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CFA Institute Research Challenge hosted by

CFA Societies Texas, Louisiana and Oklahoma Local Challenge – Southwest U.S.

West Texas A&M University

U.S. Physical Therapy

Ticker: USPH [NYSE]

Recommendation: SELL Source: Team Calculations and Nasdaq Data

Business Description: USPH is the third largest public company providing outpatient physical therapy.

Their strategy is to acquire physical therapy clinic and provide back office administrative activities,

marketing, and billing support. USPH’s current stock price of $75.45 per share is at an all-time high.

USPH has been able to successfully acquire quality clinics. Their strategy is to acquire clinic in areas with

higher reimbursement rates. They have strong debt management and significant cash availability. We

project USPH’s revenue to increase by 7.5% annually through 2021.

Industry: The industry is highly fragmented. USPH owns approximately 1.4% of total rehabilitation centers

in the U.S. No one in the market owns more than 10%. Revenue growth for the physical therapy

rehabilitation industry is expected to grow at 1.8% in the next five years.

While USPH is financially sound, their current stock price is overvalued. We recommend a sell based on

six models:

1. Running a Discounted Cash Flow analysis calculates an intrinsic value of $65.64 per share. The

intrinsic value price is discounted 8.13% below their current market price of $71.45.

2. Price multiples between competitors show USPH to be overvalued. All ratios indicate that investors

are paying more per dollar for income for other competitors. USPH has a current P/E ratio of 33.3,

approximately 200% above their competitors.

3. A Monte Carlo simulation using a tax rate of 32%, shows that 57% of scenario prices are overvalued

compared to the current market price. The assumption of using 32% tax rate is based on the historic

USPH tax rate.

4. While revenues are increasing, the revenue growth rate is decelerating. Six revenue models identity

total patient visits as the single most influential variable. Even at a projected 7.5% growth rate, we

conclude that this growth does not justify the current stock price. Revenue per patient plateaus

indicate USPH has reached a limit on their efficiency gains. As the market turns to consolidation,

fewer clinics will be acquirable; this will decrease the amount that USPH will be acquiring, which

will slow growth in total patient visits.

5. The Dividend Discount model predicts the net present value of returns over the next five years. This

model indicates that the price per share is $20.16 under the current market price. Investors cannot

expect to be properly compensated from the dividends received to justify current stock price.

6. A DuPont Ratio analysis indicates that Return on Equity (ROE) is decreasing. ROE in 2011 was 17%.

In 2016, 11%, and is forecasted to be 10% by 2021.

The multiple models used to analyze USPH’s stock provide consistent evidence that the current market

price is overvalued. These models confirm our recommendation to sell.

February 5, 2017

52 Week Price Range $45.76 - $73.05

Average Daily Volume (3m) 81,104

Beta (3m) 0.85

Shares Outstanding 12.52M

Market Capitalization 894M

Institutional Holdings 12.47

Insider Holdings 0.33

Book Value per Share $14.28

Debt to Equity 0.2

Source: Morningstar, Nasdaq

Market Profile

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Monte Carlo Current Tax Rate (32%)

Price Target: $65.64

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2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

E X P E C T E D E A R N IN G S G R O W T H

Comparison USPH SEM HLS

Forward P/E $33.33 $13.30 $15.30

Earnings Growth (1-3 yr.) 9 8.8 5.8

P/EG Ratio 3.7 1.51 2.64

Business Description US Physical Therapy (USPH) was founded in Houston, TX in 1990. Outpatient physical ther apy clinic acquisitions and start ups are their specialty. In addition, they manage twenty-one clinics for third parties. They are a general partner in their

wholly owned clinics, while they can own interest from 49% to 99% in their limited partnerships depending on the developed

agreement with the existing therapist. In the majority of clinic partnerships, USPH owns a limited partnership interest of 64%. Starting with just 55 clinics in 1994, USPH has grown into one of the largest groups of physical therapy clinics in America.

USPH went public two years after starting, first being listed on the NASDAQ, changing to the NYSE in 2012. USPH provides

physical therapy services through its subsidiaries for a variety of rehabilitation needs from injuries and pre/post operation. The majority of patient visits come from physician referrals. Patients are treated on a multi-weekly basis, usually for an hour a day.

Depending on physician recommendation, patients therapy recovery time is around 6 weeks. They are paid on a fee for service

basis from insurance reimbursement, workers compensation, and government plans. Due to their large market share, they attract new clinics by the management services they provide and the ability to negotiate insurance rates. These services include

accounting, billing, marketing campaigns, and guidance with legal compliance. In return, subsidiaries are able to focus on th e

patient's needs and satisfaction with service.

By emphasizing growth through the starting of de novo clinics and the acquisition of established facilities, USPH has grown to

540 clinics (2016) in 42 states and currently employs approximately 3,400 employees. Currently being ranked the third largest

in the industry, USPH only owns approximately 3.4% of the total physical therapy practices. This emphasizes the amount of fragmentation that exists in this industry. Unlike many competitors, USPH has a primary focus on physical therapists, which has

perpetuated attraction by quality partnerships, growing company revenue, and increasing market share. Their revenue strategy

is to own the majority interest of the clinic, while allowing the original physical therapist to own a specified minority. Successful physical therapists will be able to increase their minority interest up to 35%, which encourages growth in revenue

and patient referrals.

The industry is highly regulated by government entities that also control reimbursement rates for a portion of the business making it subject to certain risks. With an average return of approximately 33.7% annually, USPH is categorized as an

aggressive growth stock.

Company Strategy

Understanding the fragmentation in the industry, USPH focuses on five specific areas:

 Acquiring Established Growth Oriented Clinics- USPH profits from the acquisition of quality physical therapy facilities located in suburban areas that have high reimbursement trends and high relative populations. They attract

therapists who are actively pursuing efficient growth with a large referral base. They market to those who are looking to narrow their focus to their medical practices without completely losing control of their business. This appeals to physical

therapists who do not want to operate under a corporate name but want the efficiency of one.

 De Novo/Satellite Clinics - USPH focuses on under ser ved ar eas in the development of their own wholly owned clinics, while also focusing on expansion through the development of satellite clinics. Successful clinics gain management of satellite clinic, which further increase USPH market shares and overall company efficiency.

 Diversified Revenue That Provides Higher Reimbursement Rates- The physical car e industr y is thr eatened by constant change in reimbursement rates for Medicare/Medicaid. USPH has looked to diversify payment risk by

minimizing exposure to government reimbursement. USPH has kept their Medicare/Medicaid reimbursement on average

of 24% by pushing their business towards claims dealing with contractual agreements in company worker’s compensation, middle class customers likely to have private insurance, and athletic injuries. Though it is more difficult to obtain this

customer base, USPH has focused on the higher reimbursement rates these claims provide.

 Relationship Oriented - Before an acquisition, USPH executives examine each physical therapy group to better gain understanding on their future growth potential. On a personal level, they will get to know the therapist and their families to evaluate how they would fit within the ethical (and quality driven) structure of the company. This continues on a lower

level, as each physical therapist is encouraged to engage with the community; USPH wants their subsidiaries to build

relationships with their communities. Considering the personal nature of physical therapy, this methodology has allowed USPH to be successful on a micro level.

 Referral Connections - USPH has r ecognized the impor tance of physician r efer r als, consider ing most insur ance companies require customers to be referred by a physician to be treated by a physical therapist. When evaluating areas of

acquisition, USPH will observe the physical therapist with the most developed relationships with physician clinics. This area is a major focus within the company, as it is the best method of increasing total patient visits; a big driver for their net

patient revenues.

Management and Corporate Governance

Upper management - A large part of the success in the healthcare industry is dependent upon quality management. USPH has

pushed for the success of their management in relation to their stock and company equally. Christopher Reading (CEO) and

Lawrence McAfee (CFO) both have a seat on the board of directors. Reading and McAfee have held seats and those positions

since 2004. USPH is unique from its competitors in that their upper management all have a therapist/hospital background which

has given them a unique perspective on their business operations. (See appendix for information on specific corporate

compensation structuring).

 Insider Trading – As explained in appendix, USPH has given gener ous stock options to management for successful

years. To ensure continual earning growth, USPH awards stock and cash bonuses to their senior management. Annual

fiscal earnings incentives give Christopher Reading (CEO), Lawrence McAfee (CFO), and Glen McDowell (COO) the

ability to earn up to 125% of their base salaries in cash bonuses for EPS goal attainment. There are also long term stock

incentives for EPS goal attainments from the previous years: up to 16,000, 8,000, and 8,000 shares respectively. All upper-

management persons are able to receive stock options based on senior management decisions. Management salaries are a

large portion of stock options, and “insiders” have been selling since August 2015. Because of this, it is inconclusive to

state the possible reasons for insider sales.

100

200

300

400

500

600

2005 2007 2009 2011 2013 2015

Total Number of Clinics

(Source: Company Filings)

Figure 3

Figure 5

Figure 4

Figure 1

Source: Team Calculations, IBIS World

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2006 2008 2010 2012 2014 2016 2018 2020

Price to sales

Figure 2

(Source: Team Calculations)

Board of Directors - The boar d of dir ector s, in addition to the insider dir ector s and the non -director officer, own 4.3% composite in stock shares. In accordance with the NYSE standards, there are 7 independent board of directors, who have no

relationship with the company in question, defined by the Securities Exchange Commission (Securities Exchange Act of

1934).

 Responsibilities - USPH Boar d has adopted a Code of Ethics, cr eated a compliance committee, meets four times a year, declares dividends and compensation, repurchase/issue shares of stock, and selects an auditing firm. Final

decisions are voted on by shareholders, with one share equaling one vote.

Institutional Holdings - Cur r ently USPH has 13 million shar es outstanding with a total value at appr oximately $838 million. The top three institutional holders are Neuberger Berman Group (8.4%), Blackrock, Inc (7.14%), and RBC Global

Asset Management (U.S.) Inc (7.1%), with total institutional holdings at 98.51% (1/17). Large shifts in institutional buying

or selling of UPSH stock may negatively or positively affect USPH price.

 New/Sold Out - Investors have had the tendency to buy USPH with almost three times as many new positions as there was sold out positions. This is representative of our consensus in market over - buying.

 Decrease/Increase - USPH has had fewer investor s decr ease their position. We estimate this is due to institutions wanting to rebalance or capitalize on recent price appreciation.

Industry Overview

USPH is a part of the healthcare sector within the outpatient physical therapy clinic industry accounting for $30 billion in annual revenue that is anticipated to grow at 1.6% in the next five years. The main sources of demand come

from Medicare/Medicaid customers from government plans, private insurance held by young athletes and upper -

middle class persons aged 35-65, and workers compensation claims through contractual agreements. See appendix for

“food supply chain” of outpatient physical therapy clinics.

Economic Drivers:

 GDP – The United States has been proven the wealthiest industrialized country globally with a GDP of 18.04 trillion dollars in production. The regulated United States growth is more favorable than the economy of countries like China

because of the steady and constant nature it provides. This demonstrates long term future benefits as GDP is expected

to grow at 2.2% in 2017, and 2.3% in 2018, far above most other developed countries. In addition, expected further growth is anticipated as the newly elected administration carries out its focus on economic growth.

 Unemployment rate - The low unemployment rate of 4.6% has created the ability for individuals to consume. As Americans enter the workforce their disposable income is increasing; further positively affecting GDP and ability to

hold private insurance.

 Healthcare Spending - US healthcare spending increased 5.8% in 2015 to $3.2 trillion, composing 17.8% of annual GDP. This percentage of GDP significantly increases available cash flow circulation that will allow USPH to grow.

 ACA- The Affor dable Car e Act has incr eased demand in all aspects of the healthcar e industr y by r equir ing insurance for all with a fine for noncompliance. More people are covered than ever before, which has decreased

money reserves available for insurance companies to pay for rising costs, causing premiums to increase. This decrease

in money supply has also caused insurance companies to find cheaper alternatives. The inexpensive and long term successful nature of physical therapy has led many insurance companies to push easily recoverable customers to

physical therapy care. The profits to be realized from an increased insured population have caused many rehabilitation

institutions to enter the market to capture economic profits.

Industry Growth and Demand:

The healthcare industry as a whole has had strong and continuous growth patterns above most other industries in years past.

The physical therapy industry specifically has been in a growth phase, considering its alternative cost to expensive

procedures and successful treatment rate. Because of decreasing margins, insurance companies are continually looking for cost affective and less recurring alternatives to surgery.

 The physical therapy rehabilitation centers industry is expected to slow in grow at 1.6% for the next five years, while previously growing at 2.2%.

 Physical therapist jobs are forecasted to increase on average by 33% over the next 10 years. The demand for physical therapists have significantly increased because of this growth rate, as it was the 8th fastest growing jobs in 2015.

Demand for Low Cost Alternatives Has Increased Demand for Physical Therapy

To better govern costs, emerging electronic health records (EHR) has given Government entities the ability to track

outcomes for medical services. The Center for Medicare & Medicaid Services (CMS) has pushed all forms of medical

services to an E.H.R. requirement that tracks the type of patient, treatment plans, and success of treatment. This technology has become a requirement for any medical services institution that has reimbursement from Medicare/Medicaid. Quality is

now being pushed more than ever, and is now more able to be quantified. The CMS has outlined their plan for medical

services in the coming years:

1. Achieve better overall health care by making care more person-centered, reliable, accessible and safe;

2. Keep people and communities healthier by supporting proven interventions that address behavioral, social and

environmental determinants of health; and 3. spur smarter spending of health care dollars that ultimately will reduce the cost of health care for everyone.

Insurance companies are piggy-backing off of the CMS’s requirements by following the medical services that meet the

technological standards of quality. Both government entities and private insurance are pushing for better quality and low cost methods. Harvard business medical review recently performed multiple studies relating spinal fusion surgery and

physical therapy outcomes. For lower lumbar spinal stenosis (averaging $115,000 + 6 weeks of physical therapy), 169

persons were reviewed: half received back surgery with 6 weeks of physical therapy, the other half received just physical therapy. After two years, there was no difference in pain or function between the surgery and physical therapy groups. In

addition, 25% reported recurring complications from surgery, while only 10% reported recurring complication from

physical therapy. More than 650,000 spinal surgical procedures are being performed annually in the United States, with costs exceeding $20 billion. Of these 650,000 performed, it would only take 25% success rate of that number to save over

$5.8 billion using physical therapy, though actual success rates would be close to surgery (tens of billions savings). The

evidence is there for insurance and government to observe through technology. Companies will move into the market to capture the demand from insurance. It is estimated that over 15,000 new rehabilitations will enter the market by 2021. This

could negatively affect USPH, as the flood of entrants is also accompanied with lowering ability to control pricing.

(Source: Harvard Medical Review, Spinehealth.com, and Team)

20000

40000

60000

80000

100000

Hip Replacement

Knee Replacement

Back Surgury Ankle Shoulder

Average Price for Each Major Surgury

The average cost of physical therapy is

$1,800 for 6 weeks of

(Source: Nasdaq.com)

Figure 7

Figure 8

Figure 6

TOP 5 HOLDIN GS

Neuberger Berman Group

Blackrock Fund Advisors

Royal Bank of Canada

Vanguard Group INC

Renaissance Technologies LLC

1,091,731 - 8.4%

927,868 - 7.14%

790,671 - 6.1%

598,286 - 4.6%

573,654 - 4.4%

Figure 11

Figure 10

Figure 9

0.75 5.75 10.75 15.75 20.75 25.75

2016

2017

2018

2019

2020

2021

Healthcare Spending as % of GDP

% of GDP spend on

healthcare

Amt of GDP

(Source: cms.com)

(Source: tradingeconomonics.com)

(Source: Bureau of Labor Statistics)

Where the Industry is Moving: ACO’s - Accountable Care Organizations (ACO) were expedited through the ACA as a way to lower costs by working together as a cohesive group. Created by either large insurance companies or private sector

organizations, an ACO is an organization that works together with all aspects of the medical delivery model to maintain a

higher quality service while decreasing costs. This is achieved by keeping medical professionals accountable for their

success rates by the use of technical information, which will help to reduce the amount Medicare, Medicaid and Insurance

companies are paying. Since inception, ACOs have been growing in popularity: approximately 70% of the population can

be served by an ACO. The amount of ACOs have grown since 2011 to over 800 groups today (7, 4). Insurance companies are using ACO’s to ensure that quality care is taken, which mitigates the risk that is accompanied with different treatment.

Because of this large trend in quality, it is important to be on the receiving end of an ACO partnership. Due to their efficient

care models, ACOs can profit from the utilization of a therapist; therapists benefit by the referral of a new stream of patients. However, it is difficult, if not impossible, for a single physical therapist to become a part of an ACO. If there is an

ACO in the area, USPH brings the ability to negotiate on a individual providers behalf, in order to possibly gain entry into

the organization. Because of this, group clinic and individual clinics will demand the services USPH provides in areas with ACO groups. USPH has proven their quality, and will be able to easily negotiate with their size and fiscal soundness. As

more ACO groups are formed, however, USPH may be hindered from entering certain markets.

Increase in Prime Earning Year Customers Increasing Demand for Physical Therapy - The time that USPH has taken to acquire each clinic has allowed them to be strategically placed within each age demographic of the United States.

Though they service people in all age groups, they have an increased portion of patients in the 45-54 age group. This age

group is the largest demographic of private insurance holders, which benefits USPH’s high insurance market share. This also lowers no show rates, as this age group is most likely to show up to appointments at the scheduled time. As the

population is aging, lower unemployment rates allow more people in this age group to hold jobs that offer insurance.

Longer life spans are causing people to remain working, keeping employment insurance in place for a longer period. This trend benefits USPH, as they have been able to fill the demand caused by this wave of the working class. In addition,

population ages 65+ will be increasing exponentially in the next years, which will cause government spending on Medicare

to increase. USPH capitalizes by marketing to each age group for its unique characteristics: see Appendix S for a more in- depth analysis of each age group.

Competitive Positioning

The industry is largely fragmented and only has a few large players each holding less than ten percent of market share. There are approximately 32,000 physical therapy rehabilitation centers in the U.S. and USPH has ownership rights of over

500. Because of fragmentation, USPH has been hesitant to expand in certain states with a high saturation of clinics. Though

these clinics may not be owned by their main competitors, large groups of physical therapy clinics dot across the US, leaving less market share acquirable. There are few differentiated characteristics between these physical therapy

institutions, so competition must be segmented through business operation differentials. USPH is one of the few companies

who operates solely in the outpatient therapy rehab sector, however, while other competitors also have stake in specialty hospitals and inpatient at-home physical therapy. Because of this, there are no perfect competitors available for stock

comparison. Based on the similarity in business operations, our team found the following to be USPH’s main competition:

 Healthsouth Corporation (HLS) is an internationally operating provider of medical rehabilitation (109 outpatient clinics in the U.S.), specialty hospital, and home health. Their locations total more than 1,900 clinics with facilities in United Kingdom and Australia. Operating in 34 states, Healthsouth was organized in 1984. Net revenues for

Healthsouth reached $3,162,900,000 in 2015 from their various focuses on professional sports and major corporate

partnerships.

 Select Medical Corporation (SEM) expanded to outpatient physical therapy through the acquisition of Physiotherapy. Both outpatient and inpatient specialty hospitals clinics total approximately 1,500 clinics and are located in 46 states.

With net revenues reaching $2,804,507,000 in 2015, clients served by Select Medical range from critically ill

individuals to elite athletes.

 ATI Physical Therapy is a privately held company founded in 1996 that acquires various physical therapy specialties along with home health care services. Focusing on patient relationships, they emphasis meeting the goals of their

clients and gaining satisfaction. ATI has grown to 600 clinics in 24 states.

