Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - U S PHYSICAL THERAPY INC /NVFinancial_Report.xls
EX-21 - EXHIBIT 21 - U S PHYSICAL THERAPY INC /NVex21.htm
EX-31.2 - EXHIBIT 31.2 - U S PHYSICAL THERAPY INC /NVex31_2.htm
EX-23.1 - EXHIBIT 23.1 - U S PHYSICAL THERAPY INC /NVex23_1.htm
EX-32.1 - EXHIBIT 32.1 - U S PHYSICAL THERAPY INC /NVex32_1.htm
EX-31.1 - EXHIBIT 31.1 - U S PHYSICAL THERAPY INC /NVex31_1.htm
EX-31.3 - EXHIBIT 31.3 - U S PHYSICAL THERAPY INC /NVex31_3.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO            
COMMISSION FILE NUMBER 1-11151

U.S. PHYSICAL THERAPY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA
76-0364866
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
   
1300 WEST SAM HOUSTON PARKWAY SOUTH,
SUITE 300,
HOUSTON, TEXAS
77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
 
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
New York Stock Exchange
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes      No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
  (Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
 
The aggregate market value of the shares of the registrant’s common stock held by non-affiliates of the registrant at June 30, 2014 was $276,161,000 based on the closing sale price reported on the NYSE for the registrant’s common stock on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter. For purposes of this computation, all executive officers, directors and 5% or greater beneficial owners of the registrant were deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and beneficial owners are, in fact, affiliates of the registrant.
 
As of March 12, 2015, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was: 12,398,537.
 
DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENT
PART OF FORM 10-K
Portions of Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders
PART III
 


Table of Contents

   
Page
PART I
   
Item 1.
 4
Item 1A.
 13
Item 1B.
 18
Item 2.
 18
Item 3.
 18
Item 4.
 18
     
PART II
   
Item 5.
 19
Item 6.
 21
Item 7.
 22
Item 7A.
 31
Item 8.
 32
   39
Item 9.
 57
Item 9A.
 57
Item 9B.
 57
     
PART III
   
Item 10.
 58
Item 11.
 58
Item 12.
 58
Item 13.
 58
Item 14.
 58
     
PART IV
   
Item 15.
 59
 65
 
FORWARD-LOOKING STATEMENTS
 
We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to:
 
 
changes as the result of government enacted national healthcare reform;
 
 
changes in Medicare guidelines and reimbursement or failure of our clinics to maintain their Medicare certification status;
 
 
business and regulatory conditions including federal and state regulations;
 
governmental and other third party payor investigations and audits;
  
 
changes in reimbursement rates or payment methods from third party payors including government agencies and deductibles and co-pays owed by patients;
 
 
revenue and earnings expectations;
 
 
general economic conditions;
 
 
availability and cost of qualified physical therapists;
 
 
personnel productivity;
 
 
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
 
 
acquisitions, purchase of non-controlling interests (minority interests) and the successful integration of the operations of the acquired businesses;
 
 
maintaining adequate internal controls;
 
 
availability, terms, and use of capital; and
 
 
weather and other seasonal factors.
 
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement is no longer accurate.
 
PART I
 
ITEM 1. BUSINESS.
 
GENERAL
 
Our company, U.S. Physical Therapy, Inc. (the “Company”), through its subsidiaries, operates outpatient physical therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. We primarily operate through subsidiary clinic partnerships in which we generally own a 1% general partnership interest and a 64% limited partnership interest and the managing therapist(s) of the clinics owns the remaining limited partnership interest in the majority of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, we operate some clinics through wholly-owned subsidiaries under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”). Unless the context otherwise requires, references in this Annual Report on Form 10-K to “we”, “our” or “us” includes the Company and all of its subsidiaries.
 
Our strategy is to acquire single and multi-clinic outpatient physical therapy practices on a national basis and to develop outpatient physical therapy clinics. At December 31, 2014, we operated 489 clinics in 42 states. The average age of the 489 clinics in operation at December 31, 2014 was 9.1 years. There were 384 clinics operated under Clinic Partnerships and 105 were operated as Wholly-Owned Facilities. Of the 489 clinics, we developed 302 and acquired 187. Our highest concentration of clinics are in the following states—Tennessee, Texas, Michigan, Maryland, Georgia, Washington, Virginia, Pennsylvania, Wisconsin, New Jersey, Missouri, Oklahoma, Oregon, Indiana and Arizona. In addition to our 489 clinics, at December 31, 2014, we also managed 16 physical therapy practices for third parties, primarily physicians.
 
During the last three years, we completed the following multi-clinic acquisitions:
  
Acquisition
Date
 
% Interest
Acquired
   
Number of
Clinics
 
           
 
2014
       
April 2014 Acquisition
April 30, 2014
   
70
%
   
13
 
August 2014 Acquisition
August 1, 2014
   
100
%
   
3
 
                   
 
2013
               
February 2013 Acquisition
February 28, 2013
   
72
%
   
9
 
April 2013 Acquisition
April 30, 2013
   
50
%
   
5
 
May 2013 Acquistion
May 24, 2013
   
80
%
   
5
 
December 9, 2013 Acquisition
December 9, 2013
   
60
%
   
12
 
December 13, 2013 Acquisition
December 13, 2013
   
90
%
   
11
 
                   
2012
               
May 2012 Acquisition
May 22, 2012
   
70
%
   
7
 

In addition to the two multi-clinic acquisitions detailed above, in 2014, the Company acquired four individual clinics in separate transactions. In addition to the five multi-clinic acquisitions detailed above, in 2013, we acquired three individual clinics in separate transactions.  In addition to the May 2012 Acquisition, in 2012, we acquired seven individual clinics in separate transactions.
 
We continue to seek to attract physical therapists who have established relationships with physicians and other referral sources by offering therapists a competitive salary and a share of the profits or an ownership interest in the clinic operated by that therapist. In addition, we have developed satellite clinic facilities of existing clinics, with the result that a substantial number of clinic groups operate more than one clinic location. In 2015, we intend to acquire clinic practices and continue to focus on developing new clinics and on opening satellite clinics where appropriate along with increasing our patient volume through marketing and new programs.
 
Therapists at our clinics initially perform a comprehensive evaluation of each patient, which is then followed by a treatment plan specific to the injury as prescribed by the patient’s physician. The treatment plan may include a number of procedures, including therapeutic exercise, manual therapy techniques, ultrasound, electrical stimulation, hot packs, iontophoresis, education on management of daily life skills and home exercise programs. A clinic’s business primarily comes from referrals by local physicians. The principal sources of payment for the clinics’ services are managed care programs, commercial health insurance, Medicare/Medicaid and workers’ compensation insurance.
 
Our Company was re-incorporated in April 1992 under the laws of the State of Nevada and has operating subsidiaries organized in various states in the form of limited partnerships and wholly-owned corporations. This description of our business should be read in conjunction with our financial statements and the related notes contained in Item 8 in this Annual Report on Form 10-K. Our principal executive offices are located at 1300 West Sam Houston Parkway South, Suite 300, Houston, Texas 77042. Our telephone number is (713) 297-7000. Our website is www.usph.com.
 
OUR CLINICS
 
Most of our clinics are Clinic Partnerships in which we own the general partnership interest and a majority of the limited partnership interests. The managing healthcare practitioner of the clinics usually owns a portion of the limited partnership interests. Generally, the therapist partners have no interest in the net losses of Clinic Partnerships, except to the extent of their capital accounts. Since we also develop satellite clinic facilities of existing clinics, Clinic Partnerships may consist of more than one clinic location. As of December 31, 2014, through wholly-owned subsidiaries, we owned a 1% general partnership interest in all the Clinic Partnerships, except for one partnership in which we own a 6% general partnership interest. Our limited partnership interests range from 49% to 99% in the Clinic Partnerships, but with respect to the majority of our Clinic Partnerships, we own a limited partnership interest of 64%. For the vast majority of the Clinic Partnerships, the managing healthcare practitioner is a physical therapist who owns the remaining limited partnership interest in the Clinic Partnership.
 
In the majority of the Clinic Partnership agreements, the therapist partner began with a 20% interest in their Clinic Partnership earnings which increased by 3% at the end of each year thereafter up to a maximum interest of 35%.
 
Typically each therapist partner or director enters into an employment agreement for a term of up to three years with their Clinic Partnership. Each agreement typically provides for a covenant not to compete during the period of his or her employment and for up to two years thereafter. Under each employment agreement, the therapist partner receives a base salary and may receive a bonus based on the net revenues or profits generated by their Clinic Partnership. In the case of Clinic Partnerships, the therapist partner receives earnings distributions based upon their ownership interest. Upon termination of employment, the Company typically has the right, but is not obligated, to purchase the therapist’s partnership interest in Clinic Partnerships. In connection with several of our acquired clinics, in the event that a limited minority partner’s employment ceases at any time after three years from the acquisition date, we have agreed to repurchase that individual’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.
 
Each Clinic Partnership maintains an independent local identity, while at the same time enjoying the benefits of national purchasing, negotiated third-party payor contracts, centralized support services and management practices. Under a management agreement, one of our subsidiaries provides a variety of support services to each clinic, including supervision of site selection, construction, clinic design and equipment selection, establishment of accounting systems and billing procedures and training of office support personnel, processing of accounts payable, operational direction, auditing of regulatory compliance, payroll, benefits administration, accounting services, quality assurance and marketing support.
 
Our typical clinic occupies approximately 1,500 to 3,000 square feet of leased space in an office building or shopping center. We attempt to lease ground level space for patient ease of access to our clinics. We also attempt to make the decor in our clinics less institutional and more aesthetically pleasing than traditional hospital clinics. Typical minimum staff at a clinic consists of a licensed physical therapist and an office manager, as well as, if appropriate, a medical advisor. As patient visits grow, staffing may also include additional physical therapists, occupational therapists, therapy assistants, aides, exercise physiologists, athletic trainers and office personnel. Therapy services are performed under the supervision of a licensed therapist.
 
We provide services at our clinics on an outpatient basis. Patients are usually treated for approximately one hour per day, two to three times a week, typically for two to six weeks. We generally charge for treatment on a per procedure basis. Medicare patients are charged based on prescribed time increments and Medicare billing standards. In addition, our clinics will develop, when appropriate, individual maintenance and self-management exercise programs to be continued after treatment. We continually assess the potential for developing new services and expanding the methods of providing our existing services in the most efficient manner while providing high quality patient care.
 
FACTORS INFLUENCING DEMAND FOR THERAPY SERVICES
 
We believe that the following factors, among others, influence the growth of outpatient physical therapy services:
 
Economic Benefits of Therapy Services. Purchasers and providers of healthcare services, such as insurance companies, health maintenance organizations, businesses and industries, continuously seek cost savings for traditional healthcare services. We believe that our therapy services provide a cost-effective way to prevent short-term disabilities from becoming chronic conditions and to speed recovery from surgery and musculoskeletal injuries.
 
Earlier Hospital Discharge. Changes in health insurance reimbursement, both public and private, have encouraged the earlier discharge of patients to reduce costs. We believe that early hospital discharge practices foster greater demand for outpatient physical therapy services.
 
Aging Population. In general, the elderly population has a greater incidence of disability compared to the population as a whole. As this segment of the population grows, we believe that demand for rehabilitation services will expand.
 
MARKETING
 
We focus our marketing efforts primarily on physicians, including orthopedic surgeons, neurosurgeons, physiatrists, internal medicine physicians, podiatrists, occupational medicine physicians and general practitioners. In marketing to the physician community, we emphasize our commitment to quality patient care and regular communication with physicians regarding patient progress. We employ personnel to assist clinic directors in developing and implementing marketing plans for the physician community and to assist in establishing relationships with health maintenance organizations, preferred provider organizations, industry and case managers and insurance companies.
 
SOURCES OF REVENUE
 
Payor sources for clinic services are primarily managed care programs, commercial health insurance, Medicare/Medicaid and workers’ compensation insurance. Commercial health insurance, Medicare and managed care programs generally provide coverage to patients utilizing our clinics after payment by the patients of normal deductibles and co-insurance payments. Workers’ compensation laws generally require employers to provide, directly or indirectly through insurance, costs of medical rehabilitation for their employees from work-related injuries and disabilities and, in some jurisdictions, mandatory vocational rehabilitation, usually without any deductibles, co-payments or cost sharing. Treatments for patients who are parties to personal injury cases are generally paid from the proceeds of settlements with insurance companies or from favorable judgments. If an unfavorable judgment is received, collection efforts are generally not pursued against the patient and the patient’s account is written-off against established reserves. Bad debt reserves relating to all receivable types are regularly reviewed and adjusted as appropriate.
 
The following table shows our payor mix for the years ended:

 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
Payor
Net Patient
Revenue
 
Percentage
 
Net Patient
Revenue
 
Percentage
 
Net Patient
Revenue
 
Percentage
 
 
(Net Patient Revenues in Thousands)
 
             
Managed Care Program
 
$
67,139
     
22.5
%
 
$
58,680
     
22.8
%
 
$
73,244
     
30.0
%
Commercial Health Insurance
   
87,890
     
29.4
%
   
79,148
     
30.6
%
   
57,066
     
23.4
%
Medicare/Medicaid
   
69,857
     
23.4
%
   
60,697
     
23.5
%
   
58,730
     
24.1
%
Workers' Compensation Insurance
   
57,643
     
19.3
%
   
45,221
     
17.5
%
   
42,086
     
17.2
%
Other
   
16,480
     
5.4
%
   
14,537
     
5.6
%
   
12,974
     
5.3
%
Total
 
$
299,009
     
100.0
%
 
$
258,283
     
100.0
%
 
$
244,100
     
100.0
%
 
Our business depends to a significant extent on our relationships with commercial health insurers, health maintenance organizations, preferred provider organizations and workers’ compensation insurers. In some geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans to obtain payments. Failure to obtain or maintain these approvals would adversely affect financial results.
 
