U.S. Physical Therapy, Inc.

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U.S. Physical Therapy, Inc.

1300 W. Sam Houston Parkway South, Suite 300
Houston, Texas 77043
U.S.A.
Telephone: (713) 297-7000
Toll Free: (800) 580-6285
Fax: (713) 297-7090
Web site: http://www.usphysicaltherapy.com

Public Company
Incorporated: 1990
Employees: 1,276
Sales: $105.6 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: USPH
NAIC: 621498 All Other Outpatient Care Centers

U.S. Physical Therapy, Inc. is one of the only major players in the physical therapy clinic market, operating a chain of approximately 250 clinics across the United States. The company's clinics are each owned in partnership with a trained physical therapist. The company in most cases builds new clinics from the ground up. Its markets are principally small towns and suburban areas where there is little competition. Its clinics offer standard physical therapy treatments for occupational and sports injuries and postsurgical care. The vast majority of its services are paid for by insurers, health maintenance organizations, or Medicare. The company also operates some physical therapy clinics for third parties.

An Entrepreneur Taking a New Direction in 1990

U.S. Physical Therapy, Inc. was founded by Texas businessman J. Livingston Kosberg. Kosberg grew up in Texas and had a varied career by the time he began U.S. Physical Therapy in 1990. He founded a chain of nursing homes called National Living Centers, which had grown from three homes to 300 when it was acquired by another company in 1973. Kosberg had interests in television stations and the insurance industry as well, and in 1983 he became chairman of the Texas Board of Human Services, a state governing body. He also had interests in the banking industry. In 1981 he and several partners sold the Houston savings and loan Centennial Holding Co. to First Texas Savings Corp. The next year, Kosberg and an investment group bought First Texas outright. The savings and loan industry had been deregulated by an act of Congress in 1982, and First Texas, which had been losing money steadily, was now eligible to take on potentially valuable commercial real estate loans. First Texas got in at the beginning of a boom in commercial real estate development in the area. In 1984, Kosberg, as chairman of the bank, arranged a massive takeover of the largest Texas savings and loan, Gibraltar Savings of Houston. Kosberg's bank became First Texas Gibraltar. By mid-1985, the commercial real estate boom started to bust in Texas, and one year later, the state was overrun with federal bank regulators as savings and loans began to fold under an avalanche of bad debts.

First Texas Gibraltar was eventually taken over by federal regulators. Kosberg was accused of several offenses, and he settled the case against him by paying $2.5 million in restitution and agreeing not to work in the banking industry again. Revlon Chairman Ronald O. Perelman bought First Texas in 1989. That year Kosberg was attacked by a man who shot mace at him, whipped him with a pistol, and attempted to abduct him in handcuffs. The man turned out to be a condominium developer foreclosed on by First Texas. He was arrested after a further attempt on Kosberg, when he demanded $6 million.

By that time, Kosberg had already settled on a new business plan. Kosberg had made his first million building a chain of nursing homes, and after his foray into banking, he returned to the healthcare arena. In 1990 he founded U.S. Physical Therapy (USPH), with the idea of forming a chain of physical therapy clinics. He also established another company, at first called T.U. Management Inc., which provided temporary staffing for rehabilitation therapy clinics at hospitals and nursing homes. This company was renamed CareerStaff Unlimited. It went public in 1994 and was acquired by a larger company in 1995. Meanwhile, U.S. Physical Therapy began with just a handful of clinics, and it hoped to expand rapidly by acquiring existing clinics. The company went public on the NASDAQ exchange in 1992. That year it had revenue of $2.4 million, and only four clinics.

Changing Strategy in the Early 1990s

A few other firms owned groups of physical therapy clinics, but U.S. Physical Therapy was the only one operating solely in that field. NovaCare and Healthsouth Rehabilitation were other companies in the physical therapy niche, but their interests were more diversified. USPH went public only two years after its debut, and at a time when it had still not earned any money. But its plan for growth seemed solid: buy up successful clinics and run them at low cost. Yet the company had to change its strategy after a more thorough exposure to economic reality. Buying existing clinics turned out to be simply too expensive. Although the company could take on clinics that already had a thriving business and a high likelihood of success, the price tag for such an acquisition could be as high as $2 million. The company had revenue of only slightly more than that, at $2.4 million, in 1992, and it had lost $1.2 million that year. In 1994, Kosberg hired a seasoned physical therapy executive to be CEO of U.S. Physical Therapy, and the two mapped out a new course for the young company.