Favorable Revenue Streams - For business oper ations, USPH has been able to pr oduce a significantly less por tion of their revenue from Medicare/Medicaid (24.5%). Because of the flux in government spending for Medicare and Medicaid,

USPH has had more stable revenues throughout the years. Using percentage changes from government spending on

Medicare/Medicare per year and percentage changes in revenue in each company, it can be seen that competitors with

higher percentages of revenue from Medicare/Medicare have revenues that correlate more with fluctuating government

spending on Medicare and Medicaid. The low correlation for USPH is positive for USPH in more stable revenue, and less

uncertainty with pending government adjustment costs. USPH is able to better diversify their revenue streams, i.e. 50% of USPH’s revenue comes from private insurance. USPH has taken advantage of their positioning by appealing to physicians

for referrals that will also have a diversified mix of payers. This situation allows USPH to negotiate a larger portion of their

revenue with insurance companies rather than take fixed amount from the federal government. However, this also subjugates USPH to certain risks related to a dependence upon private insurance. See Appendix L for USPH competitor

revenue breakdown.

Progressive Business Model that Appeals to a Growing Generation - The upcoming millennial gener ation have unique characteristics that USPH will capture. Millennials are less likely to be entrepreneurial in nature, meaning they are

less likely to develop business’ of their own. According to a recent Harvard Business Review study, millennials are more

relationship oriented, wanting to be able to focus solely on the quality of their work and relationships in their work. Consequently, they are more prone to focus on separation of specified work (physical therapy) and everything that is

involved in running a business. USPH has recognized this need, and will continue to market acquisitions to therapists of this

growing demographic by allowing focus to be placed on the actual physical therapy; creating value by supplementing accounting, legal, technical, and logistically based areas of the business operation. Considering the millennial (especially

ages 20-25) generation is also the largest group of recent physical therapy licensures, the model USPH utilizes will continue

to allow growth.

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

Under 19

19-25

26-34

35-44

45-64

65 and older

Uninsured Rate by Percent of Population

Company Correlation

Coefficient

USPH -0.042

SEM 0.21

HLS 0.08

Figure 12

Figure 13

Figure 15

Table 1

Figure 14

(Source: healthpayorintelligence.com and Team)

(Source: Company 10K and Team)

(Source: Company 10K and Team Calculations)

(Source: ptcas.org and Team)

Employee Attraction - USPH’s business model pr ofits on the quality of their employees connections within their community. Considering the labor intense nature of physical therapy, it is important to capture the best talent. USPH out performed their competitor by attracting the best employees in the market with their benefit packages. Allowing profit sharing up to 35% encourages physicians to remain active in growing their business model. As discussed, taking on the back office activities USPH attracts physical therapists who want to focus on providing quality therapy to a larger volume of patients.

Progressive Business Model that appeals to an exit-ing generation

Capitalizing on the other end of the demographic spectrum, USPH will appeal to the entrepreneurial generation getting

close to retirement. Those looking for an exit strategy will benefit from USPH buying a portion of their business and slowly

lifting the load, while guaranteeing the purchase of the business as a whole from the owner upon retirement.

Pinnacle ACO positioning for past/present/future acquisitions - Due to their pr evious employment as physical therapists, the personal experience of each USPH executive have given them unique insights. Understanding the importance

of relationships between patient/therapist/management dynamics is valuable. More valuable is the management mindset for

personal relationships, allowing them to focus on both present and future revenue potential based on the individual clinic’s business model and values. In an industry where quality is becoming paramount, this atmosphere of management will

continue to allow growth. The time taken to assure quality acquisitions have allowed USPH to acquire preferred clinics. The

market movement to Accountable Care Organizations will continue to raise demand for USPH’s model through their beneficiary capability, an increased focus on clinical outcomes will help ensure success in the ACO era.

Location, location, location… - USPH has developed their clinics in areas with less market supply. This has created an advantage to their insurance revenue mix, considering private insurance allowables are higher in markets with more demand

(less supply of providers). USPH has consistently owned markets in which they are able to take a majority. While capturing

a majority, the areas chosen are more suburban in nature, which also constitute higher fee schedules. Their large revenue mix of workers compensation has also led them to develop clinics in more manufacturing based areas. More manufacturing

based areas give way to more demand from the need for hedging liabilities of high injury prone jobs. Physical therapy

prevents workplace accidents and companies can decrease their insurance cost by putting in specific preventative measures. USPH creates contracts like Fit2Wrk to capture the market in their areas. USPH has also correlated their clinics with areas

that have larger relative percentages of ages 45-55; these are the customers most likely to have private insurance. (see

Appendix R for more detail on locations for specified demand qualities).

Increasing Net Revenue Per Visit – Adding extr a visits per -day per-clinic has allowed USPH to be able to grow their revenues at a higher rate than their increases in acquisitions and developments. USPH’s management supplementation has

allowed their clinics to focus primarily on patients, which has increased the amount of patient visits per day. USPH has

continually stated their intent to push clinic groups to better daily productivity. Because of the time taken for each clinic acquisition, USPH upper management ensures each clinic has that goal in mind, which has been demonstrated with the

growth of each clinic’s average visit per day. To continue in this trend, USPH must increase the number of visits per day at

a greater extent. We believe USPH is close to peak efficiency in their operations.

Porter’s Five Forces:

 Competitive Rivalry - SIGNIFICANT This industry remains highly fragmented with a large amount of physical therapist owning their own clinics, which increase

competition for USPH. However, because USPH operates solely in the physical therapist area and is publically traded

(unlike most of their competitors), they have been able to acquire more strategic locations and bypass low margin practices.

 Bargaining Power of Suppliers - AVERAGE Over 70% of USPH’s revenue comes from set insurance and government rates. However, USPH acquires locations within

suburban areas where the fee schedule are set at a higher rate. Because reimbursement rates are set by location and demand,

USPH has mitigated supplier power with their location strategy. USPH has been efficient in their operations, which appeals to insurance and government entities that are looking for better outcomes. The size of USPH has also given them power in

rate setting, as they are more able to bargain for their clinics.

 Bargaining Power of Customers - LOW The bargaining power of suppliers is directly related to the power of customers, considering over 93% of patients come in

with alternative payments methods. Customers that try to bargain rates with their insurance companies are the only source of bargaining threat to USPH, though the likelihood of this occurring on a large scale basis in very minimal.

 Threat of new Entrants - AVERAGE The cost to enter this industry as a physical therapist is fairly low. With high demand for this service, it would be fairly easy

for therapists get started. USPH’s business has pushed the market to therapists joining a group practice, rather than creating an individual clinic. Due to the new nature of acquiring and consolidation, however, it may be easier for some groups to

become a larger part of the market through acquisitions. USPH remains highly competitive with the large number of clinics

it owns and the methodology in its acquiring.

 Threat of Substitute Products or Services - LOW All suitable substitutions to physical therapy are more costly and on-going pain management difficulties. These are the

reasons why USPH has become the alternative to many of the available substitutes. Insurance companies have focused on

USPH as the cheapest/most favorable option due to the expensive nature of surgery, other costly procedures, and medications.

Revenue from Workers compensation - At 18.5% , USPH has been able to secur e r evenue thr ough wor ker s compensation plans more than any of their competition. According to OSHA, there are 4.1 million work related injuries and

illnesses per year. Injuries from workplace injuries can impose substantial costs to employers. USPH recognized this need

and implemented the program Fit2Wrk to give preventative care for injury prone work environments. Negotiated contracts with companies allow less time and cost from injuries, while expediting job return time. These contracts guarantee patients,

and the increasing costs for companies will continue the need for USPH’s Fit2Wrk service. Recently, USPH has had a

recent dip in revenue from workers comp. We estimate that it will be difficult to continue to keep high streams of revenue from workers compensation as the industry grows and mean population age increases, leaving more revenue from

Medicare/Medicaid.

$35.00

$37.00

$39.00

$41.00

$43.00

$45.00

$47.00

$49.00

$51.00

$53.00

$55.00

1996 1998 2000 2002 2004 2006 2008 2010

Cost of the Most Disabling Injuries Billions

$37.1

$41.1 $44.2

$47.4

$51.7 $50.7

$48.6 $48.3

$48.6

$53 $53.4

Figure 20

(Source: Company filings and Bureau of Labor)

(Source: Liberty Mutual Research and Team)

(Source: Team Projections)

Figure 18

State % of Urban State % of USPH Total

CA 92.6% 0.19%

NJ 89.4% 2.96%

HI 89.0% 0.00%

NV 88.3% 0.56%

AZ 87.3% 2.22%

UT 87.0% 0.00%

RI 86.0% 0.00%

FL 84.8% 1.48%

IL 84.6% 0.93%

MA 84.3% 0.37%

Top 10 Urban States in US

State % of USPH Total % of Urban (AVG 67%)

TX 13.2% 80.30%

TN 13.2% 60.90%

MI 9.3% 70.50%

VA 8.0% 69.40%

WA 6.9% 76.40%

MD 5.7% 81.30%

GA 5.0% 63.20%

OR 4.8% 70.50%

PA 3.9% 68.90%

WI 8.9% 65.70%

Top 10 States for USPH

0 1 2 3 4

Comeptive Rivalry

Bargaining Power of Suppliers

Bargaining Power of Customers

Threat of New Entrants

Threat of Substitutes

Porter's Five Forces

Table 2

Table 3

(Source: Company filings and Team)

(Source: Company filings and Bureau of Labor)

Figure 19

Investment Summary

1/2/2 008 1/2/2 009 1/2/2 010 1/2/2 011 1/2/2 012 1 /2/2 013 1/2/2 014 1/2/2 015 1/2/2 016 1/2/2 017

USPH EVENT TIMELINE Trump

El e cte d

CM S Bundled

Pay ment Plan

Begins

Obama Care op en

Enrollment; 8

million gain

insurance

Credit

Line

Increase

to 125 M illion

Recognized by

Forbes as one

of America's

best small businesses

Obama

Reelected

ensuring

survival

ACO

Pioneer

Program

begins

Credit

Line

increase

s to 75 million

Successfully

launched

FIT2WRK The

Affordable

Care Act

signed into law

Recession

Takes

Obama

Elected

Acquitions

We issue a sell recommendation for USPH with a target price of $65.64, primarily using a discounted cash flow to equity method. This is a 8.13% under the current price of 71.45 (2-3-17). USPH is currently experiencing a price of an all time

high since its inception in 1992. Investors have showed support for the success of USPH through their expectations and

price appreciation. USPH is a well-managed company with solid financials cash availability for growth opportunities. The macro-environment favors the company with possible tax rate cuts. As we incorporate all the positive aspects and

potential of the company in a forecast, the stock is still close to a hold. We do not deny their merit; USPH has proven

their ability to be a successful company. The sell issue does not reside in problems with USPH: we attribute the overvaluation to recent market run-ups. This has caused price per share to increase beyond its intrinsic value. Investors

would be better finding investments with more growth opportunities. We expect the market to adjust in the near future.

We outline the causes for this consensus below:

 High P/E Ratio Coupled with Unjustified Earnings: USPH has a for war d P/E r atio of 33.3 with a r elative P/E of 1.40x. Our team estimates that earnings per share for 2016 are $1.92, creating a current P/E of 37. We expect

earnings per share to grow at 7.82%. P/E will have to rise high above the current number to supplement an investor for

price appreciation and return. As we except that as earnings grow at this rate, investors will be less willing to pay for the earnings growth at the current price and sell for capital gains. If USPH managed to keep their forward P/E at 33.3,

we estimate that future price would be at $91.24 by 2021. This would only annualize to a 6.3%; less than our required

rate of 8.4%. Any scare in expectations could cause a severe price dip: the recent price hike of $20 was from their earning announcement in November of 2016. Before this, stock price was falling quickly. If earnings do not meet the

new market expectation increases, there could be a sharp decline in price. We anticipate earnings will not meet current

price expectations.

 Increasing Price of Future Acquisition Targets: The pr ice per acquisition has had an incr easing tr end; should this trend continue, USPH will be subject to a decrease in cash flow that will negativity effect their current debt

structure. Funds being drawn away from cash flows could hinder growth potentials and cause investors to scare in

response, lowering stock price. To increase earnings by the current prices expectations, USPH would have to acquire

at a higher rate than expected. As the price of acquisitions continues to increase from less market supply, USPH will

have to pay more for their clinics. We estimate that USPH will not acquire at the rate to justify current market price.

 Uncertainty in the Environment Increases Risk: USPH has been able to successfully diver sify their payments between different sources. USPH primarily focuses on insurance, as insurance provides the highest reimbursement rates. This has given USPH competitive advantages in the past. Because of this large percentage in revenue, however,

USPH is subject to certain risks that private insurance are also subject. The uncertainty regarding congressional rule

may hinder profits through interstate insurance, lowering reimbursement rates from excess supply of insurance providers. Some of the largest health insurance companies have stated their intention of leaving the ACA, with

estimates of only one health insurance company available through the ACA in 2017 . If USPH has a customer base

from ACA, they will likely lose this customer visits. This could potentially severely effect their total patient visits; one of the main revenue drivers. For a detailed outline of possible congressional rulings effects, see appendix for details.

 Interest rates: USPH has a r evolving line of cr edit for 125 million with inter est of LIBOR + 1.5% -2.5%. As interest rates increase, cost of debt will increase. This could reduce cash flow and create an unattractive view towards

investors. This also contributes to DCF. As interest rates rise, investors will expect more from their returns. Assuming higher interest rates, investors could find better opportunity for investments with higher returns.

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

160,000.00

180,000.00

2010 2011 2012 2013 2014 2015

Increasing Cost of Acquistions

Acquisitions Average Cost Per Acquisitions

62.28%

8.91% 0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2000000

4000000

6000000

8000000

1000000 0

1200000 0

2013-2014 2014-2015 2015-2016

Uncertainty In ACA Caused Drop in Sign UP Rates

Total ACA Sign ups

% Change of ACA sign ups

Figure 23

Figure 22

Figure 21

0.5

1.5

2.5

3.5

2009 2010 2011 2012 2013 2014 2015 2016 2017E

Changes in Interest Rates 10-Year Note %

2-Year Note %

3-Month Rat e %

Cent ral Bank %

Source: Bloomberg

Source: Company Filings and Team Calculations

Source: Team Calculations

Financial Analysis

As the Market Consolidates, Growth Will Slow

The physical therapy rehabilitation industry is expected to grow at 1.6% for the next five years. Slower than the previous

five years of 2.2%. As economic profits decrease due to the fragmented nature of physical therapy rehabilitation centers, the market will continue to consolidate as larger, more efficient firms take the market. USPH has had a competitive advantage

in their market strategy by their ability to purchase successful clinics, driven by quality and efficiency. The fragmented

industry has also allowed larger groups like SEM, ATI, HLS, and KND to acquire in large quantities like USPH. As this market becomes more consolidated and fewer individual groups are available for purchase, USPH will be forced to acquire

fewer clinics at a higher cost. In time, revenue growth will slow. Figure X shows the expected increase in total rehab clinic.

USPH is not acquiring quickly enough to keep up with the market. As the market grows, there will be less availability as the market closes on its main additives.

As Wages Increase, Margins will Narrow - Operating margin increased from 54.61% in 2009 to 60.35% in 2015. Plateaus

in efficiency and low cost acquisitions, operating margin have slowed in growth. As physical therapy job growth increases,

wages are expected to grow in relation to revenue (See Figure X). USPH has had high wages historically due to the efficiency they demand from each clinic. The increase in wages could further decrease USPH’s operating margins. We

estimate that margins will decrease by approximately .7% each year due to market consolidation and wage growth.

Return on Equity - Retur n on Equity shows the efficiency at which USPH has been able to gener ate pr ofits with the

amount of equity given. There was a large dip in ROE in 2013, primarily due to the closure costs of $5.5 million they

incurred. They were able to successfully increase ROE the next year to 18.19% in 2014. There was drop to 16.41% in 2015, which was the lowest ROE has dropped since the large closure costs they incurred. We estimate this trend will continue.

USPH will not be acquiring clinics and increasing visits fast enough to keep up with the amount of equity given by

shareholders.

Strong Cash Flow from Past Successful Management Strategies Contribute to Future Growth The ability for management to handle debt has increased their cash flow availability. Cash flows have been steadily increasing each year, showing management only acquires clinics based on present financial cash flow requirements. USPH

has historically paid off the cash used for business purchases in the same year on a consistent basis. It is unlikely that they

will make a large enough acquisitions to risk not paying off their debt to keep on good terms with their line of credit. The relationship built by management has guaranteed steady growth through future financing needs, holding unforeseen factors

constant. Cash Flows Margin started to decrease in 2015, mostly due to decreases in EBITDA from salary cost increases.

The prior year was higher at 15% from USPH’s keeping clinical costs low. As these costs increase, we expect cash flow margin to decrease to 13.78% by 2021. This margin is still competitive; USPH will still have sufficient cash to use in

operations, assuming they are able to keep their management of debt under control similar to prior years. USPH has had

sufficient cash flows, but these cash flows are not being reinvested through growth at a quick enough rate.

By State Competitions: Over all the United States physical ther apy mar ket is extr emely fr agmented. However , it is a

different story when looking narrowly into each state as a separate market. USPH market share by individual states show that in many regions, they only have 1-5 clinics. While it is strategically advantageous to have a footprint in as many states

as possible for diversification and future expansion prospects, the insurance companies offer different contracts depending

on which state you are in. Because of this, the bargaining power of USPH is reduced in these areas where they are not the primary physician supplier operating. In addition, USPH is cut off from some of the high population markets such as

California and New York due to the barriers of entry their competitors have place. The barriers and cost of entering these

markets put a lockdown on USPH venturing into these areas. The market is moving towards zones with high reimbursement and high populations. All aspects of health care have shifted their focus to these areas in attempts to capitalize. This has

caused competition in certain areas to increase, making it difficult for USPH to remain relevant and hold market share here.

5.000% 7.000% 9.000%

11.000% 13.000% 15.000% 17.000% 19.000%

R E T U R N O N E Q U I T Y

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

P R O F I T M A R G I N

10000

20000

30000

40000

50000

60000

Industry Wages as Percentage of Revenues

Revenue Wages

Profitabilty Ratio 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Total Margin 4.82% 6.84% 6.72% 6.74% 6.76% 6.83% 6.87% 6.88% 6.95%

Operating Margin 59.92% 60.09% 60.35% 60.59% 60.51% 60.18% 59.67% 59.14% 58.76%

Cash Flow Margin 14.68% 15.00% 14.28% 14.28% 14.14% 14.11% 13.97% 13.82% 13.78%

Return on assets 11.60% 12.44% 11.32% 10.75% 11.23% 11.14% 11.44% 11.55% 11.78%

Return on equity 17.22% 18.19% 16.41% 15.24% 14.98% 14.68% 14.40% 14.12% 13.96%

Cash flow to equity 25.67% 27.37% 24.49% 22.89% 22.51% 22.00% 21.42% 20.92% 20.60%

Econimc value added 9,336x 12,843x 10,537x 10,451x 11,947x 12,562x 13,914x 14,832x 16,321x

Ecominc to capital 4.74% 6.07% 4.18% 3.72% 4.04% 3.93% 4.16% 4.18% 4.36%

Liquidity Ratio

Current ratio 2.14x 2.15x 3.17x 2.64x 3.07x 3.21x 3.23x 3.54x 3.69x

Capital Structure Ratios

Debt Ratio 30.79% 28.61% 27.85% 26.87% 22.91% 21.56% 17.79% 15.41% 12.91%

Coverage Ratios

Cushion Ratio 9.46x 7.24x 8.74x 6.39x 6.52x 7.76x 9.23x 11.37x 15.73x

20,000

25,000

30,000

35,000

40,000

45,000

50,000

T o

ta l

Year

Number of Individual and Clinic Groups

Establishments (Units)

Enterprises (Units)

Figure 27

Figure 28

Figure 26

Figure 25

Source: Team Calculations

Source: IBIS World and Team Calculation

Source: Team Calculations

Historical Forecast

USPH 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

ROE 13% 17% 13% 8% 12% 12% 11% 11% 11% 11% 10% 10%

ROA 11% 13% 10% 6% 9% 8% 8% 8% 8% 8% 9% 9%

Profit Margin 7% 9% 7% 5% 7% 7% 7% 7% 7% 7% 7% 7%

Tota Asset Turnover 150% 145% 147% 118% 125% 118% 113% 119% 118% 122% 124% 126%

Equity Multiplier 121% 134% 128% 148% 146% 145% 1.42 1.33 132% 126% 122% 1.19

ROE Composition Breakdown: For an In-depth Analysis , See Appendix

Valuation Various valuation methodologies are utilized in obtaining a target price for USPH. These include DCF, Relative Multiples, Sensitivity Analysis, Dividend Discount Model, and two versions of the Monte Carlo Valuation based on different tax rate

scenarios.

