Executive Summary

Q4 2016 net revenues rose 4.8% to $90.9M, driven by 4.7% higher patient visits (846K) and a slight increase in average net revenue per visit ($105.14) .
GAAP diluted EPS was $0.48 (vs. $0.38 in Q4 2015), while non-GAAP operating EPS was $0.49 (vs. $0.48), with gross margin compressing to 20.7% from 24.8% on higher salaries and two unusual items (employee health claims +$0.588M and a $0.25M tradename write-off; ~$0.04 per share after-tax) .
Management initiated FY2017 guidance: operating results $26.0–$27.3M and diluted EPS (operating) $2.07–$2.16, assuming ~37% tax rate; FY2016 operating results landed at the top-end ($24.299M) of prior guidance .
Key catalysts: accounting restatement and material weakness related to mandatorily redeemable non-controlling interests (MRNCI) treatment, with supportive lender dialogue; strong de novo and acquisition pipeline underlines volume growth trajectory .

What Went Well and What Went Wrong

What Went Well

Same-store visit growth remained positive (+2.5% in Q4) as overall visits increased to 846K and average net revenue per visit ticked up; corporate office costs fell to 8.6% of revenue (from 10.3%) improving overhead leverage .
Development momentum: “most de-novo openings in the past ten years” (28) plus ~20 acquired locations in 2016; management sees continued strong deal flow into 2017 .
Effective tax rate fell to 28.0% in Q4 (36.6% FY2016) due to early adoption of stock compensation accounting changes, providing a tailwind to after-tax earnings .

What Went Wrong

Gross margin compressed to 20.7% (vs. 24.8% prior year) and operating income declined to $11.0M (12.1% margin) on higher salaries, elevated employee health claims, de novo start-up drag, and acquisition mix with higher cost structures .
Same-store average net rate per visit declined 2.2%, and workers’ comp mix continued to trend lower (15.2% in Q4 vs. 16.2% in prior periods), pressuring rate .
Accounting restatement for MRNCI classification resulted in a reported material weakness and technical covenant default (with lender support expected), creating governance/controls overhang .

Financial Results

Summary Financials

Metric	Q2 2016	Q3 2016	Q4 2016
Net Revenues ($USD Millions)	$90.4	$88.3	$90.864
Diluted EPS (GAAP)	$0.57	$0.46	$0.48
Diluted EPS – Operating Results (Non-GAAP)	n/a	n/a	$0.49
Gross Margin ($USD Millions)	$23.0	n/a	$18.793
Gross Margin %	25.5%	22.3%	20.7%
Operating Income ($USD Millions)	$15.0	$12.1	$10.954
Operating Margin %	n/a	n/a	12.1%
Adjusted EBITDA ($USD Millions)	$15.4	n/a	$12.564

Estimate comparison: S&P Global consensus EPS and revenue for Q4 2016 were unavailable at time of pull (API limit).

Revenue Breakdown (Q4)

Segment	Q4 2015	Q4 2016
Net patient revenues ($USD Millions)	$84.881	$88.946
Other revenues ($USD Millions)	$1.843	$1.918
Total net revenues ($USD Millions)	$86.724	$90.864

KPIs

KPI	Q4 2015	Q4 2016
Total patient visits (000s)	808.3	846.0
Avg net revenue per visit ($)	$105.01	$105.14
Same-store visits growth (%)	n/a	+2.5%
Same-store avg net rate per visit change (%)	n/a	-2.2%
Operating days	64	63

Payer Mix (Sequential View)

Payer	Q2 2016	Q3 2016	Q4 2016
Insurance (Commercial + Managed Care)	50.9%	51.1%	52.7%
Workers’ Comp	16.2%	16.2%	15.2%
Medicare/Medicaid	26.2%	26.4%	25.2%
Other	6.7%	6.3%	6.8%

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Operating Results ($USD Millions)	FY 2016	$23.7–$24.5	Actual: $24.299	Met high end
Diluted EPS (Operating)	FY 2016	$1.90–$1.96	Actual: $1.94	In range
Operating Results ($USD Millions)	FY 2017	—	$26.0–$27.3	Initiated
Diluted EPS (Operating)	FY 2017	—	$2.07–$2.16	Initiated
Corporate tax rate assumption	FY 2017	—	~37%	New assumption
Dividend per share	Q4 2015 vs Q4 2016	$0.15 (Q4’15)	$0.17 (Q4’16)	Raised

