Executive Summary / Key Takeaways

• U.S. Physical Therapy (USPH) demonstrates a robust growth trajectory, propelled by strategic acquisitions and organic expansion, particularly within its high-performing Industrial Injury Prevention (IIP) segment.
• The company is actively implementing technological and operational innovations, including AI-driven documentation and virtualized front desks, to enhance efficiency, mitigate rising labor costs, and improve clinician retention.
• Despite a prolonged period of Medicare reimbursement headwinds, USPH anticipates a positive shift in 2026, coupled with significant opportunities in Remote Therapeutic Monitoring, signaling a more favorable regulatory environment ahead.
• USPH maintains a strong financial position, enabling a disciplined capital allocation strategy focused on high-return acquisitions, complemented by a recently authorized share repurchase program.
• The company's competitive advantage is rooted in its specialized, high-touch service model, exceptional patient satisfaction, and a strong balance sheet, allowing it to thrive in a fragmented market against both smaller and larger rivals.

The Foundation of Growth: A Specialized Healthcare Powerhouse

U.S. Physical Therapy, Inc. (USPH), founded in 1990, has evolved into a specialized healthcare provider with a dual focus on outpatient physical therapy and industrial injury prevention. The company's overarching strategy centers on disciplined growth through strategic acquisitions, organic expansion, and continuous operational excellence. This approach has allowed USPH to build a significant presence across the nation, operating and managing 779 clinics as of September 30, 2025.

The industry landscape is characterized by a mix of small, independent practices, hospital-based programs, and larger consolidators. USPH distinguishes itself with a decentralized, partnership-based model that fosters local adaptability and strong community ties. Its robust balance sheet provides a distinct advantage, enabling long-term investments and strategic decisions unburdened by the financial constraints often faced by smaller or highly leveraged competitors. This financial strength has been particularly beneficial in a market where some larger private equity-backed companies have experienced balance sheet limitations since late 2022, leading to more attractive acquisition multiples for USPH.

However, the sector has faced significant headwinds, notably a five-year period of Medicare rate reductions that have aggregated to over 11% in cuts, representing an approximate $25 million profit impact in 2025 alone. Despite this, USPH has consistently demonstrated resilience, leveraging aggressive commercial payer contract negotiations and a strategic emphasis on its higher-rate workers' compensation business to offset these pressures. The company's commitment to patient satisfaction is a foundational strength, evidenced by an outstanding Net Promoter Score of 93.5 and Google Care ratings of 4.9 across its network. This high level of patient approval drives strong demand and repeat business, underpinning USPH's ability to sustain volume growth even amidst broader market challenges.

Technological Edge and Operational Innovation

USPH is actively investing in technological differentiation and operational innovation to enhance efficiency and strengthen its competitive position. The company is piloting an AI-driven note system designed to streamline clinical documentation, a historically time-consuming task for therapists. This ambient listening, AI-driven assist helps clinicians complete notes more quickly and efficiently, reducing stress and potentially improving overall clinician productivity.

Complementing this, USPH is rolling out a semi-virtualization of its front desk operations, targeting 200 facilities by year-end 2025. This initiative aims to augment local staffing with remote support, creating efficiencies and reducing overhead burden, particularly across smaller locations. These technological advancements are critical for mitigating rising labor costs and improving clinician retention, thereby strengthening USPH's competitive moat and supporting margin expansion.

A significant opportunity for 2026 lies in Remote Therapeutic Monitoring (RTM). Recent changes by the Centers for Medicare & Medicaid Services (CMS) have significantly reduced the number of visits required for a billable RTM code, making the program "much more logical and much more doable". USPH views this as a "reinitiation of that opportunity" and expects it to be a "nice lift" for Medicare patients, potentially adding a few dollars per visit over the course of a case. The company has a fully integrated RTM working model through an app that integrates with its Electronic Medical Record (EMR) system. Furthermore, USPH is developing a software platform to expand its mentorship programs, connecting 2,600 clinicians across the company to foster knowledge sharing and improve retention. These initiatives collectively underscore USPH's commitment to leveraging technology to drive efficiency, enhance patient outcomes, and secure future revenue streams.

Strategic Expansion: Acquisitions and Organic Growth

USPH's growth narrative is deeply intertwined with its strategic expansion efforts, encompassing both acquisitions and robust organic growth. The company's acquisition strategy targets multi-clinic outpatient physical therapy practices, home-care physical and speech therapy practices, and Industrial Injury Prevention (IIP) businesses. This disciplined approach has yielded significant expansion, with USPH adding 84 net owned clinics in the year leading up to Q3 2025.

The 2024 acquisition of a 50% interest in Metro Physical Therapy marked USPH's entry into the New York market. Metro has proven to be a strong performer, contributing approximately $17 million in revenue in Q1 2025 and achieving impressive visits per clinic per day of around 50 by March 2025. The acquisition has also provided a significant "rate lift," with Metro's net rate increasing from approximately $101 to $107.50 per visit by Q2 2025 through renegotiated contracts. Metro's expertise in home-care services is also being leveraged, with USPH actively introducing this model to other partnerships, recognizing the attractive margins and patient demand in this segment.

Beyond acquisitions, USPH is experiencing a strong period of de novo clinic development, with 2025 projected to be one of its most active years. The company anticipates opening 30 to 50 new clinics annually, a pace supported by strategic investments in recruiting infrastructure, school affiliations, and mentorship programs designed to cultivate a stable pipeline of qualified leadership.

Segment Performance & Financial Health

USPH's operational effectiveness is evident in its segment performance and overall financial health.