The DCF valuation leads to an intrinsic value of $65.64, which represents a 8.13% discount of the current market price of

$71.45. We calculate the required rate of return (RRR) of 8.42% using the CAPM model. The required rate of return is then

used to discount our free cash flow to equity (FCFE) estimates through 2021 and a terminal value using a 2.5% terminal

growth rate. The Risk-Free Rate of 1.92% is based on a 5–year treasury constant maturity rate. As interest rates rise and expectations spur, five-year treasury bonds better capture the rising interest rates. We calculate beta by running regressions

between the returns of USPH and multiple indices. We choose the beta from 3-year S&P 500 index as the most appropriate

considering USPH tracks similar in each of the three indices. See Appendix L for team beta calculations. We obtain the terminal growth rate by using the expected GDP growth of 1.9% (world bank estimate), while considering that the

healthcare industry has historically tracked slightly above GDP growth (.6%).

Revenues:

Our team has estimated USPH’s revenue will grow at approximately 7.5% per year, lower than the historic

geometric mean of 8.02%. To find expected r evenue, our team used the str ongest pr edictor of patient r evenues:

‘Total Patient Visits’. Total Patient Visits has the highest correlation with patient revenues (R=.98, see Figure X). Total Patient Visits was also identified as the most influential variable when modeling revenue using data mining techniques. A

Simple Linear Regression predicts revenues using this formula: 115.9 * Total Patient Visits – Constant. To project total

patient visits for the next five years, historic growth rate in total clinics were used to limit the variability in total patient visit increases due to efficiency differences. (See appendix for specific process of revenue growth model predictions). The

increase of patient visits allowed USPH’s revenue to grow by 8.02% between the years of 2010-2015. Patient visits

increased by a total of approximately 1.2 million during this period. Although we project patient visits will increase by approximately 1.6 million over the next five years, on a percentage basis, this is a smaller increase (35%) than the 1.2

million increase from 2010-2015 (40%). USPH has stated that they will continue their strategy of slow, meaningful

acquisition and development. This slow acquisition growth does not justify the current stock price. They do not have the ability to increase total clinics or visits by a large enough percentage to stimulate increases in revenue growth rates above

8.02%.

USPH has been able to increase revenue per patient by being more efficient in their use of current clinics. This is a result of improvements in operational efficiency. Our analysis shows a limit to the revenue per patient fluctuating around $105 (See

figure X). This observation means that in order to grow patient revenues, USPH’s strategy must be to increase Total Patient

Visits by a larger percentage. We estimate this will not take place for three reasons:

 USPH has historically used their revolving line of credit to purchase interest in individual clinics and clinic groups. The interest rate on this line of credit is LIBOR+1.5%-2.5%. Thus, as interest rates increase, so will financing

charges. This will cause USPH to keep their acquisition process relatively constant to continue their strong cash flow

availability. In order to use the revolving line of credit in future acquisitions, USPH will need strong cash flows to comply with the consolidated fixed charge coverage ratio and consolidated leverage ratio in their amended credit

agreement. USPH will be less likely to accelerate acquisitions, thus keeping total clinics increasing at a stable rate.

 We estimates that as the market turns to acquiring larger consolidated clinic groups, there will be less for USPH to acquire. The company has recently stated their intention of straying from larger clinic groups (i.e. they prefer to acquire clinics in the 1-to-3 million dollar revenue stream range). As clinic groups gets larger, the quality clinic

groups USPH does acquire in this range will have to be bought at a higher price. The subsequent result will cause

USPH to acquire clinics at a stable rate to keep cash flows higher.

 USPH is developing a new technology that will allow them to track where patients go from physician referrals. This will help identify potential acquisitions more quickly by taking away the first step in acquisitioning; theoretically

making acquiring easier. Though there is no guarantee, it should add speed up the process. This technology will allow

them to keep increasing clinics at a constant rate. If they did not have this technology, the growth rate in revenues could start to drop at larger rates. The net affect will be total patient visits and total clinic growth increasing at a stable

rate, leading projected revenues to increase in a linear form, with the growth rate slowing at 0.1% per year. We

conclude the stock price is overinflated for USPH’s revenue growth rate.

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

$0.00

$100,000,000.00

$200,000,000.00

$300,000,000.00

$400,000,000.00

$500,000,000.00

$600,000,000.00

Expected Revenue and Total Visit Growth

EXPECTED

100

105

110

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Platou of 'Revenue Per Patient'

Sensitivity Analysis We conduct sensitivity analysis using RRR and ter minal gr owth r ate. We find that USPH is overvalued with approximately 57.89% of the scenarios below the current market price of $71.45. See Appendix G for an

in-depth presentation of the analysis.

*DCF based on FCFF and WACC yields an intrinsic value of

$56.56, consistent with our sell recommendation.

Intrinsic Value FCFF 56.56

57.89% are overvauled

Recommendation Sell

Sensitivity Analysis

Figure 30

Figure 29

Source: Team Calculations

Source: Company Filings, Team Calculations

Table 4 DCF Valuation*

Table 5

Required Return 8.42%

NPV FCFE 2017 $27,999,644

NPV FCFE 2018 $26,548,236

NPV FCFE 2018 $40,529,011

NPV FCFE 2020 $34,055,068

NPV FCFE 2021 $37,818,929

NPV Terminal $654,804,093

$821,754,980.58

[RFR+β*(Rmarket-RFR)]

Shares Outstanding 12,520,000

Intrinsic Value FCFE $65.64

Closing Price (2/3/17) $71.45

Salaries and Related Costs: Our predictions for Salaries and Related costs track with the common size statements as a percentage of net revenue at

55.28%. This is constant for projections through 2021. The Physician Extender Model ties into this percentage because

Salaries and related costs as a percentage of net revenue have increased steadily over the last 10 years. The percentage was

51.29% in 2006 and rose to 54.49% last year. We assumed another increase up to 55.28% for the coming years but then

choose that percentage to remain steady to capture the extender model. As physical therapy moves more and more towards physician assistants being heavily involved in the treatment process, we will see salaries decrease because assistants wages

are far below qualified physicians. USPH are trending towards that strategy and thus related costs will slowly start to in-

crease at a decreasing rate.

0.00

0.50

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1.50

2.00

2.50

3.00

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0 7

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Price to book

Relative Valuation

Relating financial ratios to competitors in the same industry gives the ability to discern possible misvaluation in the market

between companies. The P/EG ratio shows the willingness of investors to pay for earnings, while also considering the growth

in those earnings. If earnings are not high enough to compensate a high P/E, the P/EG ratio helps investors understand an overpriced stock. This is the case for USPH. USPH has a significantly higher P/EG ratio than their competition -

exponentially above prior years. USPH has a current P/EG of 3.7, which represents an additional 9.4% premium to their

normal relative ratios. We calculate the P/EG based valuation at $64.73, consistent with our DCF valuation (See Table 7). USPH’s earnings growth is not rising at the same rate as the its increasing price. Future earnings are expected to increase in

absolute value, but there is no indication that it will clime at a relatively higher rate to alleviate justification in current higher

price. Our team estimates earnings to grow at a geometric growth rate of 8.494% over the next five years (see the appendix).

Price to Free Cash Flows shows the pr ice that investor s ar e willing to pay for cash flows. It is also beneficial to show

cash after expenses have been subtracted to see freedom in growth opportunities. For a company that uses the majority of cash flow to acquire clinics, FCF is paramount in determining that firms ability to acquire and grow. USPH has historically

had P/FCF at a premium of 28.95% above their competitors. In 2015, USPH had a premium 50% above that ordinary

premium. This number is expected to have risen in 2016: our team estimates free cash flow and current price to produce a P/ FCF of 16.46 at the current price of $71.45. Since there is no indication for reasons in future cash flow hikes to lower this

ratio, we are confident in our consensus of “sell.” To better understand the industry ratio, we added total patient visits to

represent the relationship between cash flow per patient and market price (See table, x). It can be seen that cash flows per are not increasing by a large enough amount to justify the current stock price. Adding the companion variable of total patient

visits indicates USPH is still over-valued.

Year P/(FCF/TPV)

USPH

P/(FCF/TPV)

SEM

P/(FCF/TPV)

HLS

2015 3.59 0.34 0.056

2014 2.19 0.39 0.048

2013 1.55 0.21 0.042

2012 1.43 0.14 0.053

2011 1.39 0.15 0.068

2010 1.11 0.21 0.064

Comparison USPH SEM HLS

Forward P/E $33.33 $13.30 $15.30

Earnings Growth (1-3 yr.) 9 8.8 5.8

P/EG Ratio 3.7 1.51 2.64

3.00

6.00

9.00

12.00

15.00

2010 2011 2012 2013 2014 2015

Price/Cash Flows

Price/Cash Flows USPH Price/Cash Flows SEM Price/Cash Flows HLS

Monte Carlo Analysis:

The first Monte Carlo simulation is used with FCFE based on the past marginal corporate tax rate of 32%. We account for three different variables: growth rate in patent visits, RRR, and long-term growth rate. We use our 7.07% forecasted growth

rate in patient visits to calculate a standard deviation of .047. RRR is also tested with a manually calculated standard

deviation of .0135. Lastly, we include the long term growth rate of 2.5% with a manually calculated deviation of .0075. The results of the original Monte Carlo show a frequency range of likely outcomes of $55.00-$66.00 for intrinsic values. The

most likely value is $65.40, consistent with our intrinsic value of $65.64 from DCF. The current trading price of $71.45 is

on the outside of the upper control limit on the analysis, further indicating overvaluation of the stock. Among the 30,000 iterations we run, 17,000(57%) falls bellow the current market price. This simulation is further explained in Appendix I.

Though we expect most of our forecasts to follow historical patterns in the next 5 years, the possible corporate tax reduction brings high uncertainty to our valuation. A change in income taxes could significantly affect USPH’s net income, and

subsequently FCFE. As the new administration comes in and lobbies for tax rate decreases, many stocks are responding

positively for potential higher cash flows. We estimate the possible effects of the change using Monte Carlo simulations with a corporate tax rate of 20.11%, which is calculated based on the federal rate of 15% and the average sate rates of 5.11%

in the states USPH operates in. The alternate Monte Carlo results show a frequency for the most likely outcomes to be in the

range of approximately $57.00-$71.00. The single most likely outcome from the Monte Carlo was an intrinsic value of $60.00. Approximately 13,000 (33%) iterations fall below the current market price. The median of the new simulation is

$75.79, approximately 5.7% above the current market price., valuing USPH at closer to a “hold.” However, we recognize

that 20.11% represents significant reduction in taxes, and the valuation of $75.79 is a result from the most optimistic scenario while the actual tax cut might not be as low. In addition, if the tax rate decrease does occur, all companies with

significant domestic revenue will benefit. Considering the high relative valuation as we discuss below, we expect investors

to find better investment opportunities elsewhere. Our alternative tax simulation is explained further in Appendix I.

Dividend Discount Model In DDM, we estimate future dividends, and then discount them to find the present values. USPH started paying dividends in

2011 and has paid steady dividends of 0.17 each quarter from 2015 until present. Based on previous dividend issues, we

estimate that they will continue to increase dividends $0.02 every quarter for the next five years. Based on the calculation, and using a discount rate of 8.42%, we value the stock at $51.27. It is important to note the limitations of DDM in this case as

the model is traditionally used with companies that have had established dividend growth. Even with these limitations, the

stock is still valued 20$ below current price. Investors should also note that increase in dividend growth are still not likely to supplement capital gains.

Competitor Average P/Eg 1.78

Historic USPH Premium (5 Years) 90%

USPH NORMALIZED P/Eg 3.382

USPH Current P/Eg 3.700

Premium 9.40%

Current Trading Price (02-3-2017) 71.45

Insitrinsic Value 64.73

500

1000

1500

2000

2500

0 5

1 0

1 5

2 0

2 5

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7 5

8 0

8 5

9 0

9 5

1 0

1 1

1 2

1 3

1 4

1 5

1 6

1 7

1 8

M o

Market Price

Monte Carlo Current Tax Rate (32%)

Frequency

500

1000

1500

2000

2500

0 5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

4 5

5 0

5 5

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7 5

8 0

8 5

9 0

9 5

1 0

1 1

1 2

1 3

1 4

1 5

1 6

1 7

1 8

M o

Market Price

Monte Carlo Proposed Tax Rate (20.11%)

Frequency

500

1000

1500

2000

2500

0 5

1 0

1 5

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2 5

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Monte Carlo Current Tax Rate (32%)

Frequency

Table 8

Source: Team Calculations

Figure 31

Figure 32

Table 7

Source: Company Filings, Team Calculations

Source: Team Calculations

Table 6

Investment Risks

Uncertainty in the Affordable Care Act – [A]

One of the most prominent issues that the new administration lobbied for was repealing and replacing the Affordable Care Act.

Universal healthcare is a democrat ideology and the republican party will most likely try to alter a significant amount of th e

Act, and if allowed, repeal it entirely. There is much uncertainty on the subject of replacement. Considering 23.5% of USPH’s revenue is tied to Medicare/Medicare, a repeal or alteration could hurt USPH’s business operations. Altering the ACA slightly

without replacing it could lead to complications for the consumers and the US economy. Similarly, if the Act is repealed and

replaced with another system, there could be disaster in the healthcare insurance sector, which would affect USPH doubly. Though there is much uncertainty, USPH is in a better place than other healthcare industries. Because of the inexpensive nature

of physical therapy, and the fact that republicans are pushing for lower costs, USPH may be at an advantage with a push of

quality therapy. It also may be that, if the act is replaced by what republicans have proposed so far, fewer lower income individuals will be able to acquire Medicaid. In this case, when they come to age for Medicare, they will be in poorer health,

and, will ultimately drive up costs from their poor health. In this regard, USPH may be able to make up some of the lost

revenue from Medicaid reductions. Additionally, Medicare/Medicaid percentages of revenue is lower for USPH, which leaves them less susceptible to the possible detrimental effects of federal budget cuts to these government programs. Because of the

uncertainty regarding the situation, there is no clear answer to mitigate this risk. See appendix for possible outcomes for ACA

and the effects on USPH.

Certain government Medicare/Medicaid reductions may hinder profits [B]

Though USPH has diversified their revenue, 24% comes from Medicare/Medicaid. In 2015, the sustainable growth rate (SGR) formula for reducing Medicare expenditures was eliminated. The Medicare Access and CHIP Reauthorization Act of 2015

(MACRA) was signed into law, that decreased fee schedule payment rate by .3%. Through 2017 to 2019, however, fee

schedule payments rates will increase by .5%. It is uncertain how MACRA could be affected by the new administration. While

USPH is less affected by this than their competitors due their diversified payer mix, the reduction in payment from government

causes increases risk to USPH future cash flows which directly flows into the EPS and then the stock price. This payment

reduction is magnified as payment structures with the government are non-negotiable. USPH bases much of their strategy on clinic location, but the government is blind to this and sets the amount they will reimburse regardless of geographic location.

The largest population base in the US is baby boomers (ages 53-71). Revenue diversity decreases as this large customer base approaches Medicare eligibility, this risk will increase the importance of Medicare for USPH as these people qualify for

government services. This will decrease revenue opportunities because of the low profitability of government insurance.

Investors viewing USPH as a long term growth stock will be concerned as distant future revenues are less lucrative. We feel this scenario could encourage the position of a sell.

Lengthy Acquisition Process hindering potential gain [C]

Historically, USPH has strategically chosen clinics for acquisitions. This lengthy process may have hindered their potential of

entering new markets. As smaller companies consolidate together, USPH could miss out on potential growth opportunities due

to the long selection process they implement. Considering stock prices tends to jump with each set of acquisitions, investors have demanded USPH to hasten their process. However, USPH has stated they will not change their methodology. To maintain

quality selections, USPH has obtained extensive technology that shows that track which physical therapist physicians refer to.

This will show USPH where physician referrals are coming from in each clinic, which will help them decide which clinics are worth acquiring. This helps them quicken their selection of clinics and decreases projected closure costs. If USPH does not

accelerate their acquisition process, it could severely limit revenue growth and deter value investors that are interested in

USPH stock.

Government Regulation [D]

The healthcare industry as a whole is highly regulated. Because of the extensive regulations, parameters implemented by government could hinder USPH from actively changing their policies in benefiting their stockholders. Recently, there has been

a push for hospital care regulation to extend into the physical therapy sector. HIPAA put in place technologies for security

purposes based on customer records. These required technologies are expensive to implement and costly to avoid.

Technology Risks [E]

From the attempts to comply with government electronic monitory records, UPSH has invested capital in new technology for their business. Shown by their integration attempts with the changing market they have found a new technology that has

allowed for a better understanding of clientele characteristics (age, demographics, and specified type of ailment), as well as

better monitoring of government and insurance policy. USPH has strived to maintain strong relationships with their therapists, working to continually monitor and ensure quality. This technology helps guarantee their quality standards are implemented.

However, UPSH still remains behind some of their competitors who have moved their therapy sessions to an online bases

allowing for an increase in patients visits and sequentially net patient revenues.

Operational Risks [F]

In the past USPH has been able to increase revenues by eliminating inefficiencies in their billing systems. They have been

able to capitalize on more profitable codes when requesting reimbursement and streamlining of back office activities into the

same system, which lowers the per-patient cost of business administration. This is represented by the per/patient/day/clinic

revenue. The amount of growth USPH is experiencing here has began to slow. This means while USPH is a solid company, they have worked out most of their inefficiencies, and therefore the only way for them to increase revenues would be to

increase the amount of patients they are seeing. It is beneficial to be operating at this level of efficiency, yet from an investor

perspective, efficiency limits their ability for extra growth year on year. If this continues it could adversely affect the value of

USPH moving forward.

Liquidity Risks: [G] In a market that is always changing it is important to remain liquid in order to pay off debts and avoid bankruptcy. This

explains why cash flow is such an important part to USPH. Their current ratio while it fluctuates, it is projected to remain strong and slightly increasing finishing at 3.69 by 2021. This ability to pay off short term debt with on hand cash is important

because liquidity problems indicate cash flow issues. This is where equity growth is and payout is derived from. Investors will

be more likely to get a high dividend from a company with high cash flows.