During the year ended December 31, 2014, approximately 25.1% of our visits and 21.3%% of our net patient revenues were from patients with Medicare program coverage. To receive Medicare reimbursement, a facility (Medicare Certified Rehabilitation Agency) or the individual therapist (Physical/Occupational Therapist in Private Practice) must meet applicable participation conditions set by the Department of Health and Human Services (“HHS”) relating to the type of facility, equipment, record keeping, personnel and standards of medical care, and also must comply with all state and local laws. HHS, through Centers for Medicare & Medicaid Services (“CMS”) and designated agencies, periodically inspects or surveys clinics/providers for approval and/or compliance. We anticipate that our newly developed and acquired clinics will become certified as Medicare providers or will be enrolled as a group of physical/occupation therapists in a private practice.
 
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). The MPFS rates are automatically updated annually based on a formula, called the sustainable growth rate (“SGR”) formula. The use of the SGR formula would have resulted in calculated automatic reductions in rates in every year since 2002; however, for each year through June 30, 2014, Centers for Medicare & Medicaid Services (“CMS”) or Congress has taken action to prevent the implementation of SGR formula reductions. The Bipartisan Budget Act of 2013 froze the Medicare physician fee schedule rates at 2013 levels through June 30, 2014, averting a scheduled 20.1% cut in the MPFS as a result of the SGR formula that would have taken effect on January 1, 2014. The Protecting Access to Medicare Act of 2014 temporarily blocks this reduction through March 31, 2015 and replaces it with a 0.5% payment increase for services provided through December 31, 2014. In October 2014, CMS released the Medicare physician fee schedule rates for 2015, which included a 1% payment increase for physical therapy services. Automatic reductions in the Medicare physician fee schedule payment rates will commence on April 1, 2015, unless Congress again takes legislative action to prevent the SGR formula reductions from going into effect.
 
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years, and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented.
 
As a result of the Balanced Budget Act of 1997, the formula for determining the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/or speech-language pathology services provided to any Medicare beneficiary (i.e., the “Therapy Cap” or “Limit”) was established. Based on the statutory definitions which constrained how the Therapy Cap would be applied, there is one Limit for Physical Therapy and Speech Language Pathology Services combined, and one Limit for Occupational Therapy. During 2014, the annual Limit on outpatient therapy services was $1,920 for Physical and Speech Language Pathology Services combined and $1,920 for Occupational Therapy Services. Since January 1, 2015, the annual Limit on outpatient therapy services is $1,940 for Physical and Speech Language Pathology Services combined and $1,940 for Occupational Therapy Services. Historically, these Therapy Caps applied to outpatient therapy services provided in all settings, except for services provided in departments of hospitals. However, the Protecting Access to Medicare Act of 2014, and prior legislation, extended the annual limits on therapy expenses and the manual medical review thresholds to services furnished in hospital outpatient department settings through March 31, 2015. The application of annual limits will no longer apply to hospital outpatient department settings commencing as of March 31, 2015 unless Congress extends it.
 
In the Deficit Reduction Act of 2005, Congress implemented an exceptions process to the annual Limit for therapy expenses for therapy services above the annual Limit. Therapy services above the annual Limit that are medically necessary satisfy an exception to the annual Limit and such claims are payable by the Medicare program. The Protecting Access to Medicare Act of 2014 extended the exceptions process for outpatient therapy caps through March 31, 2015. Unless Congress extends the exceptions process further, the therapy caps will apply to all outpatient therapy services beginning April 1, 2015, except those services furnished and billed by outpatient hospital departments. For any claim above the annual Limit, the claim must contain a modifier indicating that the services are medically necessary and justified by appropriate documentation in the medical record.
 
Furthermore, under the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The Protecting Access to Medicare Act of 2014 extended through March 31, 2015 the requirement that Medicare perform manual medical review of therapy services beyond the $3,700 threshold.
 
CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. During 2011, the MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2011 and 2012, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 20% in office and other non-institutional settings and by 25% in institutional settings. The American Taxpayer Relief Act of 2012 increased the payment reduction of the practice expense component to 50%, on subsequent therapy procedures in either setting, effective April 1, 2013. In addition, the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”) directed CMS to implement a claims-based data collection program to gather additional data on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practice settings that provide outpatient therapy services are required to include this data on the claim form. Since July 1, 2013, therapists have been required to report new codes and modifiers on the claim form that reflect a patient’s functional limitations and goals at initial evaluation, periodically throughout care, and at discharge. Since July 1, 2013, CMS has rejected claims if the required data is not included in the claim.
 
The Physician Quality Reporting System, or "PQRS," is a CMS reporting program that uses a combination of incentive payments and payment reductions to promote reporting of quality information by "eligible professionals." Although physical therapists, occupational therapists and qualified speech-language therapists are generally able to participate in the PQRS program, therapy professionals for whose services we bill through our rehab agencies cannot participate because the Medicare claims processing systems currently cannot accommodate institutional providers such as rehab agencies. Eligible professionals, such as those of our therapy professionals for whose services we bill using their individual Medicare provider numbers, who do not satisfactorily report data on quality measures will be subject to a 2% reduction in their Medicare payment in 2016 and 2017.
 
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that it is in compliance in all material respects with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on our financial statements as of December 31, 2014. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program.
 
REGULATION AND HEALTHCARE REFORM
 
Numerous federal, state and local regulations regulate healthcare services and those who provide them. Some states into which we may expand have laws requiring facilities employing health professionals and providing health-related services to be licensed and, in some cases, to obtain a certificate of need (that is, demonstrating to a state regulatory authority the need for, and financial feasibility of, new facilities or the commencement of new healthcare services). Only one of the states in which we currently operate requires a certificate of need for the operation of our physical therapy business functions. Our therapists and/or clinics, however, are required to be licensed, as determined by the state in which they provide services. Failure to obtain or maintain any required certificates, approvals or licenses could have a material adverse effect on our business, financial condition and results of operations.
 
Regulations Controlling Fraud and Abuse. Various federal and state laws regulate financial relationships involving providers of healthcare services. These laws include Section 1128B(b) of the Social Security Act (42 U.S. C. § 1320a-7b[b]) (the “Fraud and Abuse Law”), under which civil and criminal penalties can be imposed upon persons who, among other things, offer, solicit, pay or receive remuneration in return for (i) the referral of patients for the rendering of any item or service for which payment may be made, in whole or in part, by a Federal health care program (including Medicare and Medicaid); or (ii) purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, ordering any good, facility, service, or item for which payment may be made, in whole or in part, by a Federal health care program (including Medicare and Medicaid). We believe that our business procedures and business arrangements are in compliance with these provisions. However, the provisions are broadly written and the full extent of their specific application to specific facts and arrangements to which the Company is a party is uncertain and difficult to predict. In addition, several states have enacted state laws similar to the Fraud and Abuse Law, which may be more restrictive than the federal Fraud and Abuse Law.

In 1991, the Office of the Inspector General (“OIG”) of the HHS issued the first of its regulations describing compensation financial arrangements that fall within a “Safe Harbor” and, therefore, are not viewed as illegal remuneration under the Fraud and Abuse Law. Failure to fall within a Safe Harbor does not mean that the Fraud and Abuse Law has been violated; however, the OIG has indicated that failure to fall within a Safe Harbor may subject an arrangement to increased scrutiny under a “facts and circumstances” test.
 
In February 2000, the OIG issued a special fraud alert regarding the rental of space in physician offices by persons or entities to which the physicians refer patients. The OIG’s stated concern in these arrangements is that rental payments may be disguised kickbacks to the physician-landlords to induce referrals. We rent clinic space for a few of our clinics from referring physicians and have taken the steps that we believe are necessary to ensure that all leases comply to the extent possible and applicable with the space rental Safe Harbor to the Fraud and Abuse Law.
 
In April 2003, the OIG issued a special advisory bulletin addressing certain complex contractual arrangements for the provision of items and services that were previously identified as suspect in a 1989 special fraud alert. This special advisory bulletin identified several characteristics commonly exhibited by suspect arrangements, the existence of one or more of which could indicate a prohibited arrangement to the OIG. Generally, the indicia of a suspect contractual joint venture as identified by the special advisory bulletin and the associated OIG advisory opinion include the following:
 
New Line of Business. A provider in one line of business (“Owner”) expands into a new line of business that can be provided to the Owner’s existing patients, with another party who currently provides the same or similar item or service as the new business (“Manager/Supplier”).
 
Captive Referral Base. The arrangement predominantly or exclusively serves the Owner’s existing patient base (or patients under the control or influence of the Owner).
 
Little or No Bona Fide Business Risk. The Owner’s primary contribution to the venture is referrals; it makes little or no financial or other investment in the business, delegating the entire operation to the Manager/Supplier, while retaining profits generated from its captive referral base.
 
Status of the Manager/Supplier. The Manager/Supplier is a would-be competitor of the Owner’s new line of business and would normally compete for the captive referrals. It has the capacity to provide virtually identical services in its own right and bill insurers and patients for them in its own name.
 
Scope of Services Provided by the Manager/Supplier. The Manager/Supplier provides all, or many, of the new business’ key services.
 
Remuneration. The practical effect of the arrangement, viewed in its entirety, is to provide the Owner the opportunity to bill insurers and patients for business otherwise provided by the Manager/Supplier. The remuneration from the venture to the Owner (i.e., the profits of the venture) takes into account the value and volume of business the Owner generates.
 
Exclusivity. The arrangement bars the Owner from providing items or services to any patients other than those coming from Owner and/or bars the Manager/Supplier from providing services in its own right to the Owner’s patients.
 
Due to the nature of our business operations, many of our management service arrangements exhibit one or more of these characteristics. However, the Company believes it has taken steps regarding the structure of such arrangements as necessary to sufficiently distinguish them from these suspect ventures, and to comply with the requirements of the Fraud and Abuse Law. However, if the OIG believes the Company has entered into a prohibited contractual joint venture, it could have an adverse effect on our business, financial condition and results of operations.
 
Our business of managing physician-owned physical therapy facilities is regulated by the Fraud and Abuse Law. However, the manner in which we contract with such facilities often falls outside the complete scope of available Safe Harbors. We believe our arrangements comply with the Fraud and Abuse Law, even though federal courts provide limited guidance as to the application of the Fraud and Abuse Law to these arrangements. If our management contracts are held to violate the Fraud and Abuse Law, it could have an adverse effect on our business, financial condition and results of operations.
 
Stark Law. Provisions of the Omnibus Budget Reconciliation Act of 1993 (42 U.S.C. § 1395nn) (the “Stark Law”) prohibit referrals by a physician of “designated health services” which are payable, in whole or in part, by Medicare or Medicaid, to an entity in which the physician or the physician’s immediate family member has an investment interest or other financial relationship, subject to several exceptions. Unlike the Fraud and Abuse Law, the Stark Law is a strict liability statute. Proof of intent to violate the Stark Law is not required. Physical therapy services are among the “designated health services”. Further, the Stark Law has application to the Company’s management contracts with individual physicians and physician groups, as well as, any other financial relationship between us and referring physicians, including any financial transaction resulting from a clinic acquisition. The Stark Law also prohibits billing for services rendered pursuant to a prohibited referral. Several states have enacted laws similar to the Stark Law. These state laws may cover all (not just Medicare and Medicaid) patients. Many federal healthcare reform proposals in the past few years have attempted to expand the Stark Law to cover all patients as well. As with the Fraud and Abuse Law, we consider the Stark Law in planning our clinics, marketing and other activities, and believe that our operations are in compliance with the Stark Law. If we violate the Stark Law or any similar state laws, our financial results and operations could be adversely affected. Penalties for violations include denial of payment for the services, significant civil monetary penalties, and exclusion from the Medicare and Medicaid programs.
 
HIPAA. In an effort to further combat healthcare fraud and protect patient confidentially, Congress included several anti-fraud measures in the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA created a source of funding for fraud control to coordinate federal, state and local healthcare law enforcement programs, conduct investigations, provide guidance to the healthcare industry concerning fraudulent healthcare practices, and establish a national data bank to receive and report final adverse actions. HIPAA also criminalized certain forms of health fraud against all public and private payors. Additionally, HIPAA mandates the adoption of standards regarding the exchange of healthcare information in an effort to ensure the privacy and electronic security of patient information and standards relating to the privacy of health information. Sanctions for failing to comply with HIPAA include criminal penalties and civil sanctions. In February of 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. Title XIII of ARRA, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), provided for substantial Medicare and Medicaid incentives for providers to adopt electronic health records (“EHRs”) and grants for the development of health information exchange (“HIE”). Recognizing that HIE and EHR systems will not be implemented unless the public can be assured that the privacy and security of patient information in such systems is protected, HITECH also significantly expanded the scope of the privacy and security requirements under HIPAA. Most notable are the new mandatory breach notification requirements and a heightened enforcement scheme that includes increased penalties, and which now apply to business associates as well as to covered entities. In addition to HIPAA, a number of states have adopted laws and/or regulations applicable in the use and disclosure of individually identifiable health information that can be more stringent than comparable provisions under HIPAA.
 