Roy Spradlin had gotten his physical therapy license in 1978 and opened his first clinic in 1980. By 1988, Spradlin's business had grown to a chain of three clinics, North Kansas City Physical Therapy. Then he sold the chain to a larger firm, Pinnacle Rehabilitation. Spradlin went to work for Pinnacle, eventually overseeing 30 clinics as president of the firm's outpatient clinic division. When he came to USPH, he helped the company revamp. The company announced that instead of buying clinics, it would build them. This meant that U.S. Physical Therapy would have to pay money up front to get each new store going, and the new clinics would naturally take some time—estimated at four to six months—to become profitable. Thus the company might continue losing money for the time being. Still, it seemed like a more workable way to get ahead than making expensive individual deals with successful clinic proprietors.

By the close of 1994, U.S. Physical Therapy had grown to about 55 clinics, and it had built most of these itself. Its formula was to find a physical therapist who was ready to run his or her own clinic. This person made a minimal investment and became a USPH partner. Partners were usually people who had run a hospital's physical therapy unit or had had a similar level of managerial control. The partner got a 20 percent interest in the new USPH clinic, which could increase to 35 percent. The clinic's success was dependent on the get-ahead spirit of the partner. The clinic carried the name of the partner, not USPH. The therapist partners could increase their income through bonuses for good performance. The parent company managed the clinics to run at low cost, which was quite different from the way some other physical therapy clinics were run. The federal program Medicare reimbursed clinics on what was called a "cost-plus" basis, meaning it paid the clinic's costs, and then added an amount so that the clinic could make a profit. Under this system, a clinic had little incentive to hold down expenses. However, USPH clinics followed a traditional business model, and kept costs in line as a matter of course. CEO Spradlin described his company's clinics to a reporter from Equities (November 1994). "The equipment in our clinics is low-tech and not high dollar," he said. Yet the clinics also offered extras that hospital units generally did not, such as late hours, quick appointments, and hand-delivery of evaluations within 48 hours. The USPH clinics emphasized customer service, something else that probably set them apart from hospital-run clinics.

USPH finished 1994 with revenues of $17.2 million. It opened 27 clinics in 1994, and as expected, it took some time for the new shops to become profitable. When they did, results were good. The new clinics brought in more revenue as the number of patient visits per day increased. Yet it did not cost substantially more to run a busy clinic than an empty one. Eventually a successful clinic had a profit margin Spradlin described as "huge." USPH finally saw black ink in the second quarter of 1995, and the company began a run of year-by-year increases in sales and net income, often at spectacular rates.

Profitability in the Late 1990s

In 1997, the company changed its stock listing from the NASDAQ Small Cap Market to the NASDAQ National Market System. Sales had grown to roughly $40 million that year. By the close of the next year, the company had just under 100 clinics operating. USPH did well in the late 1990s, continuing to open new clinics across the country. The company's formula seemed to make sense, as it spent only some $200,000 to build and develop a new clinic, whereas other companies were spending upward of $600,000 to buy existing physical therapy practices. USPH also picked its markets carefully. It did well in smaller cities or in suburbs. These areas tended to have patients with fuller insurance coverage (as opposed to coverage by managed care), which meant higher revenue per patient, and less competition. USPH did not concentrate on one region of the country, though it had a pocket of clinics in Texas and another large group in Michigan. New clinics in 1998, for example, were all over the map, in such smaller cities as Portland, Maine, and Brookings, South Dakota, and suburban areas such as Tenafly, New Jersey.

Company Perspectives:

U.S. Physical Therapy, Inc., which was founded in 1990, is a publicly held company which operates 244 outpatient physical and/or occupational therapy clinics in 35 states across the United States as of December 31, 2003. The Company's clinics provide post-operative care for a variety of orthopedic-related disorders and sports-related injuries, treatment for neurologically-related injuries, rehabilitation of injured workers and preventive care. In addition to owning and operating clinics, the Company manages several physical therapy facilities for third parties, including physician groups.