5.0% 25.0% 45.0%

Private and Manged Care

Worker's Compensation

Medicare/Medicaid

Other

USPH Payment Mix Q1 2016 - Q3 2016

2015 Q4 2016 Q1 2016 Q3

Source: Quarterly Calls

Source: Team Calculations

Figure 34

Table 10

Figure 35

Figure 33

Source: Team Calculations

2011 2.8

2012 2.78

2013 2.14

2014 2.15

2015 3.17

2016 2.64

2017 3.07

2018 3.21

2019 3.23

2020 3.54

2021 3.69

Current Ratio

15.6%

15.8%

16.0%

16.2%

16.4%

16.6%

16.8%

17.0%

17.2%

17.4%

2016 Q32016 Q12015 Q4

P e

rc e

n ta

g e

o f

R e

v e

n u

Worker's Compens ati on By Quarters

H IG

G E A

M E

D IU

LO W C D

LOW MEDIUM HIGH

Probability

Im p

a ct

Investment Risk Matrix

Common Sized Balance Sheet

Appendix A: Balance Sheet (Team Calculations)

( $ in Thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Assets

Current Assets

Cash & cash equivalents 10,952 7,976 10,113 6,429 9,179 9,983 11,671 12,898 14,271 15,778 17,779 20,480 23,354 22,932 26,031 31,705

Patient accounts receivable, gross 23,070 27,758 28,128 24,130 27,004 30,487 27,568 32,250 34,560 37,675 41,530 43,979 46,572 49,318 52,225 55,305

Allowance for doubtful accounts 1,567 2,184 2,275 1,830 2,190 2,154 1,595 1,430 1,669 1,444 1,960 1,881 2,095 2,164 2,320 2,442

Patient accounts receivable, net 21,503 25,574 25,853 22,300 24,814 28,333 25,973 30,820 32,891 36,231 39,570 42,098 44,477 47,154 49,905 52,863

Accounts receivable - other 775 1,150 898 1,331 1,555 1,614 1,703 1,844 1,503 2,388 2,163 2,375 2,623 2,753 3,072 3,210

Other current assets 2,251 1,333 1,857 2,959 3,736 5,737 5,975 4,098 6,186 5,785 10,800 9,750 11,125 9,827 11,273 9,963

Total current assets 35,981 36,033 38,721 33,019 39,284 45,667 45,322 49,660 54,851 60,182 70,312 74,703 81,579 82,666 90,282 97,741

Furniture & equipment 23,718 28,782 30,947 31,973 33,563 35,103 36,316 38,965 42,003 44,749 47,607 50,601 53,784 57,167 60,763 64,585

Leasehold improvements 15,226 17,352 18,061 19,012 19,590 20,385 20,858 21,891 22,806 25,160 27,276 28,913 30,647 32,486 34,436 36,502

Fixed assets, gross 38,944 46,134 49,008 50,985 53,153 55,488 57,174 60,856 64,809 69,909 74,883 79,514 84,432 89,654 95,199 101,087

Less accumulated depreciation & amortization 25,573 29,342 33,167 36,646 39,230 42,299 44,158 45,896 49,045 53,255 57,654 60,669 64,263 68,362 72,700 77,235

Fixed assets, net 13,371 16,792 15,841 14,339 13,923 13,189 13,016 14,960 15,764 16,654 17,229 18,845 20,169 21,291 22,499 23,852

Goodwill 20,997 37,650 55,886 57,247 79,424 92,750 100,188 143,955 147,914 171,547 193,648 197,478 216,687 225,010 233,823 243,151

Other intangible assets, net - 3,930 6,452 5,955 7,308 9,603 12,146 14,479 24,907 30,296 32,881 34,507 34,275 39,256 42,702 45,524

Other assets 1,108 1,847 1,347 869 922 2,043 1,042 1,081 1,115 1,234 1,392 1,523 1,617 1,716 1,859 2,008

Total assets 71,457 96,252 118,247 111,429 140,861 163,252 171,714 224,135 244,551 279,913 315,462 327,056 354,327 369,940 391,164 412,277

Liabilities and stockholders' equity

Current Liabilities

Accounts payable - trade 1,601 1,555 1,481 1,292 1,237 1,809 1,732 1,722 1,782 1,636 2,154 2,358 2,465 2,591 2,775 3,062

Accrued salaries & related costs 2,244 4,900 6,498 9,133 8,989 9,275 8,941 11,686 15,400 9,414 14,141 11,916 12,512 12,677 12,132 12,676

Accrued group health insurance claims 1,063 1,141 1,049 977 1,324 1,168 991 2,023 2,116 2,276 2,265 1,934 2,123 2,143 2,148 2,122

Credit balances & overpayments due to patients & payors 1,088 1,166 1,932 1,283 702 793 813 2,371 1,834 1,472 2,019 2,210 2,580 2,518 2,664 2,971

Other accrued expenses 1,925 1,864 2,273 1,066 1,729 2,846 3,371 4,545 3,489 3,434 4,555 4,006 3,871 3,966 4,100 3,986

Accrued expenses 7,007 9,071 11,752 12,459 12,744 14,082 14,116 20,625 22,839 16,596 22,979 20,066 21,086 21,304 21,044 21,755

Current portion of notes payable - 812 1,380 1,013 250 433 459 825 883 775 1,511 1,930 1,846 1,696 1,696 1,696

Total current liabilities 9,170 11,438 14,613 14,764 14,231 16,324 16,307 23,172 25,504 19,007 26,645 24,354 25,397 25,591 25,515 26,514

Long-term liablities

Notes payable 797 959 1,012 - 250 284 175 650 234 4,335 4,021 2,207 2,789 3,375 4,276 4,151

Revolving line of credit - 7,000 11,400 400 5,500 23,500 17,400 40,000 34,500 44,000 41,000 38,000 35,901 22,745 15,380 6,428

Deferred rent 1,273 1,104 1,103 1,027 966 941 894 996 991 1,395 1,313 1,441 1,561 1,673 1,842 1,936

Other long-term liabilities/Deffered Taxes 829 696 2,297 3,013 3,531 623 2,279 4,196 8,732 9,223 11,775 8,929 10,760 12,442 13,269 14,206

Total liabilities 12,069 21,197 30,425 19,204 24,478 41,672 37,055 69,014 69,961 77,960 84,754 74,931 76,407 65,826 60,281 53,234

Stockholders' equity

Common stock 137 141 142 138 139 139 141 143 145 146 148 149 149 149 149 149

Additional paid-in capital 36,304 41,452 43,648 43,210 45,570 36,133 37,489 40,569 43,577 45,251 49,506 50,735 51,995 53,286 54,609 55,965

Retained earnings (accumulated deficit) 50,704 59,442 69,446 75,632 89,876 102,405 111,321 119,206 134,186 149,016 164,547 181,340 199,265 218,376 238,624 260,495

Treasury stock at cost 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628 31,628

Total U.S. Physical Therapy, Inc. shareholders' equity 55,517 69,407 81,608 87,352 103,957 107,049 117,323 128,290 146,280 162,785 182,573 200,597 219,781 240,183 261,754 284,981

Noncontrolling interests - - - 4,873 12,426 14,531 17,336 22,727 20,934 30,325 39,967 44,557 49,147 53,738 58,328 62,918

Total equity 55,517 69,407 81,608 92,225 116,383 121,580 134,659 151,017 167,214 193,110 222,540 245,154 268,928 293,920 320,082 347,899

Redeemable non-controlling interests - - - - - - - 4,104 7,376 8,843 8,169 6,971 8,992 10,194 10,801 11,144

Total Liabilities and Shareholders Equity 71,457 96,252 118,247 111,429 140,861 163,252 171,714 224,135 244,551 279,913 315,462 327,056 354,327 369,940 391,164 412,277

Historical Forecast

( $ in Thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Assets

Cash & cash equivalents 15.33% 8.29% 8.55% 5.77% 6.52% 6.12% 6.80% 5.75% 5.84% 5.64% 5.64% 5.72% 5.71% 5.67% 5.68% 5.69%

Patient accounts receivable, gross 32.29% 28.84% 23.79% 21.66% 19.17% 18.67% 16.05% 14.39% 14.13% 13.46% 13.16% 13.79% 13.64% 13.51% 13.52% 13.61%

Allowance for doubtful accounts 2.19% 2.27% 1.92% 1.64% 1.55% 1.32% 0.93% 0.64% 0.68% 0.52% 0.62% 0.61% 0.61% 0.59% 0.61% 0.61%

Patient accounts receivable, net 30.09% 26.57% 21.86% 20.01% 17.62% 17.36% 15.13% 13.75% 13.45% 12.94% 12.54% 13.17% 13.03% 12.92% 12.92% 13.01%

Accounts receivable - other 1.08% 1.19% 0.76% 1.19% 1.10% 0.99% 0.99% 0.82% 0.61% 0.85% 0.69% 0.74% 0.72% 0.75% 0.73% 0.74%

Other current assets 3.15% 1.38% 1.57% 2.66% 2.65% 3.51% 3.48% 1.83% 2.53% 2.07% 3.42% 2.46% 2.62% 2.64% 2.79% 2.63%

Total current assets 50.35% 37.44% 32.75% 29.63% 27.89% 27.97% 26.39% 22.16% 22.43% 21.50% 22.29% 22.09% 22.08% 21.99% 22.11% 22.07%

Furniture & equipment 33.19% 29.90% 26.17% 28.69% 23.83% 21.50% 21.15% 17.38% 17.18% 15.99% 15.09% 16.41% 16.17% 15.91% 15.89% 16.10%

Leasehold improvements 21.31% 18.03% 15.27% 17.06% 13.91% 12.49% 12.15% 9.77% 9.33% 8.99% 8.65% 9.18% 9.04% 8.96% 8.96% 9.03%

Fixed assets, gross 54.50% 47.93% 41.45% 45.76% 37.73% 33.99% 33.30% 27.15% 26.50% 24.98% 23.74% 25.59% 25.20% 24.88% 24.85% 25.13%

Less accumulated depreciation & amortization 35.79% 30.48% 28.05% 32.89% 27.85% 25.91% 25.72% 20.48% 20.06% 19.03% 18.28% 19.46% 19.20% 18.99% 18.98% 19.16%

Fixed assets, net 18.71% 17.45% 13.40% 12.87% 9.88% 8.08% 7.58% 6.67% 6.45% 5.95% 5.46% 6.13% 6.00% 5.89% 5.87% 5.97%

Goodwill 29.38% 39.12% 47.26% 51.38% 56.38% 56.81% 58.35% 64.23% 60.48% 61.29% 61.39% 61.85% 61.25% 61.44% 61.48% 61.50%

Other intangible assets, net 0.00% 4.08% 5.46% 5.34% 5.19% 5.88% 7.07% 6.46% 10.18% 10.82% 10.42% 9.47% 10.23% 10.24% 10.09% 10.01%

Other assets 1.55% 1.92% 1.14% 0.78% 0.65% 1.25% 0.61% 0.48% 0.46% 0.44% 0.44% 0.46% 0.45% 0.45% 0.45% 0.45%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and stockholders' equity

Current Liabilities

Accounts payable - trade 2.24% 1.62% 1.25% 1.16% 0.88% 1.11% 1.01% 0.77% 0.73% 0.58% 0.68% 0.69% 0.67% 0.66% 0.68% 0.67%

Accrued salaries & related costs 3.14% 5.09% 5.50% 8.20% 6.38% 5.68% 5.21% 5.21% 6.30% 3.36% 4.48% 4.84% 4.75% 4.36% 4.61% 4.64%

Accrued group health insurance claims 1.49% 1.19% 0.89% 0.88% 0.94% 0.72% 0.58% 0.90% 0.87% 0.81% 0.72% 0.82% 0.81% 0.79% 0.78% 0.80%

Credit balances & overpayments due to patients & payors 1.52% 1.21% 1.63% 1.15% 0.50% 0.49% 0.47% 1.06% 0.75% 0.53% 0.64% 0.74% 0.66% 0.64% 0.67% 0.68%

Other accrued expenses 2.69% 1.94% 1.92% 0.96% 1.23% 1.74% 1.96% 2.03% 1.43% 1.23% 1.44% 1.53% 1.41% 1.40% 1.45% 1.45%

Accrued expenses 9.81% 9.42% 9.94% 11.18% 9.05% 8.63% 8.22% 9.20% 9.34% 5.93% 7.28% 7.94% 7.62% 7.19% 7.51% 7.57%

Current portion of notes payable 0.00% 0.84% 1.17% 0.91% 0.18% 0.27% 0.27% 0.37% 0.36% 0.28% 0.48% 0.37% 0.37% 0.37% 0.40% 0.38%

Total current liabilities 12.83% 11.88% 12.36% 13.25% 10.10% 10.00% 9.50% 10.34% 10.43% 6.79% 8.45% 9.00% 8.67% 8.23% 8.58% 8.62%

Long-term liabilities

Notes payable 1.12% 1.00% 0.86% 0.00% 0.18% 0.17% 0.10% 0.29% 0.10% 1.55% 1.27% 0.80% 0.93% 1.14% 1.04% 0.98%

Revolving line of credit 0.00% 7.27% 9.64% 0.36% 3.90% 14.39% 10.13% 17.85% 14.11% 15.72% 13.00% 15.17% 14.50% 14.60% 14.31% 14.64%

Deferred rent 1.78% 1.15% 0.93% 0.92% 0.69% 0.58% 0.52% 0.44% 0.41% 0.50% 0.42% 0.44% 0.44% 0.45% 0.44% 0.44%

Other long-term liabilities/Deferred Taxes 1.16% 0.72% 1.94% 2.70% 2.51% 0.38% 1.33% 1.87% 3.57% 3.29% 3.73% 3.12% 3.43% 3.39% 3.42% 3.34%

Total liabilities 16.89% 22.02% 25.73% 17.23% 17.38% 25.53% 21.58% 30.79% 28.61% 27.85% 26.87% 28.53% 27.96% 27.80% 27.79% 28.02%

Stockholders' Equity

Common stock 0.19% 0.15% 0.12% 0.12% 0.10% 0.09% 0.08% 0.06% 0.06% 0.05% 0.05% 0.06% 0.05% 0.05% 0.05% 0.05%

Additional paid-in capital 50.81% 43.07% 36.91% 38.78% 32.35% 22.13% 21.83% 18.10% 17.82% 16.17% 15.69% 16.94% 16.66% 16.36% 16.41% 16.60%

Retained earnings (accumulated deficit) 70.96% 61.76% 58.73% 67.87% 63.80% 62.73% 64.83% 53.18% 54.87% 53.24% 52.16% 53.36% 53.41% 53.04% 52.99% 53.20%

Treasury stock at cost 44.26% 32.86% 26.75% 28.38% 22.45% 19.37% 18.42% 14.11% 12.93% 11.30% 10.03% 12.09% 11.59% 11.25% 11.24% 11.54%

Total U.S. Physical Therapy, Inc. shareholders' equity 77.69% 72.11% 69.01% 78.39% 73.80% 65.57% 68.32% 57.24% 59.82% 58.16% 57.87% 58.27% 58.53% 58.21% 58.22% 58.31%

Noncontrolling interests 0.00% 0.00% 0.00% 4.37% 8.82% 8.90% 10.10% 10.14% 8.56% 10.83% 12.67% 10.55% 10.65% 11.18% 11.26% 10.91%

Total equity 77.69% 72.11% 69.01% 82.77% 82.62% 74.47% 78.42% 67.38% 68.38% 68.99% 70.54% 68.82% 69.18% 69.38% 69.48% 69.22%

Redeemable non-controlling interests 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.83% 3.02% 3.16% 2.59% 2.65% 2.85% 2.81% 2.73% 2.76%

Total Liabilities and Shareholders Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Historical Forecast

Common Sized Income Statement

Appendix B: Income Statement (Team Calculations)

Appendix C: Statement of Cash Flows

( $ in Thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Revenue

Net patient revenues $ 133,376 $ 149,437 $ 182,939 $ 195,322 $ 204,101 $ 226,579 $ 244,443 $ 258,283 $ 299,009 $ 324,293 $ 348,990 $ 382,262 $ 411,195 $ 442,174 $ 475,342 $ 510,856

Other revenues 34 304 4,747 6,087 7,132 10,427 7,645 5,775 6,065 7,009 7,658 7,964 8,283 8,614 8,959 9,317

135,194 151,686 187,686 201,409 211,233 237,006 252,088 264,058 305,074 331,302 356,648 390,226 419,478 450,788 484,301 520,173

Expenses

Salaries & related costs 69,340 79,191 100,269 105,737 110,872 125,117 132,824 141,840 163,417 180,514 197,144 215,717 231,887 249,196 267,722 287,552

Rent, clinic supplies, contract labor & other clinic operating costs 27,896 32,581 39,814 40,502 40,944 47,396 51,620 52,887 61,209 68,046 71,360 78,917 84,620 91,066 97,969 104,903

Provision for doubtful accounts 2,115 2,553 3,073 3,348 3,241 3,785 4,848 4,384 4,112 4,170 3,864 4,142 4,455 4,791 5,150 5,535

Closure costs - - 432 91 163 59 211 246 169 211 204 244 193 211 252 248

Total clinic operating costs 99,351 114,325 143,588 149,678 155,220 176,357 189,503 199,357 228,907 252,941 272,572 299,019 321,155 345,263 371,093 398,237

Gross margin (loss) 35,843 37,361 44,098 51,731 56,013 60,649 62,585 64,701 76,167 78,361 84,076 91,207 98,323 105,525 113,208 121,935

Corporate office costs 17,247 17,326 20,222 23,479 22,823 24,718 24,782 25,931 30,399 31,067 33,137 36,019 39,151 42,556 46,258 50,281

Operating income (loss) from continuing operations 18,596 20,035 23,876 28,252 33,190 35,931 37,803 38,770 45,768 47,294 50,939 55,188 59,171 62,969 66,951 71,655

Interest & other income, net - - - 8 586 5,445 6 7 18 81 78 45 56 69 84 82

Interest expense - 301 542 352 236 496 557 538 1,088 1,031 1,271 1,211 1,165 787 592 319

Income (loss) before income taxes from continuing operations 13,250 14,280 16,509 27,908 33,540 40,880 37,252 38,239 44,698 46,344 49,746 54,022 58,062 62,251 66,442 71,419

Provision for income taxes 5,057 5,465 6,505 7,934 8,840 11,097 11,034 12,236 14,274 14,653 15,832 17,287 18,580 19,920 21,262 22,854

Net income from continuing operations including non-controlling interests 8,193 8,815 10,004 19,974 24,700 29,783 26,218 26,003 30,424 31,691 33,914 36,735 39,482 42,331 45,181 48,565

Less: net income attributable to non-controlling interests - - - -8,207 -9,055 -8,809 -8,285 -8,273 -9,571 -9,412 -9,878 -10,343 -10,830 -11,340 -11,874 -12,433

Discontinued Operations -1,897 -77 - - - - - -5,007 - - - - - - - -

Net income attributable to common shareholders 6,296 8,738 10,004 11,767 15,645 20,974 17,933 12,723 20,853 22,279 24,036 26,392 28,652 30,991 33,307 36,132

Weighted average shares outstanding - basic 11,690 11,643 11,907 11,703 11,638 11,814 11,804 12,063 12,217 12,392 12,489 12,629 12,770 12,913 13,058 13,204

Weighted average shares outstanding - diluted 11,731 11,718 12,055 11,807 11,870 11,977 11,904 12,082 12,221 12,392 12,489 12,629 12,770 12,913 13,058 13,204

Year end shares outstanding 11,467 11,838 12,037 11,614 1,168 11,705 11,915 12,101 12,273 12,421 12,520 12,660 12,802 12,946 13,091 13,237

Earnings (loss) per share from continuing operations - basic $ 0.54 $ 0.76 $ 0.84 $ 1.01 $ 1.34 $ 1.78 $ 1.52 $ 1.05 $ 1.62 $ 1.77 $ 1.92 $ 2.09 $ 2.24 $ 2.40 $ 2.55 $ 2.74

Historical Forecast

( $ in Thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Revenue

Net patient revenues 98.66% 98.52% 97.47% 96.98% 96.62% 95.60% 96.97% 97.81% 98.01% 97.88% 97.85% 97.71% 97.85% 97.86% 97.83% 97.82%

Other revenues 0.03% 0.20% 2.53% 3.02% 3.38% 4.40% 3.03% 2.19% 1.99% 2.12% 2.15% 2.29% 2.15% 2.14% 2.17% 2.18%

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Expenses

Salaries & related costs 51.29% 52.21% 53.42% 52.50% 52.49% 52.79% 52.69% 53.72% 53.57% 54.49% 55.28% 55.28% 55.28% 55.28% 55.28% 55.28%

Rent, clinic supplies, contract labor & other clinic operating costs 20.63% 21.48% 21.21% 20.11% 19.38% 20.00% 20.48% 20.03% 20.06% 20.54% 20.01% 20.22% 20.17% 20.20% 20.23% 20.17%

Provision for doubtful accounts 1.56% 1.68% 1.64% 1.66% 1.53% 1.60% 1.92% 1.66% 1.35% 1.26% 1.08% 1.45% 1.36% 1.30% 1.29% 1.30%

Closure costs 0.00% 0.00% 0.23% 0.05% 0.08% 0.02% 0.08% 0.09% 0.06% 0.06% 0.06% 0.07% 0.07% 0.06% 0.06% 0.06%