We believe that our operations comply with applicable standards for privacy and security of protected healthcare information. We cannot predict what negative effect, if any, HIPAA/HITECH or any applicable state law or regulation will have on our business.
 
 Other Regulatory Factors. Political, economic and regulatory influences are fundamentally changing the healthcare industry in the United States. Congress, state legislatures and the private sector continue to review and assess alternative healthcare delivery and payment systems. Potential alternative approaches could include mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, and price controls. Legislative debate is expected to continue in the future and market forces are expected to demand only modest increases or reduced costs. For instance, managed care entities are demanding lower reimbursement rates from healthcare providers and, in some cases, are requiring or encouraging providers to accept capitated payments that may not allow providers to cover their full costs or realize traditional levels of profitability. We cannot reasonably predict what impact the adoption of federal or state healthcare reform measures or future private sector reform may have on our business.
 
COMPETITION
 
The healthcare industry, including the physical therapy business, is highly competitive. The physical therapy business is highly fragmented with no company having as much as six percent of the market share nationally. We believe that our Company is the third largest national outpatient rehabilitation provider.
 
Competitive factors affecting our business include quality of care, cost, treatment outcomes, convenience of location, and relationships with, and ability to meet the needs of, referral and payor sources. Our clinics compete, directly or indirectly, with many types of healthcare providers including the physical therapy departments of hospitals, private therapy clinics, physician-owned therapy clinics, and chiropractors. We may face more intense competition if consolidation of the therapy industry continues.
 
We believe that our strategy of providing key therapists in a community with an opportunity to participate in ownership or clinic profitability provides us with a competitive advantage by helping to ensure the commitment of local management to the success of the clinic.
 
We also believe that our competitive position is enhanced by our strategy of locating our clinics, when possible, on the ground floor of buildings and shopping centers with nearby parking, thereby making the clinics more easily accessible to patients. We offer convenient hours. We also attempt to make the decor in our clinics less institutional and more aesthetically pleasing than traditional hospital clinics.
 
ENFORCEMENT ENVIRONMENT
 
In recent years, federal and state governments have launched several initiatives aimed at uncovering behavior that violates the federal civil and criminal laws regarding false claims and fraudulent billing and coding practices. Such laws require providers to adhere to complex reimbursement requirements regarding proper billing and coding in order to be compensated for their services by government payors. Our compliance program requires adherence to applicable law and promotes reimbursement education and training; however, a determination that our clinics’ billing and coding practices are false or fraudulent could have a material adverse effect on us.
 
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits.  An adverse inspection, review, audit or investigation could result in: refunding amounts we have been paid; fines penalties and/or revocation of billing privileges for the affected clinics; imposition of a corporate integrity agreement ; exclusion  from participation in the Medicare or Medicaid programs or one or more managed care payor network; or damage to our reputation.
 
We and our clinics are subject to federal and state laws prohibiting entities and individuals from knowingly and willfully making claims to Medicare, Medicaid and other governmental programs and third party payors that contain false or fraudulent information. The federal False Claims Act encourages private individuals to file suits on behalf of the government against healthcare providers such as us. As such suits are generally filed under seal with a court to allow the government adequate time to investigate and determine whether it will intervene in the action, the implicated healthcare providers often are unaware of the suit until the government has made its determination and the seal is lifted. Violations or alleged violations of such laws, and any related lawsuits, could result in (i) exclusion from participation in Medicare, Medicaid and other federal healthcare programs, or (ii) significant financial or criminal sanctions, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed a separate violation. In addition, many states also have enacted similar statutes, which may include criminal penalties, substantial fines, and treble damages.
 
COMPLIANCE PROGRAM
 
Our Compliance Program. The ongoing success of our Company depends upon our reputation for quality service and ethical business practices. Our Company operates in a highly regulated environment with many federal, state and local laws and regulations. We take a proactive interest in understanding and complying with the laws and regulations that apply to our business.
 
Our Board of Directors (the “Board”) has adopted a Code of Business Conduct and Ethics to clarify the ethical standards under which the Board and management carry out their duties. In addition, the Board has created a Compliance Committee ("Compliance Committee") whose purpose is to assist the Board in discharging their oversight responsibilities with respect to compliance with federal and state laws and regulations relating to healthcare.
 
We have issued an Ethics and Compliance Manual and created a compliance DVD, hand-outs and an on-line testing program. These tools were prepared to ensure that every employee of our Company and subsidiaries has a clear understanding of our mutual commitment to high standards of professionalism, honesty, fairness and compliance with the law in conducting business. These standards are administered by our Compliance Officer (“CO”), who has the responsibility for the day-to-day oversight, administration and development of our compliance program. The CO, internal and external counsel, management and the Compliance Committee review our policies and procedures for our compliance program from time to time in an effort to improve operations and to ensure compliance with requirements of standards, laws and regulations and to reflect the on-going compliance focus areas which have been identified by the Compliance Committee. We also have established systems for reporting potential violations, educating our employees, monitoring and auditing compliance and handling enforcement and discipline.
 
Committees. Our Compliance Committee, appointed by the Board, consists of five independent directors. The Compliance Committee has general oversight of our Company’s compliance with the legal and regulatory requirements regarding healthcare operations. The Compliance Committee relies on the expertise and knowledge of management, the CO and other compliance and legal personnel. The CO regularly communicates with the Chairman of the Compliance Committee. The Compliance Committee meets at least four times a year or more frequently as necessary to carry out its responsibilities and reports regularly to the Board regarding its actions and recommendations.
 
In addition, management has appointed a team to address our Company’s compliance with HIPAA. The HIPAA team consists of a security officer and employees from our legal, information systems, finance, operations, compliance, business services and human resources departments. The team prepares assessments and makes recommendations regarding operational changes and/or new systems, if needed, to comply with HIPAA.
 
Each clinic certified as a Medicare Rehabilitation Agency has a formally appointed governing body composed of a member of management of the Company and the director/administrator of the clinic. The governing body retains legal responsibility for the overall conduct of the clinic. The members confer regularly and discuss, among other issues, clinic compliance with applicable laws and regulations. In addition, there are Professional Advisory Committees which serve as Infection Control Committees. These committees meet in the facilities and function as advisors.
 
The Company has in place a Risk Management Committee consisting of, among others, the CO, our General Counsel and the Corporate Vice President of Administration. This committee reviews and monitors all employee and patient incident reports and provides clinic personnel with actions to be taken in response to the reports.
 
Reporting Violations. In order to facilitate our employees’ ability to report in confidence, anonymously and without retaliation any perceived improper work-related activities, accounting irregularities and other violations of our compliance program, we have set up an independent national compliance hotline. The compliance hotline is available to receive confidential reports of wrongdoing Monday through Friday (excluding holidays), 24 hours a day. The compliance hotline is staffed by experienced third party professionals trained to utilize utmost care and discretion in handling sensitive issues and confidential information. The information received is documented and forwarded timely to the CO, who, together with the Compliance Committee, has the power and resources to investigate and resolve matters of improper conduct.

Educating Our Employees. We utilize numerous methods to train our employees in compliance related issues. The directors/administrators of each clinic are responsible for  conducting the initial training sessions on compliance with existing employees. Training is based on our Ethics and Compliance Manual, inclusive of HIPAA information, and our compliance DVD. The directors/administrators also provide periodic “refresher” training for existing employees and one-on-one comprehensive training with new hires. The corporate compliance group responds to questions from clinic personnel and will conduct frequent teleconference meetings on topics as deemed necessary.
 
When a clinic opens, the CO provides a package of compliance materials containing manuals and detailed instructions for meeting Medicare Conditions of Participation Standards and other compliance requirements. During follow up training with the director/administrator of the clinic, the CO explains various details regarding requirements and compliance standards. The CO and the compliance staff will remain in contact with the director/administrator while the clinic is implementing compliance standards and will provide any assistance required. All new office managers receive training (including Medicare, regulatory and corporate compliance, insurance billing, charge entry and transaction posting and coding, daily, weekly and monthly accounting reports) from the training staff at the corporate office. The corporate compliance group will assist in continued compliance, including guidance to the clinic staff with regard to Medicare certifications, state survey requirements and responses to any inquiries from regulatory agencies.
 
Monitoring and Auditing Clinic Operational Compliance. Our Company has in place audit programs and other procedures to monitor and audit clinic operational compliance with applicable policies and procedures. We employ internal auditors who, as part of their job responsibilities, conduct periodic audits of each clinic. Most clinics are audited at least once every 24 months and additional focused audits are performed as deemed necessary. During these audits, particular attention is given to compliance with Medicare and internal policies, Federal and state laws and regulations, third party payor requirements, and patient chart documentation, billing, reporting, record keeping, collections and contract procedures. The audits are conducted on site and include interviews with the employees involved in management, operations, billing and accounts receivable. Formal audit reports are prepared and reviewed with corporate management and the Compliance Committee. Each clinic director/administrator receives a letter instructing them of any corrective measures required. Each clinic director/administrator then works with the compliance team and operations to ensure such corrective measures are achieved.
 
Handling Enforcement and Discipline. It is our policy that any employee who fails to comply with compliance program requirements or who negligently or deliberately fails to comply with known laws or regulations specifically addressed in our compliance program should be subject to disciplinary action up to and including discharge from employment. The Compliance Committee, compliance staff, human resources staff and management investigate violations of our compliance program and impose disciplinary action as considered appropriate.
 
EMPLOYEES
 
At December 31, 2014, we employed 3,151 people, of which 2,207 were full-time employees. At that date, no Company employees were governed by collective bargaining agreements or were members of a union. We consider our relations with our employees to be good.
 
In the states in which our current clinics are located, persons performing designated physical therapy services are required to be licensed by the state. Based on standard employee screening systems in place, all persons currently employed by us who are required to be licensed are licensed. We are not aware of any federal licensing requirements applicable to our employees.
 
AVAILABLE INFORMATION
 
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our internet website at www.usph.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
 
ITEM 1A.— RISK FACTORS.
 
Our business, operations and financial condition are subject to various risks. Some of these risks are described below, and readers of this Annual Report on Form 10-K should take such risks into account in evaluating our Company or making any decision to invest in us. This section does not describe all risks applicable to our Company, our industry or our business, and it is intended only as a summary of material factors affecting our business.
 
Risks related to our business and operations
 
Healthcare reform legislation may affect our business.
 
In recent years, many legislative proposals have been introduced or proposed in Congress and in some state legislatures that would affect major changes in the healthcare system, either nationally or at the state level. At the federal level, Congress has continued to propose or consider healthcare budgets that substantially reduce payments under the Medicare programs. See “Business- Sources of Revenue” in Item 1 for more information. The ultimate content, timing or effect of any healthcare reform legislation and the impact of potential legislation on us is uncertain and difficult, if not impossible, to predict. That impact may be material to our business, financial condition or results of operations.

Our operations are subject to extensive regulation.
 
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
 
facility and professional licensure/permits, including certificates of need;
 
conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse, and physician self-referral;
 
addition of facilities and services; and
 
billing and payment for services.
 
In recent years, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry. We believe we are in substantial compliance with all laws, but differing interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our methods of operations, facilities, equipment, personnel, services and capital expenditure programs and increase our operating expenses. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations. For a more complete description of certain of these laws and regulations, see “Business—Regulation and Healthcare Reform” in Item 1.
 
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to (1) facility and professional licensure, including certificates of need, (2) conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse and physician self-referral, (3) addition of facilities and services and enrollment of newly developed facilities in the Medicare program, (4) payment for services and (5) safeguarding protected health information.
 
Both federal and state regulatory agencies inspect, survey and audit our facilities to review our compliance with these laws and regulations.  While our facilities intend to comply with the existing licensing, Medicare certification requirements and accreditation standards, there can be no assurance that these regulatory authorities will determine that all applicable requirements are fully met at any given time.  A determination by any of these regulatory authorities that a facility is not in compliance with these requirements could lead to the imposition of requirements that the facility takes corrective action, assessment of fines and penalties, or loss of licensure or Medicare certification of accreditation.  These consequences could have an adverse effect on our Company.
 
Decreases in Medicare reimbursement rates, implementation of annual caps, and payment reductions applied to the second and subsequent therapy services will adversely affect our financial results.
 
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). The MPFS rates are automatically updated annually based on a formula, called the sustainable growth rate (“SGR”) formula. The use of the SGR formula would have resulted in calculated automatic reductions in rates in every year since 2002; however, for each year through June 30, 2014, Centers for Medicare & Medicaid Services (“CMS”) or Congress has taken action to prevent the implementation of SGR formula reductions. The Bipartisan Budget Act of 2013 froze the Medicare physician fee schedule rates at 2013 levels through June 30, 2014, averting a scheduled 20.1% cut in the MPFS as a result of the SGR formula that would have taken effect on January 1, 2014. The Protecting Access to Medicare Act of 2014 temporarily blocks this reduction through March 31, 2015 and replaces it with a 0.5% payment increase for services provided through December 31, 2014. In October 2014, CMS released the Medicare physician fee schedule rates for 2015, which included a 1% payment increase for physical therapy services. Automatic reductions in the Medicare physician fee schedule payment rates will commence on April 1, 2015, unless Congress again takes legislative action to prevent the SGR formula reductions from going into effect.
 
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years, and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented.
 