The company presented a very pleasant profit picture for much of the late 1990s into the early 2000s, in spite of a new federal law that changed the way physical therapy clinics were compensated. Revenue rose as the company opened more clinics, and although some quarters produced a loss as new clinics were starting up, other quarters showed sharp increases in profits. With an increase of almost 25 percent in patient visits in the third quarter of 2000, profits rose 64 percent. Every quarter did not show such a high rate of increase, but by 2001, U.S. Physical Therapy could boast six straight years of profitability. This looked especially good in light of a major revision to Medicare in 1999. The Balanced Budget Act of 1997 took effect on January 1, 1999, and outpatient clinics were no longer compensated on the "cost-plus" basis. The change in law prompted a surge in bankruptcies among some healthcare facilities, particularly nursing homes. Yet USPH had always reined in its costs and tried to avoid low-priced managed care contracts, so the new law did not force the company to make any drastic changes. The company did lower the typical amount it paid its therapists, as the whole industry settled salaries downward. "We were running our business as you should run a business—not on a cost-plus basis," Spradlin told Investor's Business Daily (May 29, 2001), and so USPH was in good shape to manage the change in compensation.

USPH attracted more patients through 2001 and 2002, resulting in rising profitability. Earnings in the second quarter of 2001 were double what they had been for the same period a year earlier, while patient visits rose more than 20 percent for both the first two quarters of that year. By the third quarter of 2001, revenue was more than 70 percent greater than for the same time a year earlier. USPH seemed to be benefiting from a demographic pattern where the aging baby boomers were still very active physically and brought their sports-related injuries to physical therapists. When the financial magazine Kiplinger's profiled USPH (February 2002), it described the phenomenon as a "demographic sweet spot that should fuel growth for years to come." The company planned accordingly, hoping to increase its number of clinics by 20 percent in each of the next several years. USPH also continued to hold its costs down, with operating costs as a percentage of revenue falling between 1999 and 2001.

In early 2002, one analyst covering the company expected to see an earnings increase of 30 percent each year into the middle years of the decade. The company seemed to be able to achieve a high growth rate in spite of some uncertainty about the overall U.S. economy. Because almost all of its billings were covered by insurers, and not by the patients directly, the company expected patients to keep filling its clinics even as the recession that began in the final months of 2000 dragged on.

Management Changes in the 2000s

By the middle of 2002, USPH had grown to a chain of 162 clinics in 31 states. Founder J. Livingston Kosberg resigned in March 2002, as the company was releasing record figures for 2001. The company showed an increase in profit of an astonishing 89 percent for 2001, and an increase in revenue of 28 percent, to almost $81 million. President and CEO Roy Spradlin took Kosberg's place as chairman of the company, while Kosberg said he would continue as a consultant to the firm he got off the ground 12 years earlier.

The company rolled out more new clinics, passing the 200 mark in 2003. Business started to slow at the end of 2002, though, and the company was forced to reduce its profit estimates. Typically business was slow in the summer, and the number of patient visits to USPH's clinics picked up in the fall. Yet patient visits remained slow after the summer of 2002. By the spring of 2003, USPH decided that its earnings would probably grow in the range of 10 to 17 percent for the year, instead of the 17 to 22 percent it had projected earlier. Although overall patient visits climbed, the average number of visits per clinic per day fell slightly. By 2003 the company also admitted that the generally sluggish economy was affecting USPH. It had thought that its business was more or less recession-proof, as consumers did not pay directly out of their own pockets for their physical therapy appointments. Yet it seemed that even people with health insurance to pay for therapy were sometimes reluctant to schedule clinic appointments. Worried about job security, they seemed to be preferring to stay at work rather than take time off for a physical therapy session.

USPH hired a new chief operating officer in late 2003, as well as a new vice-president of operations. Both had backgrounds as practicing physical therapists, along with extensive business management experience. But USPH had run out of good news by late 2003. In September it lowered its profit outlook for the second time that year, as once again patient visits did not pick up strongly after the summer vacation lull. Nevertheless, the company had a strong cash balance and no debt, and it continued to open new clinics. By 2004, the chain had grown to close to 250 clinics. In July 2004, Chairman and CEO Roy Spradlin resigned. He had led the company for ten years, and had overseen the building of almost 100 clinics. The company offered no reason for Spradlin's resignation except that he wished to pursue other interests. At that point, company founder J. Livingston Kosberg returned to USPH as interim CEO and instituted a search for a new leader.

Key Dates:

1990:: The company is founded.
1992:: The company goes public on the NASDAQ Small Cap Market.
1994:: A new CEO heads the company.
1997:: The company moves its stock listing to the NAS DAQ National Market System.
2002:: Founder Kosberg resigns.
2004:: Chairman and CEO Spradlin resigns; Kosberg returns.