Total clinic operating costs 73.49% 75.37% 76.50% 74.32% 73.48% 74.41% 75.17% 75.50% 75.03% 76.35% 76.43% 75.70% 75.80% 75.86% 76.03% 75.96%

Gross margin (loss) 26.51% 24.63% 23.50% 25.68% 26.52% 25.59% 24.83% 24.50% 24.97% 23.65% 23.57% 24.30% 24.20% 24.14% 23.97% 24.04%

Corporate office costs 12.76% 11.42% 10.77% 11.66% 10.80% 10.43% 9.83% 9.82% 9.96% 9.38% 9.29% 9.66% 9.62% 9.58% 9.51% 9.53%

Operating income (loss) from continuing operations 13.76% 13.21% 12.72% 14.03% 15.71% 15.16% 15.00% 14.68% 15.00% 14.28% 14.28% 14.65% 14.58% 14.56% 14.47% 14.51%

Interest & other income, net 0.00% 0.00% 0.00% 0.00% 0.28% 2.30% 0.00% 0.00% 0.01% 0.02% 0.02% 0.01% 0.01% 0.02% 0.02% 0.02%

Interest expense 0.00% 0.20% 0.29% 0.17% 0.11% 0.21% 0.22% 0.20% 0.36% 0.31% 0.36% 0.29% 0.30% 0.32% 0.32% 0.32%

Income (loss) before income taxes from continuing operations 9.80% 9.41% 8.80% 13.86% 15.88% 17.25% 14.78% 14.48% 14.65% 13.99% 13.95% 14.37% 14.29% 14.25% 14.17% 14.20%

Provision for income taxes 3.74% 3.60% 3.47% 3.94% 4.18% 4.68% 4.38% 4.63% 4.68% 4.42% 4.44% 4.51% 4.54% 4.52% 4.49% 4.50%

Net income from continuing operations including non-controlling interests 6.06% 5.81% 5.33% 9.92% 11.69% 12.57% 10.40% 9.85% 9.97% 9.57% 9.51% 9.86% 9.75% 9.73% 9.68% 9.71%

Less: net income attributable to non-controlling interests 0.00% 0.00% 0.00% -4.07% -4.29% -3.72% -3.29% -3.13% -3.14% -2.84% -2.77% -3.03% -2.98% -2.95% -2.92% -2.93%

Discontinued Operations -1.40% -0.05% 0.00% 0.00% 0.00% 0.00% 0.00% -1.90% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income attributable to common shareholders 4.66% 5.76% 5.33% 5.84% 7.41% 8.85% 7.11% 4.82% 6.84% 6.72% 6.74% 6.45% 6.31% 6.61% 6.57% 6.54%

Weighted average shares outstanding - basic 8.65% 7.68% 6.34% 5.81% 5.51% 4.98% 4.68% 4.57% 4.00% 3.74% 3.50% 4.10% 3.98% 3.87% 3.84% 3.86%

Weighted average shares outstanding - diluted 8.68% 7.73% 6.42% 5.86% 5.62% 5.05% 4.72% 4.58% 4.01% 3.74% 3.50% 4.11% 3.99% 3.87% 3.84% 3.86%

Year end shares outstanding 8.48% 7.80% 6.41% 5.77% 0.55% 4.94% 4.73% 4.58% 4.02% 3.75% 3.51% 4.12% 4.00% 3.88% 3.85% 3.87%

Historical Forecast

( $ in Thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Operating Activities

Net income (loss) including noncontrolling interests 6,296 8,738 10,004 19,974 24,700 29,783 26,218 20,996 30,424 31,691 33,914 36,735 39,482 42,331 45,181 48,565

Depreciation & amortization 4,494 4,986 5,966 5,897 5,667 5,449 5,287 5,562 6,740 7,952 8,104 8,108 8,609 9,142 9,707 10,308

Provision for doubtful accounts 2,197 2,636 3,073 3,348 3,241 3,785 4,848 4,384 4,112 4,170 3,864 4,142 4,455 4,791 5,150 5,535

Equity-based awards compensation expense 1,038 1,277 1,574 1,573 1,292 2,032 2,102 2,743 3,363 4,491 4,784 4,427 5,011 5,525 6,055 6,394

Loss (gain) on sale of business & fixed assets - - - - -333 182 175 7,335 35 84 - - - - - -

Excess tax benefit from exercise of stock options - -184 -128 -44 -336 -217 1,351 -695 -948 -947 -863 -919 -910 -897 -909 -905

Deferred income tax -373 313 1,922 714 452 3,833 3,738 2,369 6,275 7,001 7,100 7,200 7,302 7,405 7,510 7,616

Write-off of goodwill - - 49 - - - - - 135 180 90 - 142 187 - 182

Patient accounts receivable -3,434 -3,543 -1,566 165 -4,169 -5,147 -1,663 -5,389 -5,388 -5,519 -5,653 -5,790 -5,931 -6,075 -6,223 -6,374

Accounts receivable - other -73 -87 252 -468 -297 -990 -561 -5 341 -852 225 -212 -248 -130 -319 -138

Other assets 168 -160 -257 -855 206 -1,972 -585 1,803 -2,493 -1,477 -5,015 1,050 -1,375 1,298 -1,446 1,310

Accounts payable & accrued expenses 1,623 -655 1,873 595 -292 1,190 -340 4,833 1,868 -7,013 6,902 -2,148 -600 895 500 340

Other liabilities 571 338 470 415 804 -275 -1,321 859 730 1,482 783 376 376 469 725 706

Net cash flows from operating activities 18,472 19,047 30,172 30,944 30,521 32,655 39,249 44,795 45,194 41,243 54,235 52,967 56,313 64,940 65,931 73,538

Investing Activities

Purchase of fixed assets -4,655 -4,034 -4,299 -3,876 -3,673 -3,222 -4,234 -4,637 -5,167 -6,263 -7,100 -4,631 -4,918 -5,222 -5,545 -5,888

Purchase of businesses, net of cash acquired -5,206 -19,504 -19,589 -1,178 -18,197 -9,451 -7,929 -46,628 -12,270 -18,965 -17,000 -16,078 -17,348 -16,809 -16,745 -16,967

Acquisitions of noncontrolling interests -1,234 -519 -1,096 -2,329 -682 -20,439 -2,244 -1,876 -5,490 -7,083 -5,500 -6,024 -6,497 -6,007 -6,457 -6,572

Proceeds on sale of business & fixed assets, net - - - 57 919 6 64 459 47 71 42 - - - - -

Net cash flows from investing activities -8,846 -23,536 -24,876 -7,326 -21,633 -31,606 -14,104 -52,449 -22,880 -32,240 -29,558 -26,734 -28,762 -28,038 -28,747 -29,427

Financing Activities

Distributions to noncontrolling interests -5,489 -5,651 -7,295 -9,438 -9,580 -9,767 -9,332 -9,164 -9,913 -9,632 -11,271 -10,343 -10,830 -11,340 -11,874 -12,433

Cash dividends to shareholders - - - - - -3,789 -9,017 -4,838 -5,873 -7,449 -8,493 -9,598 -10,727 -11,880 -13,058 -14,261

Proceeds from revolving line of credit 0 12,000 20,900 24,450 46,300 118,900 79,900 150,800 134,300 103,000 117,000 126,275 120,144 105,742 114,635 112,548

Payments on revolving line of credit 0 -5,000 -16,500 -35,450 -41,200 -100,900 -86,000 -128,200 -139,800 -93,500 -120,000 -129,275 -122,243 -118,898 -123,000 -123,500

Payment of notes payable -245 -588 -887 -1,379 -1,013 -250 -434 -459 -825 -884 -775 -1,511 -1,930 -1,846 -1,696 -1,696

Tax benefit from stock options exercised - - - - - 217 1,351 695 948 947 863 919 910 897 909 905

Other financing activities - - - - - - 75 47 222 22 - - - - - -

Net cash flows from financing activities -11,026 1,513 -3,159 -27,302 -6,138 -245 -23,457 8,881 -20,941 -7,496 -22,676 -23,533 -24,677 -37,325 -34,085 -38,437

Net increase (decrease) in cash & cash equivalents -1,400 -2,976 2,137 -3,684 2,750 804 1,688 1,227 1,373 1,507 2,001 2,701 2,874 -423 3,100 5,674

Cash & cash equivalents - beginning of period 12,352 10,952 7,976 10,113 6,429 9,179 9,983 11,671 12,898 14,271 15,778 17,779 20,480 23,354 22,932 26,031

Cash & cash equivalents - end of period 10,952 7,976 10,113 6,429 9,179 9,983 11,671 12,898 14,271 15,778 17,779 20,480 23,354 22,932 26,031 31,705

Cash paid during the period for income taxes 3,844 5,481 4,400 8,445 7,804 9,037 6,361 4,111 9,253 7,779 15,832 17,287 18,580 19,920 21,262 22,854

Cash paid during the period for interest 34 263 484 324 179 325 639 352 1,103 884 1,271 1,211 1,165 787 592 319

Historical Forecast

Appendix D: Financial Ratios (Team Calculations)

Profitabilty Ratio 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Total Margin 4.66% 5.76% 5.33% 5.84% 7.41% 8.85% 7.11% 4.82% 6.84% 6.72% 6.74% 6.76% 6.83% 6.87% 6.88% 6.95%

Operating Margin 51.88% 53.63% 54.14% 54.61% 59.25% 59.24% 60.40% 59.92% 60.09% 60.35% 60.59% 60.51% 60.18% 59.67% 59.14% 58.76%

Cash Flow Margin 13.76% 13.21% 12.72% 14.03% 15.71% 15.16% 15.00% 14.68% 15.00% 14.28% 14.28% 14.14% 14.11% 13.97% 13.82% 13.78%

Free Cash Flow Margin 3.86% 2.14% 4.28% 6.91% 9.12% 9.60% 9.83% 9.02% 9.83% 9.25% 9.45% 9.31% 9.30% 9.25% 9.18% 9.19%

Operating Cash Flow Margin

Free operating cash flow margin

Return on assets 11.47% 9.16% 8.46% 17.93% 17.54% 18.24% 15.27% 11.60% 12.44% 11.32% 10.75% 11.23% 11.14% 11.44% 11.55% 11.78%

Cash flow to assets 26.02% 20.82% 20.19% 25.35% 23.56% 22.01% 22.02% 17.30% 18.72% 16.90% 16.15% 16.87% 16.70% 17.02% 17.12% 17.38%

Return on equity 14.76% 12.70% 12.26% 21.66% 21.22% 24.50% 19.47% 17.22% 18.19% 16.41% 15.24% 14.98% 14.68% 14.40% 14.12% 13.96%

Cash flow to equity 33.50% 28.87% 29.26% 30.63% 28.52% 29.55% 28.07% 25.67% 27.37% 24.49% 22.89% 22.51% 22.00% 21.42% 20.92% 20.60%

Basic Earning power 26.02% 20.82% 20.19% 25.35% 23.56% 22.01% 22.02% 17.30% 18.72% 16.90% 16.15% 16.87% 16.70% 17.02% 17.12% 17.38%

Growth rate in equity 3.82% 25.02% 17.58% 13.01% 26.19% 4.47% 10.76% 12.15% 10.73% 15.49% 15.24% 10.16% 9.70% 9.29% 8.90% 8.69%

Econimc value added 6,446x 5,520x 6,041x 11,859x 13,489x 13,468x 13,163x 9,336x 12,843x 10,537x 10,451x 11,947x 12,562x 13,914x 14,832x 16,321x

Ecominc to capital 11.03% 6.97% 6.20% 12.27% 10.65% 9.17% 8.47% 4.74% 6.07% 4.18% 3.72% 4.04% 3.93% 4.16% 4.18% 4.36%

Liquidity Ratio

Current ratio 3.92x 3.15x 2.65x 2.24x 2.76x 2.80x 2.78x 2.14x 2.15x 3.17x 2.64x 3.07x 3.21x 3.23x 3.54x 3.69x

Days in patientsd accoutn receivale 63.13x 67.80x 56.12x 45.09x 48.29x 49.11x 41.16x 45.58x 42.19x 42.40x 43.44x 41.99x 41.34x 40.71x 40.10x 39.51x

aVERAGE PAYMENT PERIOD 33.69x 36.52x 37.15x 36.00x 33.46x 33.79x 31.41x 42.43x 40.67x 27.43x 35.68x 29.73x 28.86x 27.05x 25.10x 24.30x

Capital Structure Ratios

Debt Ratio 16.89% 22.02% 25.73% 17.23% 17.38% 25.53% 21.58% 30.79% 28.61% 27.85% 26.87% 22.91% 21.56% 17.79% 15.41% 12.91%

Equity ratio 77.69% 72.11% 69.01% 82.77% 82.62% 74.47% 78.42% 67.38% 68.38% 68.99% 70.54% 74.96% 75.90% 79.45% 81.83% 84.38%

Debt / Equity 0.22x 0.31x 0.37x 0.21x 0.21x 0.34x 0.28x 0.46x 0.42x 0.40x 0.38x 0.31x 0.28x 0.22x 0.19x 0.15x

Capitalization ratio 4.96% 12.33% 16.23% 4.59% 8.09% 17.25% 13.35% 23.29% 21.00% 23.39% 20.71% 17.10% 15.94% 12.04% 9.80% 7.13%

Coverage Ratio

TIE Ratio 0.00x 66.56x 44.05x 80.26x 140.64x 72.44x 67.87x 72.06x 42.07x 45.87x 40.08x 45.57x 50.78x 80.04x 113.08x 224.89x

Cash flow to total debt 2.80x 180.01x 141.89x 294.83x 261.17x 172.97x 189.92x 104.18x 113.59x 108.96x 108.04x 129.99x 135.78x 168.16x 195.55x 236.32x

Debt service coverage ratio 0.00x 34.28x 22.46x 41.48x 131.54x 77.59x 69.27x 52.75x 40.32x 47.04x 32.91x 31.01x 34.45x 44.58x 51.51x 62.43x

Cash flow coverage 1.60x 1.50x 1.41x 1.80x 2.02x 1.89x 1.79x 1.72x 1.68x 1.65x 1.65x 1.61x 1.61x 1.62x 1.61x 1.61x

Cushion Ratio #DIV/0! 7.17x 5.26x 4.71x 18.89x 10.75x 11.49x 9.46x 7.24x 8.74x 6.39x 6.52x 7.76x 9.23x 11.37x 15.73x

Capital expense ratio 18.92% 19.54% 17.96% 18.37% 18.68% 18.06% 17.74% 17.58% 16.43% 16.39% 16.52% 15.86% 15.60% 15.34% 15.13% 14.91%

Asset efficincy

Total asset turnover 1.89x 1.58x 1.59x 1.81x 1.50x 1.45x 1.47x 1.18x 1.25x 1.18x 1.13x 1.19x 1.18x 1.22x 1.24x 1.26x

Fixed asset turnover 10.11x 9.03x 11.85x 14.05x 15.17x 17.97x 19.37x 17.65x 19.35x 19.89x 20.70x 20.71x 20.80x 21.17x 21.53x 21.81x

Current asset turnover 3.76x 4.21x 4.85x 6.10x 5.38x 5.19x 5.56x 5.32x 5.56x 5.51x 5.07x 5.22x 5.14x 5.45x 5.36x 5.32x

Other financial ratios

Capital expenditure growth rate 39.10% 37.61% 36.85% 37.29% 36.86% 36.74% 36.48% 35.97% 35.19% 35.99% 36.42% 36.36% 36.30% 36.24% 36.17% 36.11%

Replacement viability ratio 152.29% 157.23% 147.76% 139.13% 135.49% 131.18% 129.48% 132.60% 132.14% 131.27% 129.88% 131.06% 131.38% 131.14% 130.95% 130.88%

Market to book ratio 4.28x 2.40x 1.97x 2.13x 0.20x 1.89x 2.44x 2.67x 3.08x 3.45x 3.95x

Price to earnings ratio 38.33x 18.55x 15.87x 16.76x 14.79x 11.06x 18.12x 31.68x 25.90x 30.33x 36.48x

Price cash flow ratio 7.03x 4.37x 3.72x 3.47x 0.36x 3.20x 4.66x 5.60x 6.48x 7.85x 9.60x

Historical Prices 20.70 14.10 13.33 16.93 19.82 19.68 27.54 33.26 41.96 53.68 70.20

Using the DuPont analysis, we looked at the trends from ROE. ROE has leveled around 11% after being at a high of 17% in 2011. The equity multiplier has been high to

maintain the ROE number because the Total Asset Turnover has fallen from 1.47 to a projected 1.13 at the end of 2016. The low Total Asset Turnover indicates that the

company is not using its assets as efficient in producing sales. The equity is on a slightly downward trend and our projections continue the decrease the Equity multiplier. A

service company such as USPH doesn’t expect to have a great Total Asset Turnover because of the nature of the business. One a spect that further reduces this number is that

USPH acquires clinics annually that do not produce high returns until they turn into mature clinics especially when they purchase clinics in December which usually occurs as

acquisitions purchase prices are immediately incorporated into the balance sheet but do not yield increases in earnings if they are bought later in the year. Every year their assets

produce revenue the year after purchase. This delay can cause low numbers for Total Asset Turnover if they acquire different number of clinics each year. The decreasing ROE

and TAT still indicate that the company is becoming less efficient in return to investors. This shows that the stock price appears to be inflated higher than its true intrinsic value

and is overvalued.

Historical Forecast

USPH 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

ROE 13% 17% 13% 8% 12% 12% 11% 11% 11% 11% 10% 10%

ROA 11% 13% 10% 6% 9% 8% 8% 8% 8% 8% 9% 9%

Profit Margin 7% 9% 7% 5% 7% 7% 7% 7% 7% 7% 7% 7%

Tota Asset Turnover 150% 145% 147% 118% 125% 118% 113% 119% 118% 122% 124% 126%

Equity Multiplier 121% 134% 128% 148% 146% 145% 1.42 1.33 132% 126% 122% 1.19

Appendix E: DuPont (Team Calculations)

Appendix G: Sensitivity Analysis (Team Calculations)

Our sensitivity analysis looked at the potential results with variations in the required rate of return and the long term growth rate. The required rate of 8.42% and our long term

growth rate of 2.5% gave us an intrinsic value of the bolded number seen above. In order to identify potential outcomes from variations in required rate of return and long term

growth rate we inputted discounted and premiums on both variables. Looking to see how changes in these variable would interact with each other giving different stock values

scenarios, we ranged the required rate of return from 5.72% to 11.12% and ranged the long term growth rate from 1.25% to 3.75%. By looking at the analysis it is clear to see

that more often than not, our stock is overvalued as indicated by the grey shaded boxes. This is proven when the larger number of scenarios give an intrinsic value that is below

the current market value. This shows that the company needs more favorable than currently predictable conditions in order to become valuable. In situations such as this, the

stock is given a sell decision.