As a result of the Balanced Budget Act of 1997, the formula for determining the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/or speech-language pathology services provided to any Medicare beneficiary (i.e., the “Therapy Cap” or “Limit”) was established. Based on the statutory definitions which constrained how the Therapy Cap would be applied, there is one Limit for Physical Therapy and Speech Language Pathology Services combined, and one Limit for Occupational Therapy. During 2014, the annual Limit on outpatient therapy services was $1,920 for Physical and Speech Language Pathology Services combined and $1,920 for Occupational Therapy Services. Since January 1, 2015, the annual Limit on outpatient therapy services is $1,940 for Physical and Speech Language Pathology Services combined and $1,940 for Occupational Therapy Services. Historically, these Therapy Caps applied to outpatient therapy services provided in all settings, except for services provided in departments of hospitals. However, the Protecting Access to Medicare Act of 2014, and prior legislation, extended the annual limits on therapy expenses and the manual medical review thresholds to services furnished in hospital outpatient department settings through March 31, 2015. The application of annual limits will no longer apply to hospital outpatient department settings commencing as of March 31, 2015 unless Congress extends it.
 
In the Deficit Reduction Act of 2005, Congress implemented an exceptions process to the annual Limit for therapy expenses for therapy services above the annual Limit. Therapy services above the annual Limit that are medically necessary satisfy an exception to the annual Limit and such claims are payable by the Medicare program. The Protecting Access to Medicare Act of 2014 extended the exceptions process for outpatient therapy caps through March 31, 2015. Unless Congress extends the exceptions process further, the therapy caps will apply to all outpatient therapy services beginning April 1, 2015, except those services furnished and billed by outpatient hospital departments. For any claim above the annual Limit, the claim must contain a modifier indicating that the services are medically necessary and justified by appropriate documentation in the medical record.
 
Furthermore, under the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The Protecting Access to Medicare Act of 2014 extended through March 31, 2015 the requirement that Medicare perform manual medical review of therapy services beyond the $3,700 threshold.
 
CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. During 2011, the MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2011 and 2012, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 20% in office and other non-institutional settings and by 25% in institutional settings. The American Taxpayer Relief Act of 2012 increased the payment reduction of the practice expense component to 50%, on subsequent therapy procedures in either setting, effective April 1, 2013. In addition, the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”) directed CMS to implement a claims-based data collection program to gather additional data on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practice settings that provide outpatient therapy services are required to include this data on the claim form. Since July 1, 2013, therapists have been required to report new codes and modifiers on the claim form that reflect a patient’s functional limitations and goals at initial evaluation, periodically throughout care, and at discharge. Since July 1, 2013, CMS has rejected claims if the required data is not included in the claim.

The Physician Quality Reporting System, or "PQRS," is a CMS reporting program that uses a combination of incentive payments and payment reductions to promote reporting of quality information by "eligible professionals." Although physical therapists, occupational therapists and qualified speech-language therapists are generally able to participate in the PQRS program, therapy professionals for whose services we bill through our rehab agencies cannot participate because the Medicare claims processing systems currently cannot accommodate institutional providers such as rehab agencies. Eligible professionals, such as those of our therapy professionals for whose services we bill using their individual Medicare provider numbers, who do not satisfactorily report data on quality measures will be subject to a 2% reduction in their Medicare payment in 2016 and 2017.
 
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that it is in compliance in all material respects with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on our financial statements as of December 31, 2014. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program.
 
As a result of increased post-payment reviews of claims we submit to Medicare for our services, we may incur additional costs and may be required to repay amounts already paid to us.
 
We are subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare for payment for our services. These post-payment reviews are increasing as a result of new government cost-containment initiatives. These additional post-payment reviews may require us to incur additional costs to respond to requests for records and to pursue the reversal of payment denials, and ultimately may require us to refund amounts paid to us by Medicare that are determined to have been overpaid.
 
For a further description of this and other laws and regulations involving governmental reimbursements, see “Business—Sources of Revenue” and “—Regulation and Healthcare Reform” in Item 1.

If we fail to effectively and timely transition to the ICD-10 coding system, our operations could be adversely affected.
 
Health plans and providers are required to transition to the new ICD-10 coding system, which greatly expands the number and detail of billing codes used for third-party claims. Use of the ICD-10 system is required beginning October 1, 2015. Transition to the new ICD-10 system requires significant investment in coding technology and software as well as the training of staff involved in the coding and billing process. In addition to these upfront costs of transition to ICD-10, it is possible that we could experience disruption or delays in payment due to technical or coding errors or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners.
 
An economic downturn, state budget pressures, sustained unemployment and continued deficit spending by the federal government may result in a reduction in reimbursement and covered services.
 
 An economic downturn could have a detrimental effect on our revenues. Historically, state budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services in the states in which we operate. In addition, an economic downturn, coupled with sustained unemployment, may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates.
 The existing federal deficit, as well as deficit spending by federal and state governments as the result of adverse developments in the economy or other reasons, can lead to continuing pressure to reduce governmental expenditures for other purposes, including government-funded programs in which we participate, such as Medicare and Medicaid. Such actions in turn may adversely affect our results of operations.

We depend upon reimbursement by third-party payors.
 
Substantially all of our revenues are derived from private and governmental third-party payors. In 2014, approximately 76.6% of our revenues were derived collectively from managed care plans, commercial health insurers, workers’ compensation payors, and other private pay revenue sources and approximately 23.4% of our revenues were derived from Medicare and Medicaid. Initiatives undertaken by industry and government to contain healthcare costs affect the profitability of our clinics. These payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursement for healthcare services. If insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, our profit margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower rates. In addition, in certain geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans. Failure to obtain or maintain these approvals would adversely affect our financial results.
 
In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. See “Business- Sources of Revenue” in Item 1 for more information. President Obama signed into law comprehensive reforms to the healthcare system, including changes to Medicare reimbursement. Additional reforms or other changes to these payment systems may be proposed or adopted, either by the U.S. Congress or by CMS, including bundled payments, outcomes-based payment methodologies and a shift away from traditional fee-for-service reimbursement. If revised regulations are adopted, the availability, methods and rates of Medicare reimbursements for services of the type furnished at our facilities could change. Some of these changes and proposed changes could adversely affect our business strategy, operations and financial results.
 
We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits.  An adverse inspection, review, audit or investigation could result in:
   
· 
refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from managed care payors;
       
· 
state or federal agencies imposing fines, penalties and other sanctions on us;
   
         
· 
temporary suspension of payment for new patients to the facility or agency;
     
   
· 
decertification or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;
             
· 
imposition of a corporate integrity agreement;
         
               
· 
damage to our reputation;
           
           
· 
the revocation of a facility's or agency's license; and
       
     
· 
loss of certain rights under, or termination of, our contracts with managed care payors.
 

If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results.
 
Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of individually identifiable information.
 
HIPAA required the HHS to adopt standards to protect the privacy and security of individually identifiable health-related information. The department released final regulations containing privacy standards in December 2000 and published revisions to the final regulations in August 2002. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The regulations also provide patients with significant rights related to understanding and controlling how their health information is used or disclosed. The security regulations require healthcare providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically. HITECH, which was signed into law in February of 2009, enhanced the privacy, security and enforcement provisions of HIPAA by, among other things establishing security breach notification requirements, allowing enforcement of HIPAA by state attorneys general, and increasing penalties for HIPAA violations. Violations of HIPAA or HITECH could result in civil or criminal penalties.
 
In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state. Lawsuits, including class actions and action by state attorneys general, directed at companies that have experienced a privacy or security breach also can occur.

The Company and its clinics have established policies and procedures in an effort to ensure compliance with these privacy related requirements. However, if there is a breach, we may be subject to various penalties and damages and may be required to incur costs to mitigate the impact of the breach on affected individuals.
 
We may be adversely affected by a cyber attack that could compromise our information technologies, which may cause a violation of HIPAA or HITECH.
In the normal course of business, our information technology systems hold sensitive patient information including patient demographic data, eligibility for various medical plans including Medicare and Medicaid and protected health information, which is subject to HIPAA and HITECH. We maintain our information technology systems with safeguards protecting against cyber-attacks, including passive intrusion protection, firewalls and virus detection software. However, these safeguards do not ensure that a significant cyber attack could not occur. A cyber attack that bypasses our information technology security systems could cause the loss of protected health information, or other data subject to privacy laws, the loss of proprietary business information, or a material disruption to our information technology business systems resulting in a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, our future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of protected health information, other confidential data or proprietary business information, operational or business delays resulting from the disruption of information technology systems and subsequent clean-up and mitigation activities, negative publicity resulting in reputation or brand damage with clients, members, or industry peers, or regulatory action taken as a result of such incident.
 
We depend upon the cultivation and maintenance of relationships with the physicians in our markets.
 
Our success is dependent upon referrals from physicians in the communities our clinics serve and our ability to maintain good relations with these physicians and other referral sources. Physicians referring patients to our clinics are free to refer their patients to other therapy providers or to their own physician owned therapy practice. If we are unable to successfully cultivate and maintain strong relationships with physicians and other referral sources, our business may decrease and our net operating revenues may decline.
 
We depend upon our ability to recruit and retain experienced physical therapists.
 
Our revenue generation is dependent upon referrals from physicians in the communities our clinics serve, and our ability to maintain good relations with these physicians. Our therapists are the front line for generating these referrals and we are dependent on their talents and skills to successfully cultivate and maintain strong relationships with these physicians. If we cannot recruit and retain our base of experienced and clinically skilled therapists, our business may decrease and our net operating revenues may decline. Periodically, we have clinics in isolated communities that are temporarily unable to operate due to the unavailability of a therapist who satisfies our standards.
 
Our revenues may fluctuate due to weather.
 
We have a significant number of clinics in states that normally experience snow and ice during the winter months. Also, a significant number of our clinics are located in states along the Gulf Coast and Atlantic Coast which are subject to periodic winter storms, hurricanes and other severe storm systems. Periods of severe weather may cause physical damage to our facilities or prevent our staff or patients from traveling to our clinics, which may cause a decrease in our net operating revenues.
 
We operate in a highly competitive industry.
 
We encounter competition from local, regional or national entities, some of which have superior resources or other competitive advantages. Intense competition may adversely affect our business, financial condition or results of operations. For a more complete description of this competitive environment, see “Business—Competition” in Item 1. An adverse effect on our business, financial condition or results of operations may require us to write-down goodwill.
 
We may incur closure costs and losses.
 
The competitive, economic or reimbursement conditions in our markets in which we operate may require us to reorganize or to close certain clinics. In the event a clinic is reorganized or closed, we may incur losses and closure costs. The closure costs and losses may include, but are not limited to, lease obligations, severance, and write-down or write-off of goodwill and other intangible assets.

Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
 
As part of our growth strategy, we intend to continue pursuing acquisitions of outpatient physical therapy clinics. Acquisitions may involve significant cash expenditures, potential debt incurrence and operational losses, dilutive issuances of equity securities and expenses that could have an adverse effect on our financial condition and results of operations. Acquisitions involve numerous risks, including:
 
the difficulty and expense of integrating acquired personnel into our business;
 
the diversion of management’s time from existing operations;

the potential loss of key employees of acquired companies;
 
the difficulty of assignment and/or procurement of managed care contractual arrangements; and
 
the assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.
 
We may not be successful in obtaining financing for acquisitions at a reasonable cost, or such financing may contain restrictive covenants that limit our operating flexibility. We also may be unable to acquire outpatient physical therapy clinics or successfully operate such clinics following the acquisition.
 
Certain of our internal controls, particularly as they relate to billings and cash collections, are largely decentralized at our clinic locations.
 
Our clinic operations are largely decentralized and certain of our internal controls, particularly the processing of billings and cash collections, occur at the clinic level. Taken as a whole, we believe our internal controls for these functions at our clinics are adequate. Our controls for billing and cash collections largely depend on compliance with our written policies and procedures and separation of functions among clinic personnel. We also maintain corporate level controls, including an audit compliance program, that are intended to mitigate and detect any potential deficiencies in internal controls at the clinic level. The effectiveness of these controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the level of compliance with our policies and procedures deteriorates.  If our controls fail, it would likely have an adverse effect on our financial condition and results of operation.
 
We may not be able to generate sufficient cash to service all of our indebtedness and may not be able to refinance our indebtedness on favorable terms. If we are unable to do so, we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
 
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. We may find it necessary or prudent to refinance our outstanding indebtedness with longer-maturity debt at a higher interest rate. Our ability to refinance our indebtedness on favorable terms, or at all, is directly affected by the current global economic and financial conditions. In addition, our ability to incur secured indebtedness (which would generally enable us to achieve better pricing than the incurrence of unsecured indebtedness) depends in part on the value of our assets, which depends, in turn, on the strength of our cash flows and results of operations, and on economic and market conditions and other factors.
 
If our cash flows and capital resources are insufficient to fund our debt service obligations or we are unable to refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions, or the proceeds from the dispositions may not be adequate to meet any debt service obligations then due.
 
Our Credit Agreement contains restrictions that limit our flexibility in operating our business.
 
Our Credit Agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our subsidiaries’ ability to, among other things: incur additional indebtedness; pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; make certain investments; sell or transfer assets; create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and enter into certain transactions with our affiliates.

Under our Credit Agreement, we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance we will continue to meet those ratios. A breach of any of these covenants could result in a default under our Credit Agreement. Upon the occurrence of an event of default under the Credit Agreement, the lenders thereunder could elect to declare all amounts outstanding under the Credit Agreement to be immediately due and payable and terminate all commitments to extend further credit.
 