Notes: Non-GAAP “operating results” = net income attributable to common shareholders before MRNCI change in redemption value, net of tax; “Adjusted EBITDA” excludes equity comp, interest, taxes, D&A .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2 and Q-1)	Current Period (Q4 2016)	Trend
Net rate/reimbursement	Slightly up in Q2; generally steady . Flat with pockets of pressure in Q3; legacy clinics saw ~$1.16 decline .	Expect relatively flat net rate; Medicare slightly up in some markets .	Stable-to-slightly lower.
De novo and acquisitions	Record quarter; strong pipeline; de novo best use of capital .	28 de novo and ~20 acquired locations in 2016; continued strong deal flow .	Accelerating footprint expansion.
Workers’ comp mix	16.2% (Q2) with opportunity to grow .	15.2% (Q4); focus on regaining traction (key team member back) .	Modestly declining mix; rebuilding efforts underway.
Cost structure/margins	Acquisitions carry higher cost per visit; de novo drag; room for adjustments .	Higher salaries and unusual items pressured margins; operating margin 12.1% .	Margin pressure near-term.
Tax rate/stock comp	~39.8% in Q2; consistent .	Effective tax rate down to 28% in Q4 via early adoption .	Lower effective tax rate benefit.
Sales force/IT	97 sales reps; EMR/billing upgrades planned .	Noted continued sales/ops focus; tool to enhance referral identification .	Targeted productivity investments.
Regulatory/legal	n/a in Q2; benign macro commentary in Q3 .	MRNCI accounting restatement; material weakness; lender supportive .	New governance/control risk.
Macro/ACA	n/a in Q2; hurricane impact discussed in Q3 .	ACA changes likely gradual; focus on execution regardless .	Watch policy evolution.

Management Commentary

“2016 was one of our best development years ever. We had the most de-novo openings in the past ten years, 28 to be exact; we also closed a few great acquisitions totaling another 20 locations.” — CEO, Christopher Reading .
“We ended the year with $20 million in cash, and with a credit line borrowing total of $46 million compared with $44 million at year end December 2015.” — CEO, Christopher Reading .
“As we announced… we’re going to have to do an accounting correction as it relates to how we treat… non-controlling interest… it needed to be treated differently… we asked for an extension… restatement will be accomplished through non-cash items… no impact on cash balances, net cash flow or EBITDA… Bank of America… couldn’t have been more supportive.” — CFO, Lawrance McAfee .
“Management currently expects… operating results for the year 2017 to be in the range of $26.0 million to $27.3 million and $2.07 to $2.16 in diluted earnings per share.” — Press release .

Q&A Highlights

Same-store revenue outlook: Rate environment expected to be “relatively flat”; focus on rebuilding workers’ comp mix and growing volume; Medicare slightly up in some markets .
Cost and margin drivers: Acquisitions carry higher operating costs; de novo clinics run losses initially; opportunity to reduce cost ratios over time as facilities mature .
M&A environment: Market active; management sees slight moderation from peak pricing as competitors digest prior deals; continued pursuit of quality targets .
Guidance clarification: Management indicated they did not miss FY2016 guidance; lower Q4 tax rate aided results under old accounting treatment .
Payer mix detail: Q4 mix — Insurance 52.7%, Workers’ Comp 15.2%, Medicare/Medicaid 25.2%, Other 6.8% .

Estimates Context

S&P Global consensus estimates for Q4 2016 EPS and revenue were unavailable at time of analysis due to a data access limit.
Implications: With margin compression from unusual items, Street models may reassess near-term gross margin and salary ratios, while strengthening volume and development activity may support top-line assumptions .

Key Takeaways for Investors

Near-term margin pressure was driven by mix (acquisitions, de novo start-up) and two Q4 unusual items; watch for normalization of employee health claims and benefits of Georgia consolidation to ease margin headwinds .
Volume trajectory remains strong, supported by de novo and acquisitions; positive same-store visit growth and a tool-enabled referral strategy could sustain visit per clinic gains into 2017 .
Net rate/reimbursement appears stable-to-slightly down; payer mix shifts (lower workers’ comp) warrant monitoring for rate impact and margin sensitivity .
Accounting restatement and material weakness introduce governance risk; lender support mitigates covenant concerns—track remediation progress and SEC filing timelines .
Tax rate tailwind from stock comp accounting adoption boosted Q4 results; FY2017 guidance assumes ~37% tax rate—align models accordingly .
Liquidity and balance sheet capacity remain adequate for continued development; Q4 cash $20M and $46M drawn on revolver underpin growth runway .
Dividend growth (Q4 dividend $0.17 vs $0.15 prior year) reflects confidence in cash generation despite investment pace—supportive for income-oriented holders .

U S PHYSICAL THERAPY INC /NV (USPH)·Q4 2016 Earnings Summary