Appendix F: Discounted Cash Flow and Assumptions (Team Calculations)

Forecast 2017E 2018E 2019E 2020E 2021E Terminal

Net Operating Cash Flow 52,967 56,313 64,940 65,931 73,538

Add: Interest Expense*(1-Taxrate) 824 792 535 403 217

Exclude: Capital Expenditure -26,734 -28,762 -28,038 -28,747 -29,427

FCFF 27,057 28,343 37,438 37,587 44,327

Add: Net Borrowing 4,511 4,029 15,002 10,061 12,648

Exclude: Interest Expense -1,211 -1,165 -787 -592 -319

FCFE 30,357 31,207 51,653 47,056 56,657 $980,976,039.88

NPV FCFE $27,999,643.86 $26,548,235.93 $40,529,011.35 $34,055,067.62 $37,818,929.06 $654,804,092.75

Required Return 8.42%

NPV FCFE 2017 $27,999,644

NPV FCFE 2018 $26,548,236

NPV FCFE 2018 $40,529,011

NPV FCFE 2020 $34,055,068

NPV FCFE 2021 $37,818,929

NPV Terminal $654,804,093

$821,754,980.58

Current Risk-free Rate 1.92% 5-Year Treasury Constant Maturity Rate-FRED

Beta 0.85479 Team projections

Historican Market Return 9.53% Annual returns on S&P 500 stocks 1928-Current. Domaodaran. Geometric Mean

Long-Term Growth Rate 2.50% GDP is expected to grow at 2% based on the World Bank HC Stock track above GDP

Cost of Debt 4.23% LIBOR + 2.5%. LIBOR equals 1.73 on 2/3/2017

Tax Rate 32.00%

Weight of Equity 91.21% See calculations on the right

Weight of Debt 8.79% See calculations on the right

WACC 7.93% Weighted Average Cost of Capital

[RFR+β*(Rmarket-RFR)]

Currently overvalued Price (as of 2/3/2017): $71.45

Currently undervalued

1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75%

5.72% $92.07 $96.87 $102.27 $108.41 $115.42 $123.53 $133.00 $144.21 $157.69 $174.21 $194.91

6.02% $86.03 $90.18 $94.82 $100.04 $105.95 $112.70 $120.48 $129.54 $140.25 $153.08 $168.73

6.32% $80.71 $84.34 $88.36 $92.84 $97.88 $103.57 $110.06 $117.53 $126.22 $136.45 $148.66

6.62% $75.99 $79.17 $82.69 $86.58 $90.91 $95.78 $101.27 $107.52 $114.69 $123.02 $132.79

6.92% $71.77 $74.59 $77.68 $81.08 $84.85 $89.04 $93.74 $99.03 $105.05 $111.95 $119.93

7.22% $67.98 $70.48 $73.22 $76.22 $79.52 $83.17 $87.22 $91.76 $96.87 $102.67 $109.30

7.52% $64.55 $66.79 $69.23 $71.88 $74.79 $77.99 $81.53 $85.46 $89.84 $94.77 $100.36

7.82% $61.43 $63.45 $65.63 $68.00 $70.58 $73.41 $76.51 $79.94 $83.74 $87.98 $92.74

8.12% $58.59 $60.41 $62.38 $64.50 $66.80 $69.31 $72.06 $75.07 $78.39 $82.07 $86.17

Required Rate of Return 8.42% $55.99 $57.64 $59.41 $61.33 $63.39 $65.64 $68.07 $70.74 $73.66 $76.88 $80.44

8.72% $53.60 $55.10 $56.71 $58.44 $60.30 $62.31 $64.49 $66.87 $69.45 $72.29 $75.41

9.02% $51.40 $52.77 $54.23 $55.80 $57.49 $59.30 $61.26 $63.38 $65.69 $68.20 $70.95

9.32% $49.36 $50.61 $51.95 $53.38 $54.91 $56.55 $58.32 $60.23 $62.29 $64.53 $66.98

9.62% $47.46 $48.62 $49.84 $51.15 $52.54 $54.04 $55.64 $57.36 $59.22 $61.23 $63.41

9.92% $45.70 $46.77 $47.89 $49.09 $50.37 $51.73 $53.18 $54.75 $56.42 $58.23 $60.19

10.22% $44.06 $45.04 $46.08 $47.18 $48.35 $49.60 $50.93 $52.35 $53.87 $55.51 $57.27

10.52% $42.53 $43.44 $44.39 $45.41 $46.49 $47.63 $48.85 $50.14 $51.53 $53.02 $54.61

10.82% $41.09 $41.93 $42.82 $43.76 $44.75 $45.80 $46.92 $48.11 $49.38 $50.73 $52.18

11.12% $39.74 $40.53 $41.35 $42.22 $43.14 $44.11 $45.13 $46.23 $47.39 $48.62 $49.95

Long-Term Growth Rate

Shares Outstanding 12,520,000

Intrinsic Value FCFE $65.64

Closing Price (2/3/17) $71.45

As explained in Appendix X and page 9, the revenue driver for USPH is Total Patient Visits. Our estimates are that acquisitions will not grow by a large number,

because of interest rate increases and fewer clinics to acquire, thus contributing less to revenue each year. Because of this, growth in total patients will also

contribute less to revenue each year. Lastly, revenue per patient is at a probable plateau because of USPH peaking in efficiency. We represented attributes that will

contribute to USPH’s revenue growth of 7.5% as:

 Total Patient Visits Growth

 Total Clinics Growth

 Clinical Efficiency Growth

Appendix H: Breaking down DCF and Assumptions (Team Calculations)

2016 2017 2018 2019 2020 2021

$348,990,000.00 $382,262,038.52 $411,195,095.51 $442,173,623.75 $475,342,231.25 $510,855,749.36

$7,658,000.00 $7,964,000.00 $8,283,000.00 $8,614,000.00 $8,959,000.00 $9,317,000.00

$356,648,000.00 $390,226,038.52 $419,478,095.51 $450,787,623.75 $484,301,231.25 $520,172,749.36

USPH Projected Revenues

* Spikes in 2017 revenue are due to the January 2017 clinic acquisition of 17 clinics. Since these clinics were

bought early in the year, they will bring more revenue for the year due to a full year of operations. We cannot assume this will happen in any other

year, so our assumption of linear growth is used - linear growth accounts better for overall yearly acquiring than other methods.

(Source: Team Calculations)

Salaries and Related Costs - Though salaries fluctuate with decisions by management for raises and other forms of compensation due to operational efficiencies and

success in areas that USPH decide to work on, our team estimates that as revenues rise, salaries will grow from as a larger p ercent of revenue. This is due to the

growing labor market in Physical therapy. We estimate that Salaries and Related Costs will account for an average of 55.28% of revenue in the next five years.

Revolving Line of Credit - As USPH continues to accumulate cash and growth in net income, they will be less inclined to use their line of credit. As interest rates

start to increase, they will also be less likely to use their line of interest. Our estimates had the resolving line of credit decreasing approximately 8.09% a year.

Goodwill - USPH has historically recorded their purchases of business in Goodwill. Our estimate of goodwill is highly tide to revenues, considering as total clinics

increases, revenues increase from new patient visits. We estimate that Goodwill will remain relatively constant at 61.5% of total assets.

Corporate Office Costs - These costs are associated to management pay and the internal technology costs associated with clinic acquisition research and health

record information. This technology is at their headquarters in Houston and is related to Office Costs. USPH benefits from Economies of Scale, by adding each clinic

acquisition to their network. Houston rental rates are not expected to increase in the future. Due to this, our team estimates Corporate Office costs to remain relatively

constant, with some decreases. Corporate Office costs are projected at an average of 9.53% of total revenues.

2016 2017 2018 2019 2020 2021

Efficincey contribution to Total Patient Visit

Growth 1.51% 1.85% 1.48% 1.47% 1.46% 1.46%

Clinic Contribution to Total Patient Visits

Growth 5.99% 7.37% 5.87% 5.85% 5.82% 5.80%

Total Patient Visits Contribution To Revenue

Growth 7.50% 9.23% 7.35% 7.31% 7.29% 7.26%

Other Revenues 0.153% 0.188% 0.150% 0.149% 0.149% 0.148%

Total Revenue Growth 7.65% 9.41% 7.50% 7.46% 7.43% 7.41%

0.02

0.04

0.06

0.08

0.1

0.12

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

E X P E C T E D E A R N IN G S G R O W T H

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

$0.00

$100,000,000.00

$200,000,000.00

$300,000,000.00

$400,000,000.00

$500,000,000.00

$600,000,000.00

Expected Revenue and Total Visit Growth

( $ in Thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Previous retained earnings (accumulated deficit) 44,408 50,704 59,442 69,446 75,632 89,876 102,405 111,321 119,206 134,186 149,016 164,547 181,340 199,265 218,376 238,624

Purchase & retirement of treasury stock - - - 5,581 1,401 4,656 - - - - - - - - - -

Cash dividends to shareholders - - - - - 3,789 9,017 4,838 5,873 7,449 8,493 9,598 10,727 11,880 13,058 14,261

Retained earnings (accumulated deficit) 50,704 59,442 69,446 75,632 89,876 102,405 111,321 119,206 134,186 149,016 164,559 181,340 199,265 218,376 238,624 260,495

Historical Forecast

Appendix D: Retained Earnings

State Lower limit Upper limit

Alaska 0.00% 0.00%

Arizona 2.59% 4.54%

Connecticut 3.00% 6.70%

Delaware 2.20% 6.60%

District of Columbia 4.00% 8.95%

Florida 0.00% 0.00%

Georgia 1.00% 6.00%

Idaho 1.60% 7.40%

Illinois 3.75% 3.75%

Indiana 3.30% 3.30%

Iowa 0.36% 8.98%

Kansas 2.70% 4.60%

Louisiana 2.00% 6.00%

Maine 6.50% 7.95%

Maryland 2.00% 5.75%

Massachusetts 5.20% 5.20%

Michigan 4.25% 4.25%

Mississippi 3.00% 5.00%

Missouri 1.50% 6.00%

Nebraska 2.46% 6.84%

Nevada 0.00% 0.00%

New Jersey 1.40% 8.97%

Ohio 0.53% 5.33%

Oklahoma 0.50% 5.25%

Oregon 5.00% 9.90%

Pennsylvania 3.07% 3.07%

Tennessee 6.00% 6.00%

Texas 0.00% 0.00%

Vermont 3.55% 8.95%

Virginia 2.00% 5.75%

Washington 0.00% 0.00%

Wisconsin 4.00% 7.65%

Wyoming 0.00% 0.00%

Total rates 77.46% 168.68%

# of Clinics 33 33

Average Rates 2.35% 5.11%

Monte Carlo Original:

The Monte Carlo Valuation is a random sampling system that gives a wide range of different numerical possibilities. The

system takes various inputs and assorts all the different possibilities based on how those inputs affect each other. The

algorithm then delivers the individual results based on the data interaction. Each possibility is called an iteration. Millions of iterations can be run but for our Monte Carlo valuations we implemented 30,000 iterations as it is the max our excel add-in

would allow. This number is still sufficient to demonstrate the most likely outcomes of our inputs and indicate where the

stock price is most common. Our Monte Carlo simulation accounted for three different variables. As discussed, the main driver of revenue growth is total

patient visits (and acquisitions which is correlated with patient visits). We used our 7.07% growth rate of patient visits

calculated from our historical changes in visits to calculate a standard deviation of .047. The Required Rate of Return was also tested with a manually calculated standard deviation of .0135. Lastly, we tested the long term growth rate of 2.5% with a

manually calculated deviation of .0075. These variables were tested to return the potential intrinsic value of USPH’s stock.

The intrinsic value from the Discounted Cash flow model of $65.64 was the watch cell of which the outputs were based.

Monte Carlo Alternative:

Our second Monte Carlo simulation was run to help project the results potential tax reductions would have on our stock. The

first simulation showed how the three most important variables relating to our intrinsic value would affect our stock. As stated, there is a potential new variable moving USPH to a lower tax rate that could breed beneficial results for our stock.

Instead of the historical effective tax rate of 32%, we took the base tax rate of 15% (stated by the government administration)

plus state taxes. The table shows the upper and lower corporate tax limits that USPH operates in (any states with only one clinic were omitted). The average rate was found; we went with the upper limit of 5.11% in order to be conservative. When

added to our base figure of 15%, we project a potential future tax rate of 20.11%.

We applied this tax rate to our projections to see the effect of this lower tax rate. By looking at the income from continuing operations before and after our tax provision changes, it is clear that there is a

substantial difference to the financial statements from this tax reduction and income that will flow through to the Cash flow

statement is sizably greater as can be seen. Original statement:

These numbers change the DCF noticeably and lead to a new intrinsic value of $75.79 from $65.64. This new intrinsic value

is what we used to run another Monte Carlo with the same variables as used in the first analysis: patient visits, growth rate,

and required rate of return.

Provision for income t axes 17,287 18,580 19,920 21,262 22,854

Ne t i ncome from conti nui ng ope rati ons i ncl udi ng non-control l i ng i nte re sts 36,735 39,482 42,331 45,181 48,565

Statement with 20.11% tax rate:

Provision for income t axes 10,864 11,676 12,519 13,362 14,362

Ne t i ncome from conti nui ng ope rati ons i ncl udi ng non-control l i ng i nte re sts 43,158 46,386 49,733 53,081 57,056

32% T ax Rat e Net cash flows from operat ing act ivit ies 52,967 56,313 64,940 65,931 73,538

20.11% T ax Rat e Net cash flows from operat ing act ivit ies 59,391 63,217 72,342 73,831 82,030

Appendix I: Monte Carlo Simulation (Team Calculations, taxrates.org)

500

1000

1500

2000

2500

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3 0

3 5

4 0

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8 0

8 5

9 0

9 5

1 0

1 1

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1 3

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1 6

1 7

1 8

M o

Market Price

Monte Carlo Current Tax Rate (32%)

Frequency

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1000

1500

2000

2500

0 5

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1 5

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3 0

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4 5

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Market Price

Monte Carlo Proposed Tax Rate (20.11%)

Frequency

The Physical Therapy Industry is a complicated system between “suppliers” and the subsequent “consumer.” It is important to understand the “food chain” for a company to

better understand where their demand comes from and the factors that can influence it. The three main supplier -types for the USPH food chain are government insurances,

private insurances, and workers compensation. These are the factors that most influence demand for USPH, which is why we focused our analysis on these factors. By

identifying critical factors in revenue flows, USPH is more able to be strategic in their operations within their specific supply chain. Considering USPH is dependent on

suppliers, they have difficulty controlling their risk factors. However, these risks can be strategically mitigated through business operations in a well managed firm. Unlike any

other industry, healthcare providers are subject to supplier entities more than they are subject to the consumer. USPH tries to appeal to their customer base with quality and

care but they are equally, if not more concerned, about the insurers who give them ability to have customers. This is why they encourage the development of relationships

between their local therapists and physicians. It is important to have well rooted physician relationships because it produc es a strong customer base. Physicians are also

concerned with the type of payment these customer holds (private insurance or government plans). USPH has pushed for more pri vate insurance customers, so they must

develop good relationships with the physicians that also have a focus on this niche market of private insurance customers. As consumers gain insurance, physical therapists

supply the ability to satisfy the growing demand. Private Insurance companies negotiate rates by cities which can determine USPH’s ability to have customers. Though it

seems as though private insurance has all the power, USPH has been able to leverage themselves favorably through their size i n negotiating and low supply areas. USPH is

subject to governments in regulation requirements and Medicare/Medicaid limits and requirements. Governments ask for quality outcomes at a cheaper price. USPH has

strayed away from this supplier as much as possible; it has been one of their main goals. They have done this successfully wi th only 24.5% of their revenue coming from

insurance. Lastly, the ability to acquire has been perpetuated by their revolving credit agreement. By being able to pay off their debt efficiently, they have been able to

establish a well rooted relationship with Bank of America. Their Credit is used to acquire which is how they are able to increase patient visits and company revenue. Their

ability to manage debt will allow them to continue to benefit from this relationship.

Appendix J: Physical Therapy Rehab Center Food Supply Chain and Glossary (Team Calculations)

It is important to note the uncertainty in determining the affects the new

administration will have on USPH. We estimate that USPH will fair well

under most conditions. However, there are aspects that could make it easier

– or more difficult- for USPH to continue to grow net income at a steady

rate. Below is outlined a flow chart of possible congressional ruling and

their affects on USPH. This information is taken at its most extreme levels

and variations of occurrence.

For every 1 new

regulation 2 have to be

removed: Purpose is to

encourage small

business growth and a

decrease in price

controls

Increase in

speed and

ability of

small

business

growth Higher profit

margins allow

companies to

hire more More are able to go

to the doctor cause of

an increase in

personal income

Cuts tax

rates to

15%

Business are

encouraged

to expand

domestically

More are covered

by employer

insurance (who

are in favor of

physical therapy)

USPH revenue

will be

increased by

these factors

USPH

profit

margins

increase

Repeal ACA

Up to 20 Million

Lose insurance

USPH becomes

more Medicare/

Medicaid focused

to maintain profits

USPH patients

decrease due to

lower quantity of

people insured

Under these

condition it is

unclear how

significant of

an impact it

will have on

profit margins

of USPH

If done without a replacement

USPH

revenue will

increase

because it

will still be

the low cost

solution

Transitional Activity that could happen

without actually repealing ACA

Agencies are free

to use their

interpretations of

the ACA

Insurance is

allowed to decide

how long they will

cover each illness,

reducing the

amount of days

they will pay for

Current payment subsidies

insurers receive are ended

allowing them to leave ACA

Contracts between

insurance companies

and ACA terminate

due to this subsides

ending

Allows insurers

to drop sick

patients

approved only

through ACA

Physical therapy does not take on

the extremely sick so revenues will

not be as effected by them losing

coverage. UPSH business model

looks for younger and healthier

Less sick patients are referred

to medical solutions rather

than physical therapy because

of shorter time frame

Redefine the term Hardship

allowing increase amounts who

opt out of insurance under ACA

USPH revenue decreases

because their payment

mix is insurance heavy

Insurance

is allowed

to freely

cross state

borders

USPH can

implement

favorable

contracts in

locations

increasing

revenue

Repeal and Replace ACA Coverage loss

is kept to a

minimal

Gives insurance

to those who

lost it when

ACA was

implemented

New

administration

are able to do it

at a lower cost

Government

Insurance is

not expanded;

looking for

ways to save

money

Government

begins to

seek out

physical

therapy

Quantity of

USPH patients

increase rises as

a cheaper

solution for

government

Congressional Ruling

Results of Administration Decisions

Appendix K: Possible Outcomes for Congressional Rulings (Team Calculations)

Competition Positioning USPH KND SEM HLS

Number of Rehab Properties 508 604 1023 121

Revenue $324.3M 1.58B 3.74B 2.65B

% of Revenue from Medicare/Medicaid 24.50% 83.00% 40.50% 73.20%

% of Revenue from Private Insurance 51.0% 8.0% 46.9% 19.0%

% of Revenue from Workers Compensation 18.5% <1% 12.6% 1.1%

USPH has been able to mitigate their payment risks by diversifying their payment methods. Decreasing the amount of revenue you receive from the government, they have made

themselves less susceptible to future regulations. Comparing USPH to their competitors, who have a substantial amount of revenues coming from the government, they have

been are more appealing to investors. Combining this information with their beta based on the NYSE Healthcare index of .76 USPH has placed them in a favorable position for

investors. When conservative investors are looking to diversify their portfolio they could benefit from adding USPH stock rather than some of their competitors.

Year/Index Beta R-Squared

5Y S&P 500 1.074 0.253

3Y S&P 500 0.85 0.156

5Y RUT 0.928 0.351

3Y RUT 0.864 0.267

5Y NYP 1.043 0.208

3Y NYP 0.762 0.142

Beta Analysis of USPH

USPH SEM HLS

0.85 1.15 1.1

Beta Comparison

When analyzing the level of risk USPH presents we found their beta compared to several indexes. We found that USPH beta almost always moved less than the market

regardless of which index was used for comparison. This is beneficial to USPH because it shows they are less volatile then other companies. The first index we compared was

the S&P 500 because it gives a base level for the market as a whole. This is the beta most companies will use when comparing different companies. Here we found that USPH 5

year beta moved more than the market but in recent years they have decreased their risk and have stabilized some of their validity. USPH is a smaller company who has

potentials for growth. When listening to their CEO we found that they compared themselves to the Russell 2000 due to the broader outlook it gives. This larger view on the

market let us compare USPH movement by looking at companies who were statically more likely to be equal in size and growth as USPH. These factors led us to compare

USPH with the RUT. Her we found that we offer less risk. For an investor looking to invest in a growth company with less movement compared to the market, they may be

interested in placing their money in USPH. The last index we used when comparing was the NYSE Healthcare index. The team felt it would be important to include this one in

our analysis because it shows how USPH is moving as compared to their industry. For an investor looking to diversify their risk but still interested in the profits from the

healthcare industry, they may look at this beta and feel confident in what USPH can offer On the right we have the betas of USPH and their competitors. Because beta shows

how influenced a company is based on market swings we felt it important to compare these. USPH is the only one out of their competitors who is volatile than the market. In

economic downturns this component interprets USPH as being a safer investment choice in comparison with their competitors.