Risks Relating to Our Outstanding Common Stock
 
Our stock price could be volatile, which could cause you to lose part or all of your investment.
 
The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In particular, the market price of our common stock has been and may continue to be highly volatile. During 2014, our stock price ranged from a low of $29.56 per share (on May 8, 2014) to a high of $44.00 per share (on October 31, 2014). Factors, such as announcements concerning acquisitions, changes in revenues and earnings expectations, regulatory conditions, including federal and state regulations, and economic and other external factors, as well as period-to-period fluctuations and financial results, may have a significant effect on the market price of our common stock.
 
From time to time, there has been limited trading volume in our common stock. In addition, there can be no assurance that there will continue to be a trading market or that any securities research analysts will continue to provide research coverage with respect to our common stock. It is possible that such factors will adversely affect the market for our common stock.
 
Issuance of shares in connection with financing transactions or under stock incentive plans will dilute current stockholders.
 
Pursuant to our stock incentive plans, our Compensation Committee of the Board of Directors, consisting solely of independent directors, is authorized to grant stock awards to our employees, directors and consultants. Shareholders will incur dilution upon the exercise of any outstanding stock awards or the grant of any restricted stock. In addition, if we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.
 
The number of shares of our common stock eligible for future sale could adversely affect the market price of our stock.
 
At December 31, 2014, we had reserved approximately 700 shares of common stock for issuance under outstanding options and 497,000 shares for future equity grants. These shares of common stock are registered for sale or resale on currently effective registration statements and have been approved by stockholders. We may issue additional restricted securities or register additional shares of common stock under the Securities Act of 1933, as amended (the “Securities Act”) in the future. The issuance of a significant number of shares of common stock upon the exercise of stock options or the availability for sale, or sale, of a substantial number of the shares of common stock eligible for future sale under effective registration statements, under Rule 144 or otherwise, could adversely affect the market price of the common stock.
 
Provisions in our articles of incorporation and bylaws could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders.
 
Certain provisions of our articles of incorporation and bylaws may delay, discourage, prevent or render more difficult an attempt to obtain control of our company, whether through a tender offer, business combination, proxy contest or otherwise. These provisions include the charter authorization of “blank check” preferred stock and a restriction on the ability of stockholders to call a special meeting.
 
ITEM  1B. UNRESOLVED STAFF COMMENTS.
 
Not Applicable.
 
ITEM 2. PROPERTIES.
 
We lease the properties used for our clinics under non-cancelable operating leases with terms ranging from one to five years, with the exception of the property for one clinic which we own. We intend to lease the premises for any new clinic locations except in rare instances where leasing is not a cost-effective alternative. Our typical clinic occupies 1,500 to 3,000 square feet.
 
We also lease our executive offices located in Houston, Texas, under a non-cancelable operating lease expiring in April 2022. We currently occupy approximately 39,452 square feet of space (including allocations for common areas) at our executive offices.
 
ITEM 3. LEGAL PROCEEDINGS.
 
We are involved in litigation and other proceedings arising in the ordinary course of business. While the ultimate outcome of lawsuits or other proceedings cannot be predicted with certainty, we do not believe the impact of existing lawsuits or other proceedings will have a material impact on our business, financial condition or results of operations.
 
ITEM  4. MINE SAFETY DISCLOSURES.
 
Not Applicable.
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
PRICE QUOTATIONS
 
Our common stock has traded on the New York Stock Exchange (“NYSE”) since August 14, 2012 under the symbol “USPH.” Prior to that, our common stock was traded on the Nasdaq Global Select Market under the symbol “USPH”. As of March 12, 2015, there were 71 holders of record of our outstanding common stock. The table below indicates the high and low sales prices of our common stock reported for the periods presented.

   
2014
   
2013
 
Quarter
 
High
   
Low
   
High
   
Low
 
                 
First
 
$
37.25
   
$
30.16
   
$
28.24
   
$
22.80
 
Second
   
35.23
     
29.56
     
31.56
     
22.84
 
Third
   
37.19
     
33.21
     
32.15
     
26.91
 
Fourth
   
44.00
     
34.00
     
35.84
     
29.55
 

During 2014, we paid a quarterly dividend of $0.12 per share totaling $0.48 per share for 2014, which amounted to a total of aggregate cash payments of dividends to holders of our common stock in 2014 of approximately $5.9 million.  During 2013, we paid a quarterly dividend of $0.10 per share totaling $0.40 per share for 2013, which amounted to a total of aggregate cash payments of dividends to holders of our common stock in 2013 of approximately $4.8 million.  In 2015, our Board of Directors declared a quarterly dividend of $0.15 per share payable to shareholders of record on March 20, 2015 to be paid on April 3, 2015. We are currently restricted from paying dividends in excess of $7,500,000 in any fiscal year on our common stock under the Credit Agreement.

FIVE YEAR PERFORMANCE GRAPH
 
The performance graph and related description shall not be deemed incorporated by reference into any filing under the Securities Act or under the Exchange Act, except to the extent that the Company specifically incorporates this information by reference.  In addition, the performance graph and the related description shall not be deemed “soliciting material” or “filed” with the SEC or subject to Regulation 14A or 14C.
 
Prior to August 14, 2012, our common stock traded on the NYSE. On August 14, 2012, our common stock began trading on the New York Stock Exchange (“NYSE”). The following performance graph compares the cumulative total stockholder return of our common stock to The NYSE Composite Index and the NYSE Health Care Index for the period from December 31, 2009 through December 31, 2014. The graph assumes that $100 was invested in our common stock and the common stock of each of the companies listed on The NYSE Composite Index  and The NYSE Health Care Index on December 31, 2009 and that any dividends were reinvested.
 
Comparison of Five Years Cumulative Total Return for the Year Ended December 31, 2014

 
 
12/09
12/10
12/11
12/12
12/13
12/14
U. S. Physical Therapy, Inc.
        127
            149
          148
            207
       265
       315
NYSE Composite
        125
            139
          130
            147
       181
       189
NYSE Healthcare Index
        120
            121
          132
            148
       191
       223
 
ITEM 6. SELECTED FINANCIAL DATA.
 
The following selected financial data from continuing operations should be read in conjunction with the description of our critical accounting policies set forth in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated Financial Statements and Notes included herein.
 
   
For the Years Ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
 
($ in thousands, except per share data)
 
                     
Net revenues
 
$
305,074
   
$
264,058
   
$
249,651
   
$
231,523
   
$
208,646
 
Income from continuing operations including non-controlling interests, net of tax
 
$
30,424
   
$
26,003
   
$
26,640
   
$
26,679
   
$
24,083
 
Net income including non-controlling interests
 
$
30,424
   
$
20,996
   
$
26,217
   
$
29,783
   
$
24,700
 
Net income attributable to common shareholders
 
$
20,853
   
$
17,492
   
$
18,212
   
$
18,812
   
$
15,305
 
                                         
Basic earnings per share attributable to common shareholders:
 
$
1.71
   
$
1.45
   
$
1.54
   
$
1.60
   
$
1.32
 
Diluted earnings per share attributable to common shareholders:
 
$
1.71
   
$
1.45
   
$
1.53
   
$
1.57
   
$
1.30
 
                                         
Total dividends declared and paid per common share
 
$
0.48
   
$
0.40
   
$
0.76
   
$
0.32
   
$
-
 
Regular dividends $ 0.48 $ 0.40 $ 0.36 $ 0.32 $ -
Special dividend $ - $ - $ 0.40 $ - $ -
 
   
On December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
($ in thousands)
 
                     
Total assets
 
$
244,551
   
$
224,135
   
$
171,714
   
$
163,252
   
$
140,861
 
Long-term debt, less current portion
 
$
34,734
   
$
40,650
   
$
17,575
   
$
23,784
   
$
5,750
 
Working capital
 
$
29,347
   
$
26,488
   
$
29,015
   
$
29,343
   
$
25,053
 
Current ratio
   
2.15
     
2.14
     
2.78
     
2.80
     
2.76
 
Total long-term debt to total capitalization
   
0.21
     
0.27
     
0.13
     
0.20
     
0.05
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
EXECUTIVE SUMMARY
 
Our Business. We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and rehabilitation of injured workers.
 
During 2014, 2013 and 2012, we completed the following multi-clinic acquisitions:

Acquisition
Date
 
% Interest
Acquired
 
Number of
Clinics
 
           
2014
       
April 2014 Acquisition
April 30
   
70
%
   
13
 
August 2014 Acquisition
August 1
   
100
%
   
3
 
                   
2013
               
February 2013 Acquisition
February 28
   
72
%
   
9
 
April 2013 Acquisition
April 30
   
50
%
   
5
 
May 2013 Acquistion
May 24
   
80
%
   
5
 
December 9, 2013 Acquisition
December 9
   
60
%
   
12
 
December 13, 2013 Acquisition
December 13
   
90
%
   
11
 
                   
2012
               
May 2012 Acquisition
May 22
   
70
%
   
7
 
 
In addition to the two multi-clinic acquisitions detailed above, in 2014, the Company acquired four individual clinics in separate transactions.  In addition to the five multi-clinic acquisitions detailed above, in 2013, we acquired three individual clinics in separate transactions.  In addition to the May 2012 Acquisition, in 2012, we acquired seven individual clinics in separate transactions.
 
The results of operations of the acquired clinics have been included in our consolidated financial statements since the date of their acquisition.
 
On September 30, 2013, we sold the remainder of our physician services business. Previously, the Company closed its two physician services facilities – one in August 2013 and the other in December 2012. As previously disclosed in the Company’s public filings, the physician services business incurred negative gross margins in 2012 and through the first nine months of 2013. Revenues from physician services were generated by patient visits, franchise arrangements and fees from third parties. The results of operations and the loss on the sale of the physician services business have been reclassified to discontinued operations for all periods presented.
 
The following table details the losses from discontinued operations reported for the physician services business (in thousands):

Schedule of Details of Losses Reported for Physician Services

   
Year Ended
December 31, 2013
   
Year Ended
December 31, 2012
 
Net revenues
 
$
864
   
$
2,435
 
Operating costs
   
1,537
     
2,761
 
Gross margin
   
(673
)
   
(326
)
Direct general and administrative expenses less proceeds
   
1,176
     
278
 
Write off of goodwill and other intangible assets
   
6,338
     
-
 
Loss from discontinued operations, before tax
   
(8,187
)
   
(604
)
Tax benefit (provision)
   
3,180
     
181
 
(Loss) income from discontinued operations
 
$
(5,007
)
 
$
(423
)
 
At December 31, 2014, we operated 489 clinics in 42 states. The average age of our clinics at December 31, 2014 was 9.1 years.
 
In addition to our owned clinics, we also manage physical therapy facilities for third parties, primarily physicians, with 16 third-party facilities under management as of December 31, 2014.
 
CRITICAL ACCOUNTING POLICIES
 
Critical accounting policies are those that have a significant impact on our results of operations and financial position involving significant estimates requiring our judgment. Our critical accounting policies are:
 
Revenue Recognition. Revenues are recognized in the period in which services are rendered. Net patient revenues (patient revenues less estimated contractual adjustments) are reported at the estimated net realizable amounts from insurance companies, third-party payors, patients and others for services rendered. The Company has agreements with third-party payors that provide for payments to the Company at contracted amounts different from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience.
 
Revenues from physician services, sold primarily through franchisee arrangements, are considered multiple deliverables—training and ongoing services. Each component can be purchased separately. Revenue is recognized over the period the respective services are provided.

Contractual Allowances. Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in our clinics. We estimate contractual allowances based on our interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on our historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow us to provide the necessary detail and accuracy with our collectibility estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from our estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. Our billing system may not capture the exact change in our contractual allowance reserve estimate from period to period. Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, the historical difference between net revenues and corresponding cash collections has generally reflected a difference within approximately 1% of net revenues. Additionally, analysis of subsequent period’s contractual write-offs on a payor basis reflects a difference within approximately 1% between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, we believe that a reasonable likely change in the contractual allowance reserve estimate would not be more than 1% at December 31, 2014. For purposes of demonstrating the sensitivity of this estimate on the Company’s financial condition, a one percent increase or decrease in our aggregate contractual allowance reserve percentage would decrease or increase, respectively, net patient revenue by approximately $798,000 for the year ended December 31, 2014. Management believes the changes in the estimate of the contractual allowance reserve for the periods ended December 31, 2014, 2013 and 2012 have not been material to the statement of operations.
 
The following table sets forth information regarding our patient accounts receivable as of the dates indicated (in thousands):

   
December 31,
 
   
2014
   
2013
 
Gross patient accounts receivable
 
$
79,721
   
$
73,636
 
Less contractual allowances
   
45,161
     
41,386
 
Subtotal - accounts receivable
   
34,560
     
32,250
 
Less allowance for doubtful accounts
   
1,669
     
1,430
 
Net patient accounts receivable
 
$
32,891
   
$
30,820
 
 
The following table presents our patient accounts receivable aging by payor class as of the dates indicated (in thousands):
 
   
December 31, 2014
   
December 31, 2013
 
   
Current to
           
Current to
         
Payor
 
120 Days
   
120+ Days
   
Total
   
120 Days
   
120+ Days
   
Total
 
Managed Care/ Commercial Plans
 
$
11,906
   
$
1,418
   
$
13,324
   
$
10,762
   
$
1,336
   
$
12,098
 
Medicare/Medicaid
   
7,121
     
1,391
     
8,512
     
6,943
     
996
     
7,939
 
Workers Compensation*
   
7,160
     
1,136
     
8,296
     
6,883
     
1,009
     
7,892
 
Self-pay
   
1,250
     
1,461
     
2,711
     
1,236
     
1,347
     
2,583
 
Other**
   
1,171
     
546
     
1,717
     
1,137
     
601
     
1,738
 
Totals
 
$
28,608
   
$
5,952
   
$
34,560
   
$
26,961
   
$
5,289
   
$
32,250
 


* Workers compensation is paid by state administrators or their designated agents.
** Other includes primarily litigation claims and, to a lesser extent, vehicular insurance claims.