Physical Therapy Operations

The Physical Therapy Operations segment reported net revenue of $168.11 million for the three months ended September 30, 2025, an increase of 17.8% year-over-year. Gross profit for the segment surged 30% to $31.19 million in Q3 2025. This growth was driven by strong patient demand, with visits per clinic per day reaching a new Q3 record of 32.2. The net rate per patient visit remained stable at $105.54 in Q3 2025, a notable achievement given the ongoing Medicare rate reductions.

Crucially, the company has demonstrated effective cost management. Salaries and related costs per visit decreased year-over-year to $62.07 in Q3 2025 (excluding Metro acquisition incentives), and total operating costs per visit increased by only 1% to $86.88, which management considers a strong result in an inflationary environment. The workers' compensation business, a higher-rate payer category, represented 9.7% of net patient revenue in Q3 2025, with a 5% increase in visits.

Industrial Injury Prevention Services (IIP)

The IIP segment continues to be a significant growth driver. For the three months ended September 30, 2025, net revenue increased 14.6% year-over-year to $29.02 million, with this growth being "purely organic" after lapping a prior-year acquisition. Gross profit for the segment rose 10.7% to $5.68 million, maintaining a strong gross profit margin of 19.6%. The slight dip in margin from the prior year was attributed to a reallocation of amortization and the addition of lower-margin auto clients. Management is highly confident in the IIP segment's continued double-digit growth, fueled by organic expansion, cross-selling, and entry into new industry verticals, including a large contract with a premier auto manufacturer.

Consolidated Financials and Liquidity

On a consolidated basis, USPH reported Adjusted EBITDA of $23.9 million for Q3 2025, an increase of 13.2% year-over-year. Operating Results per share for the quarter were $0.66. The company maintains a robust financial position, with $31.10 million in cash and cash equivalents and $148.50 million in available credit under its Senior Credit Facilities as of September 30, 2025. The debt-to-equity ratio stands at a healthy 0.31 (TTM). USPH's capital allocation strategy prioritizes high-return acquisitions, though a $25 million share repurchase program was authorized in August 2025 to provide additional flexibility.

The company also benefits from an interest rate swap agreement, fixing its term loan rate at 4.7% through mid-2027, which generated $1.60 million in interest savings for the nine months ended September 30, 2025.

Competitive Landscape and Strategic Positioning

USPH operates in a highly fragmented market, competing with small, independent practices, hospital-based programs, and larger consolidators like Select Medical Holdings Corporation (SEM), ATI Physical Therapy (ATIP), and Encompass Health Corporation (EHC). USPH's competitive strengths lie in its specialized, high-touch clinic model, particularly its expertise in industrial injury prevention services, and its strong local market adaptability. The company's robust balance sheet allows it to deploy resources and make long-term investments, a significant advantage over many private equity-backed competitors who have faced balance sheet constraints.

USPH's IIP segment provides a key differentiator, offering specialized services that address a critical need for corporate clients and potentially yielding superior margins from recurring contracts. While larger rivals like SEM and EHC may possess greater overall scale and diversified service portfolios, USPH's focused approach enables it to acquire smaller practices at attractive multiples and integrate them effectively. The company's technological initiatives, such as AI-driven documentation and virtualized front desks, are designed to enhance efficiency and clinician retention, allowing USPH to maintain its high-quality in-person care while addressing cost pressures, thereby matching or exceeding the operational efficiency of more tech-focused rivals like ATIP.

Outlook, Guidance, and Risks

USPH has reaffirmed its Adjusted EBITDA guidance for the full year 2025 to be in the range of $93 million to $97 million. This outlook is underpinned by several key assumptions: continued volume growth of 2-3% in mature clinics, an underlying increase of approximately 2% in non-Medicare rates driven by ongoing commercial payer negotiations and workers' compensation growth, and the full-year contribution from acquisitions completed in 2024, including Metro PT. The IIP segment is expected to maintain double-digit growth.

A pivotal shift in the regulatory environment is anticipated for 2026. After five years of cumulative cuts, 2025 is expected to be the last year of significant Medicare rate reductions (a 2.9% reduction with a $5.7 million EBITDA impact). For 2026, the proposed Medicare Physician Fee Schedule (MPFS) indicates a "slight positive" increase of approximately 1.5% for therapy services, with specific positive adjustments for manual therapy. Furthermore, the simplified requirements for Remote Therapeutic Monitoring (RTM) present a significant new revenue opportunity for 2026.

Despite this positive outlook, USPH faces inherent risks. Regulatory changes in Medicare and private third-party payer policies remain a constant challenge. The competitive environment for hiring and retaining qualified staff, though showing signs of improvement due to USPH's investments, could still impact growth. General economic conditions, including inflationary pressures and potential recessionary periods, could affect patient demand and operating costs. Additionally, the company's growth-by-acquisition strategy carries integration risks and the variability of contingent consideration payments. Legal and regulatory audits also pose ongoing risks to the business.

Conclusion

U.S. Physical Therapy stands as a compelling investment opportunity, demonstrating remarkable resilience and strategic foresight in a dynamic healthcare landscape. The company's ability to consistently deliver strong volume growth, enhance operational efficiencies through technological innovation, and strategically expand its footprint through accretive acquisitions underscores a robust investment thesis. The anticipated positive shift in Medicare reimbursement for 2026, coupled with the burgeoning opportunities in Remote Therapeutic Monitoring, positions USPH for a more favorable operating environment ahead.

With a strong balance sheet supporting its capital allocation priorities and a differentiated competitive stance built on specialized services and exceptional patient satisfaction, USPH is well-equipped to capitalize on future growth. Its leadership in industrial injury prevention and proactive approach to cost management further solidify its long-term potential, making USPH a noteworthy consideration for discerning investors seeking a resilient growth story in the healthcare sector.