Appendix L: Competition Positioning (Team Calculations, Company Filings)

Appendix L: Beta Analysis of USPH and Competitors (Team Calculations and Value Line)

Appendix M: Dividend Discount Model (Team Calculations)

Using the Dividend Discount Model, we value the price of USPH by using dividends growth and then discounting the stock price to

present value. This model has some limitations because it requires a constant growth rate of dividend. USPH had some dividend

growth fluctuations over the years. USPH only started paying out dividends in 2011 so a historic trend cannot be established for a

long period of time. For our model, we assumed USPH would continue their trend increase in dividend payout. USPH paid stable

dividend at $0.17 paid each quarter in 2015 until present. Using an estimate increase of $.02 every quarter for the next 5 years based

on the past years increases which has had 3 of the last 4 years seeing a $.08 increase. We used the model to obtain an estimation of

the value of the stock. Based on the calculation, and using a discount rate of 8.42%, we valued the stocks intrinsic value to be worth

$51.58. It is important to note the limitations of the DDM model as the model is traditionally used larger companies that pay a more

predictable amount of dividends. USPH dividends experienced an anomaly in 2012 with a sharp rise in payout, followed shortly with

a huge decline. Since then USPH has trended dividend increases with 8 cent extra per year per share. Even with these limitations, the

stock is still valued 20$ below current closing price. While the amount under may be argued, it is a substantial difference that show

USPH is overvalued. This future amount shows how USPH stock price has been on the rise and is unlikely to get much higher even

with the growth in their dividends.

2011 D1 = 0.32

2012 D2 = 0.76

2013 D3 = 0.4

2014 D4 = 0.48

2015 D5 = 0.6

2016 D6 = 0.68

2017 D7 = 0.76

2018 D8 = 0.84

2019 D9 = 0.92

2020 D10 = 1

2021 D11 = 1.08

P5 = 71.45

Value = 51.2751

Historical

Ye ar Divide nd

Ove rvalue d

P E

R C

E N

T C

H A

N G

E I

N P

E M

P LO

Y M

E N

NET PATIENT REVENUE

C O R E L L AT I O N

P R

O C

E E

D F

R O

M L

IN E

O F

C R

E D

NET PATIENT REVENUE

C O R R E L AT I O N Y

E A

R LY

U N

IN SU

R E

D R

A T

NET PATIENT REVENUES

C O R R E L AT I O N

P A

Y M

E N

T S

T O

L IN

E O

F C

R E

D IT

NET PATIENT REVENUE

C O R R E L AT I O N

T O

T A

L C

LI N

IC S

NET PATIENT REVENUE

C O R R E L AT I O N

E O

P C

A SH

F LO

W S

NETR PATIENT REVENUE

C O R R E L AT I O N

Growth rate is forecasted to increase at 7.5% through 2021 . For USPH, growth rate is based on net patient revenues . The best predictor of net patient revenues is total patient visits.

Total patient visits was used in a simple linear regression model to predict revenues, which resulted in the “best model” fit over other more complicated models. Confirming this fact,

we used the simple linear regression model to forecast USPH’s revenues for 2017-2021. Many variables were analyzed to find which had a strong correlation with net patient

revenues (See Above). Of the nine variables analyzed, total patient visits had the highest positive correlation with revenue; as total patient visits increase, revenue increases. Next,

seven statistical and data mining models were investigated to create equations that could be used to forecast future revenues. Table ’Data Mining Results’ shows the model

correlation to the data and the best fitting model demonstrated by the lowest absolute error value. The SLR uses a feature selection algorithm to find the most influential variable and

removes the less influential variables from the model, giving the formula ‘Net Patient Revenue’ = 115.9 * ‘Total Patient Visits’ – (2,699,416). The last term is a constant derived by

the model. Both the correlation analysis and the SLR modeling confirm that total patient visits is the most influential variable in predicting net patient revenue. This equation is

confirmed by the observation that USPH has focused in operations that increase total patient visits. Other improvements have increased the payments rates from patient visits. Next,

we forecasted total patient visits using a combination of historic trends of total patient visits and total clinics. The formula used for this was ‘Increase in Patient Visits’ = .50 * Δ

‘Total Patient Visits’ (2010-2015) + .50 * Δ ‘Total Clinics’ (2010-2015). Total clinics was used to adjust for variability in efficiency of each clinic. Since total clinic changes has a

high correlation with total patient visits at a coefficient of 98.4, total clinic increases were used to further justify the increase in total patient visits. This forecasted the growth rate of

total patient visits is 7.07%. This growth rate is important to the Monte Carlo simulations described in Appendix I in this report to determine if the stock price is properly valued and

thus influence the buy, hold, sell recommendation . Using this rate in the SLR formula equates to a growth rate of 7. 5%.

Model Used:

Simple

Variable Linear

Regression

Gaussian

Processes

Isotonic

Regression

Linear

Regression

Model

Linear

Node 0

SMO

Regression ZeroR model

Correlation Coefficent 0.9993 0.8796 0.903 0.9848 0.9989 0.9986 0.7951

(Closer to 1 the better)

Relative Absolute error 13.34% 76.36% 5439.03% 33.61% 18.25% 26.83% 66.46%

(The lower the better)

Data Mining Results

T O

T A

L P

A T

IE N

T V

IS IT

NET PATIENT REVENUE

C O R R E L AT I O N

(Source: Team Estimates)

N E

T P

A T

IE N

T R

E V

N U

ACQUISITIONS

C O R R E L AT I O N

Appendix M: Revenue Growth Model (Team Calculations)

Strengths Weaknesses

High Reimbursement Slow Acquisitions

Personal Relationships Marketing Expenses

Large Number of Patients Growth rate Increases at Decresing rate

Efficient at Operating Interest Paid to RLC

Multi Clinic Managements Substitute Products

Debt Management Increasing Labor Costs

Mass of Data Medicare/Medicaid Reimbursement Limits

Profitable locations

Opportunity Threats

Aging Population Daily Patients Restraint

Increase in Medicare Rates No Online Base

Moving to Online Therapy Daily Revenue/Patient Plateu

Growth in Total Patients Market Condensing decreases amount USPH Acquires

Large Line of Credit for Acquistions Barriers to Entry

Technology that Finds quality Acquistions

SWOT Analysis:

The team felt that in addition to Porter’s Five Forces, analyzing the SWOT gave a broader look at the industry USPH is operating in.

Strengths: 5

USPH has focused on acquisitions in states with high population and high reimbursement rates. Their target location is within rural suburban areas where they can be in personal relationship with the community yet strategic with a large number of patients. Preferring physicians who are already fairly efficient at operating with multiple clinics, USPH is

interested in the future development rather clinics needing to be fixed Becoming excellent debt managers, USPH keeps modest financial leverage when acquiring physicians’

clinics. With a revolving line of credit they have been able to buy into quality clinics with a mass of data. From the combination of clinics across the states USPH uses this data to better analyze where would be the most profitable location to acquire next. USPH has benefitted from economies of scale marginal technology costs lower with each increase

in total clinics.

Weaknesses: 2 Their slow acquisition process may leave them at a loss in the growing consolidation market. Also, considering USPH’s acquisitions are not forced to follow similar branding,

marketing expenses are created for the hiring of multiple brand positions. Because the need for physical therapy is increasing and there is a decrease in the amount of available

therapy graduates, USPH stands in a position with a decrease labor sector which increases labor costs. This combined with the limited reimbursements on Medicare/Medicaid,

USPH faces opposition of future expansion at their current rate.

Opportunity: 3

Growing numbers in ages 65+ will likely increase Medicare rates in the future. Though USPH has strategically penetrated high insurance markets, they could easily tap into the

Medicare market in a broader way, which could help them grow if they felt the need. Unlike their competitors, they have currently developed their revenue to a younger, active market, but are also in a favorable position to pursue another market. Similar to other industries, USPH has not created a solid online physical therapy presence yet. The

technology advancement has made online physical therapy a profitable solution to those who are facing reimbursement limitations. Expanding their services online has create

potential for future success of USPH.

Threats: 3

The limited ability for therapist to see a certain number of patients, coupled with growing technological ability have led companies like eWellness to create an online based physical therapy clinic. Though this cannot reach a majority of patients needs, the growing popularity of “not having to leave home mindset” could hurt USPH’s business by

taking over this customer base. This is also an opportunity for USPH if they pursue it correctly; a high threat if non handled correctly. Another area USPH has substantial threat in is they have worked out all inefficiencies for daily client billing. In addition, management has pushed for their physical therapists trying to see more patients per day the past

which has been the large source of increased profit, however they have reached a plateauing area making it difficult for this amount of gain to continue at this rate in the future.

Appendix N: SWOT Analysis (Team Calculations)

Because of the fragmentation of the industry, it is important for USPH to be separated from their competitors. ATI and SEM are the purest competitors of USPH so

they are the ones placed for comparison in this graph. In areas with less competition, reimbursement rates are higher for both government and insurance entities. As

seen in the map above, USPH has chosen clinic areas that are not heavily saturated by their competition. These high reimbursement rate areas, however, are appealing

to their competitors. There are no barriers to entry for their larger competitors, so they are subject to market infiltration. Additionally, USPH ‘s high concentration in

certain market may pose certain risks by lack of diversification. However, USPH has positioned themselves well bhy capturing the market before mas infiltration.

(02/03/2017)

# of Shares % of Total Market Value Non Exec Totals

Jerald L. Pullins 24596 0.2% 1,757,384.20$ 251,043.00$

Christopher J. Reading 116877 0.9% 8,350,861.65$ -

Lawrance W. McAfee 45212 0.4% 3,230,397.40$ -

Daniel C. Arnold 128654 1.0% 9,192,328.30$ 177,043.00$

Mark J. Brookner 53750 0.4% 3,840,437.50$ 188,543.00$

Harry S. Chapman 33750 0.4% 2,411,437.50$ 204,543.00$

Dr. Bernard A. Harris, Jr 34834 0.4% 2,488,889.30$ 189,543.00$

Marlin W. Johnston 36849 0.3% 2,632,861.05$ 188,543.00$

Edward L. Kuntz 5750 - 410,837.50$ 191,543.00$

Reginald E. Swanson 6881 0.1% 491,647.45$ 115,295.00$

Clayton K. Trier 11250 0.1% 803,812.50$ 214,043.00$

Glenn D. McDowell 42771 0.3% 3,055,987.95$ -

Totals 541174 4.5% 38,666,882.30$ 1,720,139.00$

USPH % of Market Shares compared to competitors

(Source: Team Estimates)

Appendix O: Market Share By State and Board of Director Holdings (Team Calculations Company Filings)

Appendix P: Board of Director Holdings (Team Calculations and USPH Proxy)

USPH has stated many times their strategy in developing clinics in suburban areas. The reason for this is that areas with les s demand have

higher reimbursement rates for both low supply, and less condense areas of population. Both insurance and government entities follow this

trend, so it is important for USPH to capitalize. If the reimbursement rate is dollars more per patient, the higher rate can translate to millions of

dollars in difference. This may be why USPH has been able to keep their margins so high with respect to how many clinics they have. This

graph was found using census bureau information. The information was the percentage of urban areas by state. Dividing each states number of

clinics owned by USPH by the total clinics found the higher areas of clinics by state. Comparing these number graphically depict higher

suburban areas correlating with higher concentration of USPH clinics. This is true in most areas except Florida. USPH has stated they tend to

stay away from Florida and the East Coast due to the low reimbursement rate, considering the market saturation of physical therapy clinics in

Florida.

USPH lies alone among their competition with their high revenue from workers compensation (18.6%). USPH seeks out specific deals that will

help benefit their revenue streams by giving companies preventative care. Preventive care has two benefits for manufacturing companies: it

lowers workplace accidents and the insurance costs associated with a workplace accidents are also lowered. USPH has helped to lower the

overall costs these manufacturing companies incur by keeping their employee on the job. USPH has been able to go into these c ompanies to

provide service to them before the accidents occur. The affect of entering into a deal to prevent harm helps OSHA look favora bly onto the

respective companies. USPH understands their market, and has been able to correlate many of their clinics into manufacturing states. Above is a

graph with the percentage of USPH clinics by state, related to the percentage of employment in manufacturing by state. This was found using

census bureau numbers to find total manufacturing employment by state, and dividing that by the total number of employment by state. In the

future, USPH will further be able to capitalize with the manufacturing market considering the increased infrastructure plans that the new

administration will be implementing: other manufacturing stocks have responded favorably to this news.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY

P E R C E N T O F M A N U FA C T U R IN G E M P L OYM E N T BY STAT E % of total employment % of total USPH clinics

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4.00%

6.00%

8.00%

10.00%

12.00%

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AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY

U SP H C L IN IC TO SU BU R BA N A R E A BY STAT E % OF total USPH perc entage urban in 10s

Appendix Q: USPH Clinic Percentage by State Related to Market (Team Calculations Bureau of Labor Statistics, Company Filings)

Demographics

0-18

USPH targets high school athletes as a client base. To help accomplish this, USPH encourages physical therapists to attend local events. Considering it is important to have

parents trust, the relationship-oriented PT’s help USPH By attending the sporting events of the high school athletes they have been able to build this referral source through high

school sports events.

18-24

As millennials enter the workforce they have been categorized as being less entrepreneurial. This mindset that is spreading across the age category works in advantage for USPH

because of the established business model they have set up. As the population ages and the older generation who established USPHs acquired clinics retire, USPH is able to hire

these millennials to take over the therapist’s position. USPH provides a way for this age group to do the job they want to do and not have to worry about added stress.

This age group also hold the statistic that 50% of Americans will develop some form of musculoskeletal injury and the recovery process will last on average three years.

Physical therapy is one of the only sources of healing for these types of injuries, further increase demand of USPH services. Because USPH presents themselves as the most cost

effective solution solution to an age group who haven’t necessarily established themselves financially yet, they have been able to capture this market

26-34

As the population is aging, more people are becoming - and remaining - physically active. This increase the chance for injury or muscle straining and the demand for USPH.

Extending this, more people have played some type of sport when they are younger and some of the delayed effects of this show up in this age demographic.

With the unemployment rate in the United States dropping, more people are able to hold jobs. Coming out of college and looking for work, this age is more likely to have a hire

job rate that offered company offered insurance. Due to the favor of physical therapist’s in the insurance industry, this increases the amount of individuals getting insurance.

35-54

This age group is the most likely group to have insurance. This is the prime target areas for USPH because they are the most likely to both complete treatment as well as fully pay their portion of the bill. Because they will have insurance and most of USPH payments come from some sort of insurance claims this is important to the revenue structure of

USPH. This group accounts for 50,000,000 persons, which is higher than any other age group. Also, because they usually have families or some sort of responsibility they are

more inclined to have stable jobs. With this stability, the chances of worker’s compensation claim occurring increases. USPH has strategically placed themselves in the workers compensation subsection because an employer is mandated to have it. This decreases the possibility for uncollected bills because a company has set aside provisions for this

event.

55-64

As the population ages, the median age limit is continuously increasing. These longer life spans are causing people to work longer at their jobs and they are wearing out their bodies more and more. The longer their bodies are working, ligaments and joints are more likely to wear down and cause pain. This is good for USPH because they have been

able to help reduce some of this pain and provide a necessary service to these individuals.

Insurance companies and employers have found it better to remain proactive in the caring/curing of patients. One way they have found ot do this is by physical therapy. This age and older is at a higher risk of disabilities. When a short term disability occurs rather than ignoring the first sign of a pattern they have adopted the trend of taking care of it to

reduce the chances of it becoming a more expensive chronic illness.

65+

As people age, they begin to recover slower and less efficiently but they are at a greater need/frequency for healthcare services. While everyone in this age group qualifies for

government assistance, USPH tries to be careful at taking on large portions of these clients. This is due primarily to the fact that the government has a set reimbursement rate that are non negotiable with limits on how much can be used. In addition they also have provisions to take back payments if patients are not being served at their required quality

standards or are having to come in for a repeat case. Because the older population is already at a higher risk for repeating illnesses and injuries, they pose the potential higher

cost to USPH.

Appendix R: USPH’s Market to In Each Age Group (Team Calculations and Census Bureau)

State Employed PTs % of USPH Total Manufacturing Employees % of Rural % of Uninsured % of Urban # of HS Athletes Population

Alabama 2050 0.19% 252400 39.6% 13.0% 60.4% 123339 4779736

Alaska 510 0.93% 13500 32.5% 10.3% 67.5% 24374 710231

Arizona 2990 2.22% 156100 12.5% 13.7% 87.5% 122185 6392017

Arkansas 1940 0.19% 153500 46.5% 9.6% 53.5% 61263 2915918

California 19000 0.19% 1271000 7.4% 11.8% 92.6% 797101 37253956

Colorado 4560 0.00% 140100 17.6% 10.3% 82.4% 128600 5029196

Connecticut 3780 0.56% 160700 20.9% 6.4% 79.1% 111211 3574097

Delaware 660 0.74% 25700 27.0% 7.4% 73.0% 29665 897934

Florida 12020 1.48% 335700 15.2% 15.7% 84.8% 267954 18801310

Georgia 5230 5.00% 373700 15.2% 15.9% 63.2% 197537 9687653

Hawaii 710 0.00% 13500 36.8% 4.2% 89.0% 36871 1360301

Idaho 1010 0.93% 62200 11.0% 15.2% 57.4% 44524 1567582

Illinois 10590 0.93% 572500 42.6% 8.7% 84.6% 340972 12830632

Indiana 4580 1.85% 519300 15.4% 10.8% 64.9% 152552 6483802

Iowa 1830 0.74% 216100 35.1% 6.3% 60.6% 136138 3046355

Kansas 1570 1.48% 161000 39.4% 11.0% 69.1% 102593 2853118

Kentucky 2580 0.00% 240200 30.9% 7.5% 51.8% 96525 4339367

Louisiana 2670 0.37% 148800 48.2% 15.7% 68.1% 101311 4533372

Maine 1240 1.48% 50000 31.9% 8.8% 44.6% 51624 1328361

Maryland 4580 5.74% 102400 55.4% 7.5% 81.3% 118102 5773552

Massachusetts 8010 0.37% 249800 18.7% 3.5% 84.3% 226925 6547629

Michigan 8370 9.26% 598000 15.7% 7.6% 70.5% 295660 9883640

Minnesota 3960 0.19% 314900 29.5% 5.8% 69.9% 235243 5303925

Mississippi 1510 0.56% 141000 30.1% 14.7% 47.1% 113136 2967297

Missouri 3950 2.22% 260700 52.9% 11.6% 68.7% 171937 5988927

Montana 1010 0.19% 18700 31.3% 13.3% 52.5% 31355 989415

Nebraska 1540 0.37% 95300 47.5% 10.6% 66.1% 77137 1826341

Nevada 1530 0.56% 42000 33.9% 14.5% 88.3% 45033 2700551

New Hampshire 1430 0.19% 67500 11.7% 8.8% 51.0% 45028 1316470

New Jersey 7590 2.96% 245600 49.0% 9.7% 89.4% 279377 8791894

New Mexico 1120 0.00% 27900 10.6% 12.8% 73.0% 49713 2059179

New York 15970 0.00% 450500 27.0% 8.6% 84.3% 389475 19378102

North Carolina 5910 0.19% 460200 15.7% 14.4% 50.4% 194352 9535483

North Dakota 550 0.19% 26000 49.6% 6.9% 53.3% 25073 672591

Ohio 7310 0.93% 688200 46.7% 7.6% 74.1% 319929 11536504

Ohklahoma 1870 2.04% 133600 25.9% 16.5% 67.7% 114675 3751351

Oregon 2530 4.81% 186400 32.3% 7.3% 70.5% 100176 3831074

Pennsylvania 10760 3.89% 568000 29.5% 7.4% 68.9% 319562 12702379

Rhode Island 1010 0.00% 41900 31.1% 5.6% 86.0% 28486 1052567

South Carolina 2550 0.19% 231600 14.0% 12.3% 54.6% 95390 4625364

South Dakota 670 0.19% 44000 45.4% 10.6% 50.0% 29160 814180

Tennessee 4320 13.15% 331500 50.0% 13.0% 60.9% 109349 6346105

Texas 13060 13.15% 866700 39.1% 22.3% 80.3% 804598 25145561

Utah 1540 0.00% 125300 19.7% 12.4% 87.0% 59988 2763885

Vermont 740 0.37% 30700 13.0% 4.7% 32.2% 14889 625741

Virginia 5400 7.96% 234400 67.8% 12.6% 69.4% 173283 8001024

Washington 4720 6.85% 292200 30.6% 7.4% 76.4% 160245 6724540

West Virginia 1210 0.00% 48300 23.6% 7.7% 36.1% 35981 1852994

Wisconsin 4360 3.89% 472800 63.9% 5.9% 65.7% 186595 5686986

Wyoming 390 0.37% 9900 35.0% 14.0% 65.0% 19020 563626

Physical Therpy Information By State

The team did an analysis on variables that play into to the expansion of clinics in multiple states. USPH focuses on patient who are young and active, submitting worker

compensation claims, and those in underserved areas with high populations. Looking at the percentage of USPH in each state we are able to see how they have tried to position

their clinics in areas with a higher amount of manufacturing workers.