Reimbursement for Medicare beneficiaries is based upon a fee schedule published by HHS. For a more complete description of our third party revenue sources, see “Business—Sources of Revenue” in Item 1.
 
Provision  for Doubtful Accounts. We determine our provision for doubtful accounts based on the specific agings and payor classifications at each clinic. We review the accounts receivable aging and rely on prior experience with particular payors to determine an appropriate reserve for doubtful accounts. Historically, clinics that have a large number of aged accounts generally have less favorable collection experience, and thus, require a higher allowance. Accounts that are ultimately determined to be uncollectible are written off against our bad debt allowance. The amount of our aggregate allowance for doubtful accounts is regularly reviewed for adequacy in light of current and historical experience.
 
Accounting for Income Taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
 
We do not believe that we have any significant uncertain tax positions at December 31, 2014, nor is this expected to change within the next twelve months due to the settlement and expiration of statutes of limitation.
 
We did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the twelve months ended December 31, 2014 and 2013.
 
Carrying Value of Long-Lived Assets. Our property and equipment, intangible assets and goodwill (collectively, our “long-lived assets”) comprise a significant portion of our total assets. The accounting standards require that we periodically, and upon the occurrence of certain events, assess the recoverability of our long-lived assets. If the carrying value of our property and equipment exceeds their undiscounted cash flows, we are required to write the carrying value down to estimated fair value.
 
Goodwill. The fair value of goodwill and other intangible assets with indefinite lives are tested for impairment annually and upon the occurrence of certain events, and are written down to fair value if considered impaired. We evaluate goodwill for impairment on at least an annual basis (in the third quarter) by comparing the fair value of its reporting units to the carrying value of each reporting unit including related goodwill. We operate a one segment business which is made up of various clinics within partnerships. The partnerships are components of regions and are aggregated to that operating segment level for the purpose of determining reporting units when performing the annual goodwill impairment test. In 2014 and 2013, we had six regions.
 
An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other intangible assets, exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using two factors: (i) earnings prior to taxes, depreciation and amortization for the reporting unit multiplied by a price/earnings ratio used in the industry and (ii) a discounted cash flow analysis. A weight is assigned to each factor and the sum of each weight times the factor is considered the estimated fair value. For 2014, the factors (i.e., price/earnings ratio, discount rate and residual capitalization rate) were updated to reflect current market conditions. The evaluation of goodwill in 2014, 2013 and 2012 did not result in any goodwill amounts that were deemed impaired.
 
SELECTED OPERATING AND FINANCIAL DATA
 
The following table and discussion relates to continuing operations unless otherwise noted. The defined terms with their respective description used in the following discussion are listed below:

2014
Year ended December 31, 2014
2013
Year ended December 31, 2013
2012
Year ended December 31, 2012
New Clinics
Clinics opened or acquired during the year ended December 31, 2014
Mature Clinics
Clinics opened or acquired prior to January 1, 2014
2013 New Clinics
Clinics opened or acquired during the year ended December 31, 2013
2013 Mature Clinics
Clinics opened or acquired prior to January 1, 2013
2012 New Clinics
Clinics opened or acquired during the year ended December 31, 2012
2012 Mature Clinics
Clinics opened or acquired prior to January 1, 2012

The following table presents selected operating and financial data, used by management as key indicators of our operating performance:
 
   
For the Years Ended December 31,
 
   
2014
   
2013
   
2012
 
Number of clinics, at the end of period
   
489
     
472
     
431
 
Working Days
   
255
     
255
     
255
 
Average visits per day per clinic
   
22.9
     
21.5
     
21.7
 
Total patient visits
   
2,818,815
     
2,440,590
     
2,313,814
 
Net patient revenue per visit
 
$
106.08
   
$
105.83
   
$
105.50
 

RESULTS OF OPERATIONS

FISCAL YEAR 2014 COMPARED TO FISCAL 2013
 
Net revenues rose 15.5 % to $305.1 million for 2014 from $264.1 million for 2013 primarily due to increases in net patient revenues which are discussed in detail below.
 
Net income from continuing operations prior to the revaluation of non-controlling interests, net of tax for 2014 increased 19.2% to $20.8 million, or $1.71 per diluted share, from $17.5 million, or $1.45 per diluted share.
 
Net Patient Revenues
 
Net patient revenues increased to $299.0 million for 2014 from $258.3 million for 2013, an increase of $40.7 million, or 15.8%.  The increase in net patient revenues of $40.7 million consisted of an increase of $11.4 million from New Clinics and $29.3 million from Mature Clinics of which $17.9 million related to the two clinic groups acquired in December 2013.  During 2014, we acquired two multi-clinic groups for a total of 16 clinics. The net patient revenues from these multi-clinic groups are included in our results since the respective date of their acquisition.  See above table detailing our multi-clinic acquisitions. The average net patient revenue per visit increased to $106.08 in 2014 from $105.83 in 2013.
 
Total patient visits increased to 2,819,000 for 2014 from 2,441,000 for 2013. The growth in patient visits was attributable to 108,000 visits in New Clinics primarily due to the acquisitions in 2014 and an increase of 270,000 visits for Mature Clinics primarily due to the two clinic groups acquired in December 2013.
 
Net patient revenues are based on established billing rates less allowances and discounts for patients covered by contractual programs and workers’ compensation. Net patient revenues reflect contractual and other adjustments, which we evaluate monthly, relating to patient discounts from certain payors. Payments received under these programs are based on predetermined rates and are generally less than the established billing rates of the clinics.
 
Other Revenues
 
Other revenues, consisting primarily of management fees, increased by $290,000 from $5.8 million to $6.1 million.  On December 31, 2014, we managed 16 third-party physical therapy facilities versus 18 on December 31, 2013, however our average number of management contracts was higher in 2014 versus 2013.
 
Clinic Operating Costs
 
Clinic operating costs were $228.9 million, or 75.0% of net revenues, for 2014 and $199.4 million, or 75.5% of net revenues, for 2013. The increase was attributable to $10.2 million in operating costs of New Clinics, an increase in operating costs of $18.5 million for 2013 New Clinics and an increase of $0.8 million 2013 Mature Clinics. Each component of clinic operating costs is discussed below:
 
Clinic Operating Costs—Salaries and Related Costs
 
Salaries and related costs increased to $163.4 million for 2014 from $141.8 million for 2013, an increase of $21.6 million, or 15.2%. Approximately $7.3 million of the increase was attributable to New Clinics. The remaining $14.3 million of the increase was due to $12.5 million in higher costs at various 2013 New Clinics due to a full year of activity for clinics developed or acquired in 2013 (see table detailing acquisition dates above) and higher costs of $1.8 million in costs at 2013 Mature Clinics. Salaries and related costs as a percentage of net revenues was 53.6% for 2014 and 53.7% for 2013.
 
Clinic Operating Costs—Rent, Clinic Supplies and Other
 
Rent, clinic supplies and other costs increased to $61.2 million for 2014 from $52.9 million for 2013, an increase of $8.3 million, or 15.7%. For 2014, New Clinics accounted for approximately $2.8 million of the increase and 2013 New Clinics accounted for approximately $6.0 million of the increase due to a full year of activity. Rent, clinic supplies and other costs for 2012 Mature Clinics decreased $0.5 million in 2014 as compared to 2013.   For 2013, included in the rent, clinic supplies and other costs for 2012 Mature Clinics is a pre-tax charge of $850,000 related to an estimated refund due to a payor for overpayments to a partnership clinic group over several years.  Rent, clinic supplies and other costs as a percent of net revenues was 20.1% for 2014 and 20.0% for 2013.
 
Clinic Operating Costs—Provision for Doubtful Accounts
 
The provision for doubtful accounts for net patient receivables of $4.1 million as a percentage of net patient revenues was 1.3% for 2014.  The provision for doubtful accounts for net patient receivables of $4.4 million as a percentage of net patient revenues was 1.7% for 2013.  During 2013, we recorded a reserve for a receivable from a management contract of $0.1 million.

Our provision for doubtful accounts as a percentage of total patient accounts receivable was 4.8% at December 31, 2014 and 4.4% at December 31, 2013. The provision for doubtful accounts at the end of each period is based on a detailed, clinic-by-clinic review of overdue accounts and is regularly reviewed in the aggregate in light of historical experience.
 
The accounts receivable days outstanding were 39 days for both December 31, 2014 and December 31, 2013. Net patient receivables in the amount of $3.9 million and $4.4 million were written-off in 2014 and 2013, respectively.
 
Closure Costs
 
For 2014, closure costs amounted to $169,000 which included a write-off of goodwill of $135,000. In 2013, closure costs amounted to $246,000.
 
Gross Margin
 
In 2014, the gross margin increased by $11.5 million, or 17.7%, as compared to 2013. The gross margin percentage for 2014 was 25.0% as compared to 24.5% for 2013.
 
Corporate Office Costs
 
Corporate office costs, consisting primarily of salaries, benefits and equity based compensation of corporate office personnel and directors, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruiting fees, were $30.4 million for 2014 and $25.9 million for 2013. Corporate office costs as a percentage of net revenues were 10.0% for 2014 and 9.8% in 2013. The increase is primarily due to increases in salaries, benefits and equity based compensation.
 
Interest Expense
 
Interest expense increased to $1.1 million for 2014 from $538,000 for 2013 primarily due to higher average borrowings throughout the year as result of acquisitions. At December 31, 2014, $34.5 million was outstanding under our Credit Agreement. See “Liquidity and Capital Resources” below for a discussion of the terms of our new revolving credit facility.
 
Provision for Income Taxes
 
The provision for income taxes was $14.3 million for 2014 and $12.2 million for 2013. We accrued state and federal income taxes at an effective tax rate (provision for taxes divided by the difference between income from operations and net income attributable to non-controlling interest) of 40.6% for 2014 and 41.1% for 2013. The provision for income taxes for 2014 includes an additional provision of $223,000 related to the true-up of our 2013 tax provision, and for 2013, $393,000, based on a detailed reconciliation of our federal and state taxes payable and receivable accounts along with our federal and state deferred tax asset and liability accounts.
 
Net Income Attributable to Non-controlling Interests
 
Net income attributable to non-controlling interests was $9.6 million in 2014 and $8.5 million in 2013. As a percentage of operating income before corporate office costs, net income attributable to non-controlling interests was 12.6% in 2014 compared to 13.2% in 2013. The reduction is attributable to the Company’s increased ownership interest in certain physical therapy partnerships.

FISCAL YEAR 2013 COMPARED TO FISCAL 2012
 
Net revenues rose 5.8 % to $264.1 million for 2013 from $249.7 million for 2012 primarily due to increases in net patient revenues which are discussed in detail below.
 
Net income from continuing operations prior to the revaluation of non-controlling interests, net of tax eported net income attributable to common shareholders for 2013 decreased 4.0% to $17.5 million from $18.2 million in 2013. Diluted earnings per share were $1.45 for 2013 and $1.53 for 2012.
 
Net Patient Revenues
 
Net patient revenues increased to $258.3 million for 2013 from $244.1 million for 2012, an increase of $14.2 million, or 5.8%.  The increase in net patient revenues of $14.2 million consisted of an increase of $12.4 million from 2013 New Clinics and $1.8 million from 2012 Mature Clinics. During 2013, we acquired five multi-clinic groups for a total of 42 clinics.  The average net patient revenue per visit increased to $105.83 in 2013 from $105.50 in 2012.  The net patient revenues from these multi-clinic groups are included in our results since the respective date of their acquisition.  See above table detailing our mutli-clinic group acquisitions.
 
Total patient visits increased to 2,441,000 for 2013 from 2,314,000 for 2012. The growth in patient visits was attributable to 110,000 visits in 2013 New Clinics primarily due to the acquisitions in 2013 and an increase of 17,000 visits for 2012 Mature Clinics.
 
Net patient revenues are based on established billing rates less allowances and discounts for patients covered by contractual programs and workers’ compensation. Net patient revenues reflect contractual and other adjustments, which we evaluate monthly, relating to patient discounts from certain payors. Payments received under these programs are based on predetermined rates and are generally less than the established billing rates of the clinics.
 
Other Revenues
 
Other revenues, consisting primarily of management fees, increased by $224,000 from $5.6 million to $5.8 million. This increase was primarily due to an increase in the number of management contracts.  On December 31, 2013, we managed 18 third-party physical therapy facilities versus 15 on December 31, 2012.
 
