annual and lifetime coverage caps. It also sets a minimum ratio of direct health care
spending to premium income, and creates price competition bolstered by the creation of three standard insurance coverage levels to
enable like-for-like comparisons by consumers, and a web-based health insurance exchange where consumers can compare prices and
purchase plans. The system preserves private insurance and private health care providers and provides subsidies in the form of income
tax reductions to enable lower income Americans to buy insurance. PPACA also made many changes to the 1997, 2000 and 2003 laws
that had previously changed Medicare and further expanded eligibility for Medicaid (that expansion was later ruled by the Supreme
Court to be at the discretion of the states)
2015 The Medicare Access & CHIP Reauthorization Act (MACRA) made significant changes to the process by which many Medicare Part B services are reimbursed and also extended SCHIP
Appendix 14 Private Equity Trends and Analysis
EY recently reported in August 2016 on the state of Private Equity. Their findings are summarized here:
Buyout fundraising, the type of financing that would likely be used to acquire a series of physical therapy clinics, was behind
2015’s pace by 5.5%
Dry powder, or unused funds committed to a private equity firm, were up 12% compared to the prior year and stood at $540.4
billion dollars
Healthcare represented 10% of the deal value up until July 2016, the 3rd largest sector
A record number of add-on deals in 2015, and projected to continue in 2016 (add-on, or platform deals, are when a company
buys smaller companies and combines them with a larger firm; very similar to what USPH already does)
Less capital being raised and a large level of dry powder, the highest level on record, indicate that the industry is struggling to find
attractive investment opportunity. Healthcare is on their radar, and it is likely they will be evaluating the physical therapy industry
and USPH’s business model. The increasing number of platform deals is an indication that a build-up strategy is a popular
approach to adding value and generating returns. Also, BlackRock is the largest institutional holder of USPH currently. This is
significant because they have close relations with private equity giant Blackstone, who as of 12/14/16 is sitting on $102.2 billion
dollars in undeployed capital.
Appendix 15 Insider & Institutional Holding
In the last 9 months, the CEO, CFO, and COO, have liquidated 24%, 35%, and 38% of their holdings, respectively.
While we understand management may have liquidity needs, we believe the large volume of shares being sold
indicates that insiders feel the stock is overvalued.
$0
$10
$20
$30
$40
$50
$60
$70
$80
0K20K40K60K80K
100K120K140K160K
Sh
are
Pri
ce
# o
f S
ha
res
Hel
d b
y I
nsi
der
s
Insider Holdings vs. Stock Price
Other - >1%
Hedge Fund Managers - 6%
Government - 1%
Family Offices & Banks -4%
BlackRock -11%
Neuberger Berman - 9%
RBC - 6%
The Vanguard Group- 5%
Renaissance
Technologies - 5%
Tradiational Investment Managers -
91%
% of Total Shares Outstanding
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Appendix 16 Monte Carlo Analysis Assumptions
Based on the sensitive analysis, the growth rate is the main driver of USPH’s intrinsic value. We used the past 30
years’ historical data and set the long term growth rate range from 3% to 4%
Trump’s presidency brings uncertainties to tax rate; thus, we tested the impact of various tax rates on the implied
share price
Capital structure is another important factor influencing intrinsic values. We assumed a 0.8% standard deviation
for WACC
Appendix 17 Corporate Governance
Management Team
Board of Directors
Jerald L. Pullins, Chairman of the Board
Jerald L. Pullins became Chairman of the Board on May 17, 2011 and has served on our Board since 2003. He is currently engaged in the
development and management of private enterprises in the healthcare field. From October 2007 to the present, Mr. Pullins has been the
Managing Member of SeniorCare Homes, LLC, which develops, owns and operates supervised, residential homes for senior citizens with
Alzheimers, dementia and other memory impairment conditions. From 2007 to present, he has also served as Chairman of the Board of Directors
of Pet Partners, LLC, a private enterprise involved in the acquisition and management of primary care, small animal veterinary hospitals.
Glenn McDowell (COO)
Age: 59
Tenure: 14 Years
COO: 12 years
Formerly RVP of USPH for 2 years
Formerly employed at HealthSouth
Corporation
BS (PT) from SUNY at Stony Brook,
BS (History) from Lycoming College
Sold 38% of Shares in last 9 months
Lawrence McAfee (CFO)
Age: 61
Tenure: 14 years
Formerly CFO and EVP for 14
(2003) & 13 (2004) years
Formerly President and CFO of
Wonderware Mobile Solutions
BBA from UT, MBA from SMU
Sold 35% of shares in last 9
Months
Christopher Reading (CEO)
Age: 52
Tenure: 14 years
CEO: 12 Years
COO: 2 years’ prior
Former SVP of Operations at
HealthSouth Corporation
BS in PT with High Honors from
Medical College of Virginia
Sold 24% shares in last ~ 9 months
John Bates (VP,Corporate Controller)
Age: 52
Tenure: 11 years
Richard Binstein (Secretary)
Formerly EVP at
Physiotherapy Associates, Inc.
JD from The Catholic
University of America, BS
from the University of
Delaware
Source: Capital IQ
Johnny Blanchard (Assistant
Corporate Controller)
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Christopher J. Reading, President, CEO and Director
Christopher J. Reading was promoted to President and Chief Executive Officer and elected to our Board of Directors effective November 1,
2004. Prior to 2004, Mr. Reading served as our Chief Operating Officer since joining us in 2003. From 1990 to 2003, Mr. Reading served in
various executive and management positions with HealthSouth Corporation where most recently he served as Senior Vice President of
Operations responsible for over 200 facilities located in 10 states. Mr. Reading is a physical therapist.