Appendix S: Breaking Down State Factors of USPH (Team Calculations and Census Bureau, Bureau of Labor Statistics, nfhs.org Company 10K)

This point and figure graph we created inspired by stockcharts.com shows the historical frames of buying and selling for USPH. The benefit of using a point and figure chart

is that it ignores the issue of time which will eliminate extensive noise of normalized daily activity for the investor. By only placing an X or O when it the price moves a

specified amount, this helps to see what the trend is for USPH stock and what is likely to happen in the future. By looking at the upward, or downward trends, the team was

able to verify prediction based on the resistance lines it naturally creates.

Increasing Stock Price

Stock Price has approximately $50.00

over the last 5 years

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Point and Figure Chart USPH

Shows Inflated Price

Appendix T: Stock Price and Point and Figure Chart (Team Calculations, Nasdaq.com, and stockcharts.com)

Upper management

USPH has showed their continual effort in the balance of retaining and appealing to talented management, the success of the company, and the success of the shareholders (both

short and long term). Reading, McAfee, and Glenn D. McDowell (COO) are paid above their base pay according to the difference in actual performance and objective

performance of their company. It can be clearly seen that UPSH sticks to this policy, according to decreases and increases in their pay in less successful years. All three officers can be paid based on company performance and EPS through cash . If EPS is above the objective, cash bonuses are given based on a percentage of base income, increasing as

the EPS is further above projection. To keep future growth momentum prominent, the officers are paid a percentage stock options based on EPS goal attainment, which can be

higher in value than the cash bonuses based on past performance. Most of the stock also have vesting options, which shows the longevity of this method. Earnings per share were 1.77, 1.62, 1.05, and 1.52 for 2015, 2014, 2013, and 2012 respectively. 2013 Non-equity Incentive Plan Compensation was due in part to company performance. USPH

had a large loss of 4.5 Mil from discontinued operations, which contributed to their low EPS. USPH awarded their management for a “job well done” in dealing with the

unfortunate circumstance from closure costs and regulation changes from ACA implementation.

Clayton K. Trier, Director is a private investor who joined USPH board in 2005. He was a founder of U.S. Delivery Systems, Inc., which developed the first national

network providing same-day delivery service.

Jerald L. Pullins, Chairman of the Board has been with USPH since 2011 and has been a member beginning 2003. Mr. Pullins has interest in development and

managing private companies in the healthcare field. Beginning in 2007, he has

served as Chairman of the Board of Directors of Pet Partners, LLC, which is a private enterprise dealing with the acquisition and management of small animal

veterinary hospitals.

Christopher J. Reading, President, CEO and Director was a physical therapist promoted to President and Chief Executive Officer in 2004. He was elected to USPH

Board of Directors November 2004. Prior to 2004, Mr. Reading served as our Chief

Operating Officer at USPH in 2003. From 1990 to 2003, Mr. Reading served in various executive/management positions with HealthSouth Corporation. One distinct

position that plays into USPH Mr. Reading held was Senior Vice President of

Operations covering 200 facilities located in 10 states.

Lawrance W. McAfee, EVP, CFO and Director became Executive Vice President and a member of USPH Board of Directors November 2004. Mr. McAfee also has

served as our Chief Financial Officer of USPH since 2003. In the past, Mr.

McAfee’s has served as Chief Financial Officer of three publicly traded companies and was the President of two private companies.

Daniel C. Arnold, Director joined as Chairman of the Board in 2004. Mr. Arnold is a

private investor who is currently engaged only USPH board activities and his personal

investment activities. Previously Mr. Arnold was Chairman of the Board of Trustees

for Baylor College of Medicine.

Mark J. Brookner, Director has served on USPH Board since August 1998. Current- ly a private investor, he served as USPH Chief Financial Officer from 1992 to 1998

as well as Secretary and Treasurer for parts of that time frame.

Harry S. Chapman, Director has been a board member since 2010. Mr. Chapman serves as the Chairman and the Chief Executive Officer of Chapman Schewe, Inc.,

which is 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, and had involvement in HMO and PPO plans in several states.

Mr. Chapman’s also served as a head of EQUICOR’s Health Plan and sales operation

in Houston and as a Regional Vice-President for Lincoln National Insurance Compa- ny’s Central Region.

Dr. Bernard A. Harris, Jr., Director joined USPH board 2005. Dr. Harris was Presi- dent and Chief Executive Officer of Vesalius Ventures, a venture capital firm that

invests in early stage medical informatics and technology. He has served as a Class

III director of Sterling Bancshares, Inc., a bank holding company. Also Dr Bernard was Chief Medical Officer and Vice President for Space Hub, an aerospace compa-

ny. He finished his residency at the Mayo Clinic.

Marlin W. Johnston, Director joined USPH Board in 1992. Mr. Johnston was a man- agement consultant at Tonn & Associates since 1993. Mr. Johnston also served as a

consultant to the Texas Department of Health and the Texas Department of Protective

and Regulatory Services.

Edward L. Kuntz, Director USPH board member since 2014, is the former Chair- man and Chief Executive Officer of Kindred Healthcare. 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. Mr. Kuntz serves as a director of Rotech Healthcare and American Electric Technologies, Inc.

Reginald E. Swanson, Director joined our Board 2007. Mr. Swanson is Managing Director of STAR Physical Therapy, LP, a subsidiary of USPH. Mr. Swanson started

STAR Physical Therapy, LLC, in 1997. As a licensed athletic trainer he has been

involved with sports medicine and physical therapy for over 25 years.

USPH takes a great emphasis in having quality leadership. Their board members all

have backgrounds in physical therapy and the healthcare industry. With the variety

of people USPH has brought together for their board they have been able to gain

expertise on multiple business decisions causing USPH to propel forward.

Name and Position Year Salary Stock Awards Non-equity Incentive

Plan Compensation

All other Compensa

tion Total Compensation

Christopher J. Reading 2015 $616,500 $1,140,253 124,950 $1,289 $1,882,992

-Chief Executive Officer 2014 $575,692 $1,552,200 $721,250 $1,242 $2,850,384

2013 $558,730 $974,400 $369,516 $1,242 $1,903,888

Lawrence W. McAfee 2015 $445,769 $570,126 $90,300 $3,701 $1,109,896

-Chief Financial Officer 2014 $419,231 $776,100 $525,000 $2,322 $1,722,653

2013 $409,577 $487,200 $278,880 $2,322 $1,177,979

Glenn D McDowell 2015 $413,615 $570,126 $84,000 $2,411 $1,070,152

-Chief Operating Officer 2014 $376,077 $776,100 $471,250 $2,322 $1,625,749

2013 $363,942 $487,200 $230,408 $2,322 $1,083,872

Appendix U: USPH Board of Directors Descriptions and Compensation (Team Calculations, Proxy, and USPH Website)

The physical therapy industry as a whole has been in steady growth over the past years. This is due in part to the increase demand of physical therapy from insurance companies.

This has caused an expected job outlook increase for physical therapy at 33% from 2014 to 2014. With the climbing prices of surgeries, physical therapy has grown in

popularity due to being a good substitute. Study have shown physical therapy can offer the same result as an expensive surgery. They have identified it as a source of savings,

which further increases the demand. Below is a graph of the growing need of physical therapy by state. This shows which states USPH may decide they want to expand further

into by looking at who has the creates amount of need. Looking at these areas we can interpret them as underserved areas who may have increased reimbursement rates. The

growing demand of therapists is coupled with the increased demand of physical therapist assistant jobs as well. Physical therapist assistants have a predicted growth of 40%

from 2014-2024.

This could be attributed to the extender model many therapists have begun to implement. Varied by a case study from Louis C. Gapenski, the extender model has a business

setup where physical therapy assistants are doing the majority of the patient treatments and then the physical therapist will come into each session and check on the patient to

make sure it all went well. While the payment for a visit with just a physical therapist assistant is only reimbursable up to 85%, if the physical therapist is present for a portion of

the time they can bill for the full reimbursement amount. This offers a way for therapists to extend the amount of patient they see each day and further increase the amount of

revenue they bring in. There are limits on the amount of physical therapist assistants any one physical therapist may supervise. While this varies by state it averages to about 3:1

assistants to therapists. While it is unknown to what extend USPH is using this extender model, we do know that if they have not started, there are benefits from the

implementation of physical therapist assistant extenders. If USPH has already implemented this it has potential to be magnified on a larger scale further reducing salaries paid

and patients seen. There is a growing demand for physical therapist (assistants) and it verifies the opportunity for growth in patient visits by using this extender model. Because

USPH total revenue is driven off of total patient visits, this offers another way for them to boost their now stagnating per patient revenues. Physical therapist assistant’s annual

wages are about half of what a normal therapist is making, so if implemented strategically, USPH would be able to not only raise the per patient revenue but also the costs they

are incurring from salaries of each employees.

Spinal Fusion (1 time surgery) Physical Therapy (353 visits)

$115,000 $10,400

Lumbar Spinal Stenosis - 2 Year Recovery Time Frame

Surgery + 6 Wks of Physical Therapy Physical Therapy (6 Wks)

$5,600 $600

Torn Meniscus - 6 Week Recovery Time Frame

The economy has been improving with the lowering of unemployment rates inherently coupled with an increase in GDP. The numbers above are pulled from Bloomberg and

show the year over year percentage change in key economic factors. The rising percentage each year of GDP is helping to put people back to work, helping them return to their

jobs. This allows them to gain health insurance and start going to the doctor. One of the areas that is expected to increase is the industrial production. This increase is important

to USPH because they work closely with manufacturing companies by implementing worker compensation programs helping to preven t workplace accidents. This increase

amount of workers increases the statistical likelihood of workplace accidents occurring. USPH has a strategic positon in this area because they contract with companies to

prevent the accidents helping to prevent large procedures with regular visits of industrial employees. Then when accidents do occur the companies are already in contact with

USPH , causing USPH to have a double win from this one contract area.

A large concern for USPH is the rising interest rates shown above. A large portion of their revenues goes to paying for the acquiring of physical therapist clinics. This has the

potential to make their business practices more expensive. This would then affect the amount of free cash flow they have available to either acquire other clinics or pay back to

their shareholders. The rising rate will not only make it more expensive to purchase businesses but can also make the interest payments they have on their revolving line of credit

more expensive.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Real GDP YoY% -2.8 2.5 1.6 2.2 1.7 2.4 2.6 1.6 2.3 3.3

Consumer Spending YoY% -1.6 1.9 2.3 1.5 1.5 2.9 3.2 2.7 2.6 2.5

Industrial Production YoY% -11.4 5.5 2.9 2.8 1.9 2.9 0.3 -1 1.4 2.3

unemployment % 9.3 9.6 8.9 8.1 7.4 6.2 5.3 4.8 4.6 4.5

CPI YoY% -0.3 1.6 3.2 2.1 1.5 1.6 0.1 1.3 2.4 2.4

CORE PCE YoY% 1.2 1.3 1.5 1.9 1.5 1.6 1.4 1.7 1.8 2

central bank rate % 0.25 0.25 0.25 0.25 0.25 0.25 0.5 0.75 1.3 -

3-month rate % 0.25 0.3 0.58 0.31 0.25 0.26 0.61 1 1.57 -

2-year note % 1.14 0.6 0.24 0.25 0.38 0.67 1.05 1.19 1.7 -

10-year note % 3.84 3.3 1.88 1.76 3.03 2.17 2.27 2.45 2.83 -

Macroeconomic Factors Expanded

Appendix V: Physical Therapist Industry (Team Calculations, Bureau of Labor Statistics)

Appendix X: Macroeconomics Factors

Car Wrecks: Incr eases in the number of car wr ecks per year could be linked to the low unemployment

rate. Over the past years, the unemployment rate has been steadily decreasing while the amount of car

wrecks has been on the rise. Several researches feel these could be linked. With a larger amount of people on

the road, traveling to and from work, coupled with the low gas rates in the US, these factors have

inadvertently caused more individuals to be in car wrecks. These rising numbers are predicted to continue

into the recent future. The most common injury from a car wreck is whiplash. This injury is curable,

especially with the help of a physical therapist. While no one likes the idea of being in a car wreck, it is

important to get quality help for your injuries it important to get quality help for injuries after the fact. USPH

has a unique competitive advantage from this unpredictable economic event.

Flu: USPH CEO stated in tr anscr ipt calls ther e was a significant decr ease in patients visits due to an

increase in the amount of flu infected patients. Illnesses, such as the flu, could pose a substantial threat to

USPH revenues because it directly decreases the amount of visits they perform. According to the Center of

Disease Control, 2016 had a hospitalization rate of 20.3 per 100,000 for flue infected patients. The national

baseline for flu illnesses is 2.2%. January 2017 had a 3.9% infection rate which has started the year out above

average. The amount of time someone is effected ranges from 1 to 20 weeks long with the average landing at

13 weeks. If a patient is suppose to be attending therapy visits– whose average visit length is 6 weeks– they

could miss the entire session. In addition to this, statistics show those who miss their physical therapy visits

are less likely to make up those visits at a later date. The probability of them making up these visits

decreases with each week that passes. While it is not possible to predict who will get the flu, those who do

could cause adverse effects for the revenue stream of USPH. One advantage USPH has over this is they

market to a younger generation of patients who are less likely to have the flu. However, as the population

ages and they begin switching into the older demographics this will have a larger effect of their business.

0 6

12 18 24 30 36 42 48 54 60 66 72 78 84 90

Amt Lab Confirmed Flu Hospitalizations

4040 50 1 4

Weeks of the Year

65 yrs +

5-17 yr

18-49 yr

50- 64 yr

0-4 yr

2016 2017

0.00%

1.00%

2.00%

3.00%

4.00%

5.00% Percentage of Visits for Flu

40 50 1 4

Weeks of the Year

2.2% Average

2016 2017

Vacations: USPH CEO stated the amount of patient visits for USPH could be adver sely effected by the

increasing rate of Americans on vacation. As the level of disposable income rises, the amount of trips people

are taking are expand as well as the length they are on those trips. As individuals leave home for the summer,

USPH patient visits in those specific months drop. USPH CEO stated patient visits have historically been

down in July. This drop in patient visit trend could continue to rise as more people have the ability to go on

vacations. As people miss their physical therapy visits, they are unlikely to reschedule those visits at a later

date. This creates a deficit in USPH projected revenues. If America’s spending trends continue to rise in this

area, USPH revenues could be greatly penalized.

13200

13400

13600

13800

14000

14200

14400

14600 2016 Disposable Income

2017 Expect ations

Obesity: Accor ding to a study found by Move For war d PT and confir med by the Center for Disease

Control, 68% of the American population is considered overweight and approximately 36% are considered to

be obese. This growing amount growth in obese individuals can have negative effects on multiple areas of

their lives leading towards chronic diseases and can escalate to early death. Physical therapy has been one

solution in this area. By working with patients to increase their mobility and flexibility they are able to

reduce the negative affects obesity takes on the human joints. Working to reduce the pain this causes they are

able to improve the standard of living for these patients. By developing each patient an individualized

physical activity plan they are able to work with these patients to fight obesity or at least the effects it causes

on the body. Creating workout plans that their patients enjoy they are able to decrease the negative effects in

a way that protects the muscles and tissues. When done without a physical therapist there is a greater risk of

injury occurring. USPH is benefiting from this cliental because this is an effect that would take multiple visits

to overcome, which increases the amount of billable. Also, those who are serious about losing weight are less

likely to skip out of their appointments.

10% 13% 16% 19% 22% 25% 28% 31% 34% 37% 40%

P e

rc e

n ta

g e

o f

O b

e s

% of Obese Population

Adults

Yout h

Weather: One of the most unpr edictable factor s, yet has one of the gr eatest effects is the weather patter ns. In USPH’s 10K they discus s how they anticipate differ ent

weather patterns limiting their ability to see patients. Because people view physical therapy as an elective procedure, many times it holds less importance to the individual. This

means when heavy storms hit an area, patients will not risk the trip to the physical therapist. This holds a potential decrease in the amount of billable patient visits for USPH. A

greater problem the climate has is the mass effect it has on patients. In other events

it is only a few who are effected by the event; however, when a storm hits it has the

potential to decrease all of the clinic visit. This could end up decreasing the bottom

line revenues for USPH by $12,517.79. The graph on the right shows an example of

the revenues that could be lost assuming one clinic is removed from operations for

one week and they have been operating at max efficiency. If these patterns hit an

area where there are multiple clinics, or if it is an event that could last for several

weeks (such as Hurricane Katrina) the bottom line effects could be substantially

escalated.

Per Patient/Per Clinic Revenues 105.28$ 105.28$ 105.28$

Average Patients/Day/Clinic 23.78 23.78 23.78

Number of Days Lost 5 5 1

Number of Clinic Effected 1 5 10

Total Losts from Storm 12,517.79$ 62,588.96$ 25,035.58$

Effects of a Storm 2015

Appendix W: Natural Events That Indirectly Effect USPH (Team Calculations, cdc.gov, usnews.com, moveforwardpt.com)

This graph shows a comparison of four different stocks: USPH, Aetna (AET),

United Health Corp (UNH), and Kindred (KND). USPH has a correlation

of .96 and .98 with these major companies stocks. This shows that USPH ‘s

stocks respond in a similar manor to insurance stocks news. As USPH’s stock

continues to track major insurance companies stock, potential investors should

monitor factors that could significantly affect major insurance changes. This is

also consistent with the large percent of revenue coming from private

insurance. Unlike their competitors (KND), who have a low percent of

revenue from private insurance.

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1/14/ 2008 1/14/ 2009 1/14/ 2010 1/14/ 2011 1/14/ 2012 1/14/ 2013 1/14/ 2014 1/14/ 2015 1/14/ 2016

Health Insurance/USPH Stock v. Competitor

close USPH close KND close AET close UNH

Company Stock Stock Correlation

USPH/AET Correlation 0.96

KND/AET Correlation -0.020

USPH/KND Correlation -0.149

AET/UNH Correlation 0.98

USPH/UNH Correlation 0.98

Appendix X: USPH Stock in Relation to Major Insurance Companies (Team Calculations, Nasdaq.com)

-0.40

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0.20

0.40

0.60

0.80

1.00

1.20

USPH/AET Correlation

KND/AET Correlation

USPH/KND Correlation

AET/UNH Correlation

USPH/UNH Correlation

STO C K C O R R E L AT IO N

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 compa- ny. 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 au- thor(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or com- pleteness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This infor- mation 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 Society of Austin, CFA Society of Dallas Fort Worth, CFA Society of Houston, CFA Society of Louisiana, CFA Society of San Antonio, CFA Institute or the CFA Institute Research Chal- lenge with regard to this company’s stock.

CFA Institute Research Challenge