Clinic Operating Costs
 
Clinic operating costs were $199.4 million, or 75.5% of net revenues, for 2013 and $186.7 million, or 74.8% of net revenues, for 2012. The increase was primarily attributable to $10.2 million in operating costs of 2013 New Clinics and an increase in operating costs of $6.3 million for 2012 Mature Clinics offset by a decrease in operating costs of $3.8 million for 2012 Mature Clinics. Included in the 2013 results is a pre-tax charge of $0.9 million related to an estimated refund due to a payor for overpayments to a partnership clinic group over several years.  Without this charge, operating costs for 2012 Mature Clinics would have been reduced by $4.7 million. Each component of clinic operating costs is discussed below:
 
Clinic Operating Costs—Salaries and Related Costs
 
Salaries and related costs increased to $141.8 million for 2013 from $131.6 million for 2012, an increase of $10.2 million, or 7.8%. Approximately $7.5 million of the increase was attributable to 2013 New Clinics. The remaining $2.7 million of the increase was due to $4.4 million in higher costs at various 2012 Mature Clinics offset by a decrease of $1.7 million in costs at 2012 Mature Clinics. Salaries and related costs as a percentage of net revenues was 53.7% for 2013 and 52.7% for 2012.
 
Clinic Operating Costs—Rent, Clinic Supplies and Other
 
Rent, clinic supplies and other costs increased to $52.9 million for 2013 from $50.1 million for 2012, an increase of $2.8 million, or 5.6%. The 2013 New Clinics accounted for approximately $2.8 million of the increase and 2012 Mature Clinics accounted for approximately $1.6 million of the increase due to a full year of activity for clinics developed or acquired in 2012. Rent, clinic supplies and other costs for 2012 Mature Clinics decreased $1.6 million in 2013 as compared to 2013 due to cost containment efforts.   Included in the rent, clinic supplies and other costs for 2012 Mature Clinics is a pre-tax charge of $850,000 related to an estimated refund due to a payor for overpayments to a partnership clinic group over several years.  Without this charge, rent, clinic supplies and other costs for 2012 Mature Clinics would have decreased by $2.5 million.  Rent, clinic supplies and other costs as a percent of net revenues was 20.0% for 2013 and 20.1% for 2012.
 
Clinic Operating Costs—Provision for Doubtful Accounts
 
The provision for doubtful accounts for net patient receivables of $4.4 million as a percentage of net patient revenues was 1.7% for 2013.  The provision for doubtful accounts for net patient receivables of $4.7 million as a percentage of net patient revenues was 1.9% for 2012.  During 2012, we recorded a reserve for a receivable from a management contract of $0.1 million.

Our provision for doubtful accounts as a percentage of total patient accounts receivable was 4.4% at December 31, 2013 and 5.8% at December 31, 2012. Without the effects of the receivables related to the clinics acquired in December 2013, which are initially recorded at net realizable value, our allowance for bad debts as a percentage of patient accounts receivable was 4.79%.  The provision for doubtful accounts at the end of each period is based on a detailed, clinic-by-clinic review of overdue accounts and is regularly reviewed in the aggregate in light of historical experience.
 
The accounts receivable days outstanding were 39 days at December 31, 2013 and 42 days at December 31, 2012. Net patient receivables in the amount of $4.4 million and $4.9 million were written-off in 2013 and 2012, respectively.
 
Closure Costs
 
For 2013, closure costs amounted to $246,000. In 2012, closure costs amounted to $211,000.
 
Gross Margin
 
In 2013, the gross margin increased by $1.8 million, or 2.8%, as compared to 2012. The gross margin percentage for 2013 was 24.5% as compared to 25.2% for 2012.
 
Corporate Office Costs
 
Corporate office costs, consisting primarily of salaries, benefits and equity based compensation of corporate office personnel and directors, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruiting fees, were $25.9 million for 2013 and $24.5 million for 2012. Corporate office costs as a percentage of net revenues were 9.8% for both 2013 and 2012.
 
Interest Expense
 
Interest expense decreased to $538,000 for 2013 from $557,000 for 2012 primarily due to lower average borrowings throughout the year. At December 31, 2013, $40.0 million was outstanding under our Credit Agreement; however, $36.0 million was drawn on December 13, 2013 resulting in a minimal effect on interest expense and average borrowings for 2013. See “Liquidity and Capital Resources” below for a discussion of the terms of our Credit Agreement.
 
Provision for Income Taxes
 
The provision for income taxes was $12.2 million for 2013 and $11.2 million for 2013. For 2013, we accrued state and federal income taxes at an effective tax rate (provision for taxes divided by the difference between income from operations and net income attributable to non-controlling interest) of 41.1%. For 2013, the provision for income taxes for the 2013 period includes an adjustment of $393,000 related to the true-up of our 2012 tax provision based on a detailed reconciliation of our federal and state taxes payable and receivable accounts along with our federal and state deferred tax asset and liability accounts.  The provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interests is 40% for 2013. In 2012, the income tax provision was reduced by $350,000 related to a taxable deduction charged to additional-paid-in-capital for the reduction of a subsidiary intercompany loan and included a charge of $162,000 for a true-up of our 2011 tax provision.
 
Net Income Attributable to Non-controlling Interests
 
Net income attributable to non-controlling interests was $8.5 million in 2013 and $8.4 million in 2012. As a percentage of operating income before corporate office costs, net income attributable to non-controlling interests was 13.2% in 2013 compared to 13.4% in 2012. The reduction is attributable to the Company’s increased ownership interest in certain physical therapy partnerships.

LIQUIDITY AND CAPITAL RESOURCES
 
We believe that our business is generating sufficient cash flow from operating activities to allow us to meet our short-term and long-term cash requirements, other than those with respect to future significant acquisitions. At December 31, 2014, we had $14.3 million in cash and cash equivalents compared to $12.9 million at December 31, 2013. Although the start-up costs associated with opening new clinics and our planned capital expenditures are significant, we believe that our cash and cash equivalents and availability under our revolving credit facility are sufficient to fund the working capital needs of our operating subsidiaries, future clinic development and acquisitions and investments through at least December 2015. The amount outstanding under our Credit Agreement was $34.5 million at December 31, 2014 compared to $40.0 million at December 31, 2013.  At December 31, 2014, we had $90.5 million available under our Credit Agreement. Significant acquisitions would likely require financing under our Credit Agreement.
 
The increase in cash and cash equivalents of $1.4 million from December 31, 2013 to December 31, 2014 was due primarily to $45.2 million provided by operations and $0.9 million from the tax benefit of equity compensation transactions.  The major uses of cash for investing and financing activities included: purchase of businesses ($12.3 million), distributions to non-controlling interests ($9.9 million), payments of cash dividends to our shareholders ($5.9 million), net reduction of  balance under our Credit Agreement ($5.5 million), acquisitions of non-controlling interests ($5.5 million), purchases of fixed assets ($5.2 million), and payments on notes payable ($0.8 million).
 
Effective December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility with a maturity date of November 30, 2018 (“Credit Agreement”). The Credit Agreement is unsecured and has loan covenants, including requirements that the Company comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceeds from the Credit Agreement may be used for working capital, acquisitions, purchases of the Company’s common stock, dividend payments to the Company’s common stockholders, capital expenditures and other corporate purposes. The pricing grid which is based on the Company’s consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.5% to 2.5% or the applicable spread over the Base Rate ranging from 0.1% to 1%. Fees under the Credit Agreement include an unused commitment fee ranging from 0.1% to 0.25% depending on the Company’s consolidated leverage ratio and the amount of funds outstanding under the Credit Agreement.  On December 31, 2014, $34.5 million was outstanding under our Credit Agreement resulting in $90.5 million of availability, and we were in compliance with all of the covenants thereunder.

The purchase price for the 70% interest in the April 2014 Acquisition was $10.6 million in cash and a $400,000 seller note, that is payable in two principal installments totaling $200,000 each, plus accrued interest, in April 2015 and 2016. The purchase price for the August 2014 Acquisition was$1.0 million in cash. In addition, during 2014, the Company acquired three individual clinic practices for an aggregate of $595,000.  The purchase price for the 72% interest in the February 2013 Acquisition was $4.3 million in cash and $400,000 in a seller note, that is payable in two principal installments totaling $200,000 each, plus accrued interest, in February 2014 and 2015. The purchase price for the 50% interest in the April 2013 Acquisition was $2.4 million in cash and $200,000 in a seller note, that is payable in two principal installments totaling $100,000 each, plus accrued interest, in April of 2014 and 2015.  The purchase price for the 80% interest in the May 2013 Acquisition was $3.6 million in cash and $200,000 in a seller note, that is payable in two principal installments totaling $100,000 each, plus accrued interest, in May of 2014 and 2015.  The purchase price for the 60% interest in the December 9, 2013 Acquisition was $1.7 million in cash.  The purchase price for the 90% interest in the December 13, 2013 Acquisition was $35.5 million in cash and $500,000 in a seller note, that is payable in two principal installments totaling $250,000 each, plus accrued interest, in December 2014 and 2015. The aggregate purchase price for the three individual clinics acquired in 2013 was $238,000. In four separate transactions during 2014, we purchased interests in two partnerships which were previously classified as redeemable, non-controlling interest. The interests in the partnerships purchased ranged from 10.0% to 35.0%, The aggregate of the purchase prices paid was $4.9 million, which included $3.0 million of net book value. The remaining purchase price of $1.9 million, less future tax benefits of $0.8 million, was recognized as an adjustment to additional paid-in capital. Also, in four separate transactions during 2014, we purchased partnership interests in four partnerships. The interests in the partnerships purchased and sold ranged from less than 1% to 35%. The aggregate of the purchase prices paid was $0.6 million. The purchase prices paid included a net of $0.1 million of undistributed earnings. The remaining $0.5 million, less future tax benefits of $0.2 million, was recognized as an adjustment to additional paid-in capital. Through 15 separate transactions during 2013, the Company purchased partnership interests in 10 partnerships and sold interests in five partnerships. The interests in the partnerships purchased and sold ranged from less than 1% to 35%. The aggregate of the purchase prices paid was $1.9 million and the proceeds for the sales was $0.8 million, which included cash of $0.2 million and notes receivable of $0.6 million.
 
The purchase price for the 70% interest in the May 2012 Acquisition was $6,090,000 in cash and $250,000 in seller notes, that are payable in two principal installments totaling $125,000 each, plus any accrued interest, in May 2013 and 2014. The seller notes accrued interest at 3.25% per annum. In addition to the May 2012 Acquisition, in 2012, the Company, through its subsidiaries, purchased seven outpatient therapy practices in seven transactions for aggregate cash consideration of $1,938,000 and, in one transaction a $100,000 note payable. In addition, in 15 separate transactions during 2012, we purchased partnership interests in 15 partnerships in which we had an existing controlling interest. The interests in the partnerships purchased ranged from 10% to 35%. The aggregate of the purchase prices paid was $2.2 million, which included $0.2 million of undistributed earnings. The remaining purchase price of $2.0 million, less future tax benefits of $0.8 million, was recognized as an adjustment to additional paid-in capital. During 2012, we sold interests in the range of 0.64% to 1% in three partnerships for an aggregate price of $239,000. This amount less related undistributed earnings of $5,000 was credited to additional paid-in capital.
 
Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions in selected markets. We have from time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and financing. Any large acquisition would likely require financing.
 
We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting Medicare Rehab Agency status approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the account receivable has been outstanding for 120 days or longer.
 
We have future obligations for debt repayments, employment agreements and future minimum rentals under operating leases. The obligations as of December 31, 2014 are summarized as follows (in thousands):

Contractual Obligation
 
Total
   
2015
   
2016
   
2017
   
2018
   
2019
   
Thereafter
 
Credit Agreement and Notes Payable
 
$
35,617
   
$
883
   
$
234
   
$
-
   
$
34,500
   
$
-
   
$
-
 
Interest Payable
 
$
43
     
36
     
7
     
-
     
-
     
-
     
-
 
Employee Agreements
 
$
33,219
     
24,293
     
8,542
     
295
     
83
     
6
     
-
 
Operating Leases
 
$
73,425
     
24,418
     
18,545
     
12,661
     
7,845
     
4,225
     
5,731
 
   
$
142,304
   
$
49,630
   
$
27,328
   
$
12,956
   
$
42,828
   
$
4,231
   
$
5,731
 

We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payable relate only to certain of the acquisitions of businesses and non-controlling interests that occurred in 2014 and 2013. For those acquisitions, we entered into several notes payables aggregating $1.8 million. The notes are payable in equal annual installments of principal over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 4.0% per annum, subject to adjustment. In addition, we assumed leases with remaining terms of 1 month to 6 years for the operating facilities. At December 31, 2014, the balance on these notes payable was $1.1 million.

In conjunction with the above mentioned acquisitions, in the event that a limited minority partner’s employment ceases at any time after three or four years from the acquisition date, as applicable, we have agreed to repurchase that individual’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.
 
As of December 31, 2014, we have accrued $1.8 million related to credit balances and overpayments due to patients and payors.  This amount is expected to be paid in 2015.
 
From September 2001 through December 31, 2008, the Board authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). In connection with the March 2009 Authorization, we amended our prior credit agreement to permit share repurchases of up to $15,000,000. We are required to retire shares purchased under the March 2009 Authorization.  Under the March 2009 Authorization, we have purchased a total of 859,499 shares.  There is no expiration date for the share repurchase program.  The Credit Agreement permits the Company to purchase, commencing on October 24, 2012 and at all times thereafter, up to $15,000,000 of its common stock subject to compliance with covenants.  There are currently an additional estimated 340,501 shares that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during 2013 or 2014.
 
Off Balance Sheet Arrangements
 
With the exception of operating leases for our executive offices and clinic facilities discussed in Note 14 to our consolidated financial statements included in Item 8, we have no off-balance sheet debt or other off-balance sheet financing arrangements.
 