Lawrance W. McAfee, EVP, CFO and Director
Lawrance W. McAfee was promoted to Executive Vice President and elected to our Board of Directors effective November 1, 2004. Mr.
McAfee also serves as our Chief Financial Officer, a position he has held since joining us in 2003. Mr. McAfee’s experience includes having
served as Chief Financial Officer of three public companies and President of two private companies.
Daniel C. Arnold, Director
Daniel C. Arnold was named our Chairman of the Board on July 6, 2004. Mr. Arnold is a private investor engaged primarily in managing his
personal investments. He previously served as Chairman of the Board of Trustees of the Baylor College of Medicine. He is currently serving
only on the Board of U.S. Physical Therapy, Inc.
Mark J. Brookner, Director
Mark J. Brookner has served on our Board since August 1998. Mr. Brookner is currently a private investor. He served as our Chief Financial
Officer from 1992 to 1998 and as our Secretary and Treasurer during portions of that period.
Harry S. Chapman, Director
Harry S. Chapman has served on our Board since August 30, 2010. Mr. Chapman is the Chairman and the Chief Executive Officer of Chapman
Schewe, Inc., a healthcare insurance and employee benefits consulting firm. Previously, he served as a Corporate Senior Vice-President and
Managed Care Officer of CIGNA’s South Central Region, with responsibility for HMO and PPO plans in several states. Mr. Chapman’s
experience also includes having served as a head of EQUICOR’s Health Plan and sales operation in Houston and as a Regional Vice-President
for Lincoln National Insurance Company’s Central Region.
Dr. Bernard A. Harris, Jr., Director
Dr. Bernard A. Harris joined our Board on August 23, 2005. From 2001, Dr. Harris has been President and Chief Executive Officer of Vesalius
Ventures, a venture capital firm that invests in early stage medical informatics and technology. From 2006, Dr. Harris has served as a Class III
director of Sterling Bancshares, Inc., a bank holding company. From 1996 to 2001, he served as Chief Medical Officer and Vice President for
Space Hab, an aerospace company. Dr. Harris is a former astronaut, having completed two space shuttle missions. He completed his residency in
Internal Medicine at the Mayo Clinic and trained as a flight surgeon at the Aerospace School of Medicine at Brooks Air Force Base.
Marlin W. Johnston, Director
Marlin W. Johnston has served on our Board since 1992. Mr. Johnston has been a management consultant with Tonn & Associates, a
management consulting firm, since 1993. During 1992 and 1993, Mr. Johnston served as a management consultant to the Texas Department of
Health and the Texas Department of Protective and Regulatory Services.
Edward L. Kuntz, Director
Edward L. Kuntz has served on the Board since August 25, 2014. Mr. Kuntz is the former Chairman and Chief Executive Officer of Kindred
Healthcare (NYSE:KND), the largest diversified provider of post-acute care services in the United States. From 1999 through May 2014, he
served as Chairman of the Board of Directors of Kindred and as Chief Executive Officer from 1999 to 2004. He also serves as a director of
Rotech Healthcare and American Electric Technologies, Inc. (NADSAQ-CM: AETI). Mr. Kuntz is also an operating partner in Sentinel Capital
Partners, a private equity firm.
Reginald E. Swanson, Director
Reginald E. Swanson joined our Board on September 6, 2007. Mr. Swanson is Managing Director of STAR Physical Therapy, LP, a subsidiary
of the Company. Mr. Swanson is founder of STAR Physical Therapy, LLC, and from 1997 to 2007, was its president and managing member. He
is a licensed athletic trainer and has been involved with sports medicine and physical therapy for over 25 years.
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Clayton K. Trier, Director
Clayton K. Trier joined our Board on February 23, 2005. Mr. Trier is a private investor. He was a founder and former Chairman and Chief
Executive Officer of U.S. Delivery Systems, Inc., which developed the first national network providing same-day delivery service, from 1993 to
1997. Before it was acquired in 1996, U.S. Delivery was listed for two years on the New York Stock Exchange.
Sources
"Opportunity Within The Multi-Billion Physical Therapy Industry: Examining U.S. Physical Therapy And EWellness." Seeking
Alpha. Seeking Alpha, 17 May 2016. Web. 04 Feb. 2017. <http://seekingalpha.com/author/logical-assessment/articles>.
United States. 2010 Census. Washington, D.C.: U.S. Department of Commerce, Economics and Statistics Administration, U.S.
Census Bureau, 2013. Print.
"The Federation of State Boards of Physical Therapy." NPTE Graduation Year Reports | FSBPT. N.p., n.d. Web. 04 Feb. 2017.
< https://www.fsbpt.org>.
"Healthcare Reform in the United States." Wikipedia. Wikimedia Foundation, n.d. Web. 06 Feb.
2017. https://en.wikipedia.org/wiki/Healthcare_reform_in_the_United_States
Robert Karr | Dec 14, 2016 1:27 Pm EST. "Blackstone and KKR Build Dry Powder." Blackstone and KKR Build Dry Powder -
Market Realist. Market Realist, 4 Dec. 2016. Web. 06 Feb. 2017. <http://marketrealist.com/2016/12/blackstone-and-kkr-build-dry-
powder/>.
"Private Equity Capital Briefing - August 2016." Private Equity Capital Briefing - August 2016 (n.d.): n.
pag. Www.ey.com/publications. EY, 1 Aug. 2016. Web. 4 Feb. 2017. <http://www.ey.com/Publication/vwLUAssets/EY-private-
equity-capital-briefin-august-2016/$FILE/EY-private-equity-capital-briefin-august-2016.pdf>.
Source: USPH.com
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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, CFA Institute or the CFA Institute Research Challenge with regard to
this company’s stock.
CFA Institute Research Challenge