FACTORS AFFECTING FUTURE RESULTS
 
The risks related to our business and operations include:
 
 
changes as the result of government enacted national healthcare reform;
 
 
changes in Medicare guidelines and reimbursement or failure of our clinics to maintain their Medicare certification status;
 
 
business and regulatory conditions including federal and state regulations;
 
 
governmental and other third party payor investigations and audits;
 
 
changes in reimbursement rates or payment methods from third party payors including government agencies and deductibles and co-pays owed by patients;
 
 
revenue and earnings expectations;
 
 
general economic conditions;
 
 
availability and cost of qualified physical therapists;
 
 
personnel productivity;
 
 
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
 
 
acquisitions, purchase of non-controlling interests (minority interests) and the successful integration of the operations of the acquired businesses;
 
 
maintaining adequate internal controls;
 
 
availability, terms, and use of capital; and
 
 
weather and other seasonal factors.
 
See Risk Factors in Item 1A of this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We do not maintain any derivative instruments such as interest rate swap arrangements, hedging contracts, futures contracts or the like. Our only indebtedness as of December 31, 2014 was seller notes of $1.1 million and an outstanding balance on our Credit Agreement of $34.5 million. The outstanding balance under our Credit Agreement is subject to fluctuating interest rates. A 1% change in the interest rate would yield an additional $345,000 of interest expense. See Note 8 to our consolidated financial statements included in Item 8.
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATION

 33
 35
 36
 37
 38
 39
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
U.S. Physical Therapy, Inc.
 
We have audited the accompanying consolidated balance sheets of U.S Physical Therapy, Inc. (a Nevada Corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of net income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Physical Therapy, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their consolidated operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2015 expressed an unqualified opinion.
 
/s/ GRANT THORNTON LLP
 
 
 
Houston, Texas
 
March 12, 2015
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
U.S. Physical Therapy, Inc.
 
We have audited the internal control over financial reporting of U.S. Physical Therapy, Inc. (a Nevada Corporation) and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report appearing under Item 9A on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014, and our report dated March 12, 2015 expressed an unqualified opinion on those financial statements.
 
/s/ GRANT THORNTON LLP
 
Houston, Texas
 
March 12, 2015
 
 
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
December 31, 2014
   
December 31, 2013
 
ASSETS
 
(In thousands, except per share data)
 
Current assets:
       
Cash and cash equivalents
 
$
14,271
   
$
12,898
 
Patient accounts receivable, less allowance for doubtful accounts of $1,669 and $1,430, respectively
   
32,891
     
30,820
 
Accounts receivable - other, less allowance for doubtful accounts of $198 and $198, respectively
   
1,503
     
1,844
 
Other current assets
   
6,186
     
4,098
 
Total current assets
   
54,851
     
49,660
 
Fixed assets:
               
Furniture and equipment
   
42,003
     
38,965
 
Leasehold improvements
   
22,806
     
21,891
 
Fixed assets, gross
   
64,809
     
60,856
 
Less accumulated depreciation and amortization
   
49,045
     
45,896
 
Fixed assets, net
   
15,764
     
14,960
 
Goodwill
   
147,914
     
143,955
 
Other intangible assets, net
   
24,907
     
14,479
 
Other assets
   
1,115
     
1,081
 
Total assets
 
$
244,551
   
$
224,135
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable - trade
 
$
1,782
   
$
1,722
 
Accrued expenses
   
22,839
     
20,625
 
Current portion of notes payable
   
883
     
825
 
Total current liabilities
   
25,504
     
23,172
 
Notes payable
   
234
     
650
 
Revolving line of credit
   
34,500
     
40,000
 
Deferred rent
   
991
     
996
 
Other long-term liabilities
   
8,732
     
4,196
 
Total liabilities
   
69,961
     
69,014
 
Commitments and contingencies
               
Redeemable non-controlling interests
   
7,376
     
4,104
 
Shareholders’ equity:
               
U. S. Physical Therapy, Inc. shareholders’ equity:
               
Preferred stock, $.01 par value, 500,000 shares authorized, no shares issued and outstanding
   
-
     
-
 
Common stock, $.01 par value, 20,000,000 shares authorized, 14,487,346 and 14,315,882 shares issued, respectively
   
145
     
143
 
Additional paid-in capital
   
43,577
     
40,569
 
Retained earnings
   
134,186
     
119,206
 
Treasury stock at cost, 2,214,737 shares
   
(31,628
)
   
(31,628
)
Total U. S. Physical Therapy, Inc. shareholders’ equity
   
146,280
     
128,290
 
Non-controlling interests
   
20,934
     
22,727
 
Total equity
   
167,214
     
151,017
 
Total liabilities and stockholders' equity
 
$
244,551
   
$
224,135
 

See notes to consolidated financial statements.
 
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME

   
Year Ended
December 31, 2014
   
Year Ended
December 31, 2013
   
Year Ended
December 31, 2012
 
   
(In thousands, except per share data)
 
Net patient revenues
 
$
299,009
   
$
258,283
   
$
244,100
 
Other revenues
   
6,065
     
5,775
     
5,551
 
Net revenues
   
305,074
     
264,058
     
249,651
 
Clinic operating costs:
                       
Salaries and related costs
   
163,417
     
141,840
     
131,604
 
Rent, clinic supplies, contract labor and other
   
61,209
     
52,887
     
50,102
 
Provision for doubtful accounts
   
4,112
     
4,384
     
4,824
 
Closure costs
   
169
     
246
     
211
 
Total clinic operating costs
   
228,907
     
199,357
     
186,741
 
Gross margin
   
76,167
     
64,701
     
62,910
 
Corporate office costs
   
30,399
     
25,931
     
24,504
 
Operating income from continuing operations
   
45,768
     
38,770
     
38,406
 
Interest and other income, net
   
18
     
7
     
6
 
Interest expense
   
(1,088
)
   
(538
)
   
(557
)
Income before taxes from continuing operations
   
44,698
     
38,239
     
37,855
 
Provision for income taxes
   
14,274
     
12,236
     
11,215
 
Net income from continuing operations including non-controlling interests
   
30,424
     
26,003
     
26,640
 
Discontinued operations, net of tax benefit of $-0-, $3,180 and $181.
   
-
     
(5,007
)
   
(423
)
Net income including non-controlling interests
   
30,424
     
20,996
     
26,217
 
Less: net income attributable to non-controlling interests
   
(9,571
)
   
(8,273
)
   
(8,284
)
Net income attributable to common shareholders
 
$
20,853
   
$
12,723
   
$
17,933
 
Basic earnings per share attributable to common shareholders:
                       
From continuing operations prior to revaluation of redeemable non-controlling interests, net of tax
 
$
1.71
   
$
1.45
   
$
1.54
 
Charges to additional-paid-in-capital - revaluation of non-controlling interests, net of tax
   
(0.09
)
   
-
     
-
 
From continuing operations, net of tax
   
1.62
     
1.45
     
1.54
 
From discontinued operations, net of tax
   
-
     
(0.40
)
   
(0.02
)
Basic
 
$
1.62
   
$
1.05
   
$
1.52
 
Diluted earnings per share attributable to common shareholders:
                       
From continuing operations prior to revaluation of redeemable non-controlling interests, net of tax
 
$
1.71
   
$
1.45
   
$
1.53
 
Charges to additional-paid-in-capital - revaluation of non-controlling interests, net of tax
   
(0.09
)
   
-
     
-
 
From continuing operations, net of tax
   
1.62
     
1.45
     
1.53
 
From discontinued operations, net of tax
   
-
     
(0.40
)
   
(0.02
)
Basic
 
$
1.62
   
$
1.05
   
$
1.51
 
                         
Shares used in computation:
                       
Basic
   
12,217
     
12,063
     
11,804
 
Diluted
   
12,221
     
12,082
     
11,904
 
Dividends declared per common share
 
$
0.48
   
$
0.40
   
$
0.76
 
Earnings attributable to common shareholders:
                       
From continuing operations
 
$
20,853
   
$
17,492
   
$
18,212
 
From discontinued operations
   
-
     
(4,769
)
   
(279
)
Net income attributable to common shareholders
 
$
20,853
   
$
12,723
   
$
17,933
 

See notes to consolidated financial statements.
 
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

   
U.S.Physical Therapy, Inc.
         
                                     
   
Common Stock
   
Additional
   
Retained
   
Treasury Stock
   
Total
Shareholders’
   
Non-controlling
         
   
Shares
   
Amount
   
Paid-In Capital
   
Earnings
   
Shares
   
Amount
   
Equity
   
Interests
   
Total
 
   
(In thousands)
 
Balance December 31, 2011
   
13,919
   
$
139
   
$
36,133
   
$
102,405
     
(2,215
)
 
$
(31,628
)
 
$
107,049
   
$
14,531
   
$
121,580
 
Proceeds from exercise of stock options
   
130
     
2
     
20
     
-
     
-
     
-
     
22
     
-
     
22
 
Net tax benefit from exercise of stock options
   
-
     
-
     
1,209
     
-
     
-
     
-
     
1,209
     
-
     
1,209
 
Issuance of restricted stock
   
81
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Cancellation of restricted stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Compensation expense - restricted stock
   
-
     
-
     
2,102
     
-
     
-
     
-
     
2,102
             
2,102
 
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
   
-
     
-
     
135
     
-
     
-
     
-
     
135
             
135
 
Purchase of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
2,892
     
2,892
 
Acquisition and sales of non-controlling interests, net
   
-
     
-
     
(955
)
   
-
     
-
     
-
     
(955
)
   
(244
)
   
(1,199
)
Contribution of non-controlling interest partners
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
49
     
49
 
Transfer of losses from non-controlling interests
   
-
     
-
     
(1,155
)
   
-
     
-
     
-
     
(1,155
)
   
1,155
     
-
 
Distributions to non-controlling interest partners
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(9,332
)
   
(9,332
)
Cash dividends to shareholders
   
-
     
-
     
-
     
(9,017
)
   
-
     
-
     
(9,017
)
   
-
     
(9,017
)
Net income
   
-
     
-
     
-
     
17,933
     
-
     
-
     
17,933
     
8,285
     
26,218
 
Balance December 31, 2012
   
14,130
   
$
141
   
$
37,489
   
$
111,321
     
(2,215
)
 
$
(31,628
)
 
$
117,323
   
$
17,336
   
$
134,659
 
Proceeds from exercise of stock options
   
17
     
2
     
45
     
-
     
-
     
-
     
47
     
-
     
47
 
Net tax benefit from exercise of stock options
   
-
     
-
     
695
     
-
     
-
     
-
     
695
     
-
     
695
 
Issuance of restricted stock
   
175
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Cancellation of restricted stock
   
(6
)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Compensation expense - restricted stock
   
-
     
-
     
2,743
     
-
     
-
     
-
     
2,743
     
-
     
2,743
 
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
   
-
     
-
     
248
     
-
     
-
     
-
     
248
     
-
     
248
 
Purchase of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
10,541
     
10,541
 
Acquisitions and sales of non-controlling interests, net
   
-
     
-
     
(651
)
   
-
     
-
     
-
     
(651
)
   
(155
)
   
(806
)
Reclass to redeemable non-controlling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(4,104
)
   
(4,104
)
Distributions to non-controlling interest partners
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(9,164
)
   
(9,164
)
Cash dividends to shareholders
   
-
     
-
     
-
     
(4,838
)
   
-
     
-
     
(4,838
)
   
-
     
(4,838
)
Net income
   
-
     
-
     
-
     
12,723
     
-
     
-
     
12,723
     
8,273
     
20,996
 
Balance December 31, 2013
   
14,316
   
$
143
   
$
40,569
   
$
119,206
     
(2,215
)
 
$
(31,628
)
 
$
128,290
   
$
22,727
   
$
151,017
 
Proceeds from exercise of stock options
   
21
     
1
     
43
     
-
     
-
     
-
     
44
     
-
     
44
 
Net tax benefit from exercise of stock options
   
-
     
-
     
948
     
-
     
-
     
-
     
948
     
-
     
948
 
Issuance of restricted stock
   
150
     
1
     
-
     
-
     
-
     
-
     
1
     
-
     
1
 
Cancellation of restricted stock
           
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Compensation expense - restricted stock
   
-
     
-
     
3,363
     
-
     
-
     
-
     
3,363
     
-
     
3,363
 
Purchase of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
4,725
     
4,725
 
Revaluation of redeemable non-controlling interets
   
-
             
(1,086
)
   
-
     
-
     
-
     
(1,086
)
   
-
     
(1,086
)
Reclass to redeemable non-controlling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(6,375
)
   
(6,375
)
Acquisitions and sales of non-controlling interests, net
   
-
     
-
     
(260
)
   
-
     
-
     
-
     
(260
)
   
(63
)
   
(323
)
Cash dividends to shareholders
   
-
     
-
             
(5,873
)
   
-
             
(5,873
)
   
-
     
(5,873
)
Contribution of non-controlling interest partners
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
177
     
177
 
Distributions to non-controlling interest partners
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(9,432
)
   
(9,432
)
Net income
   
-
     
-
     
-
     
20,853
     
-
     
-
     
20,853
     
9,175
     
30,028
 
Balance December 31, 2014
   
14,487
   
$
145
   
$
43,577
   
$
134,186
     
(2,215
)
 
$
(31,628
)
 
$
146,280
   
$
20,934
   
$
167,214
 

See notes to consolidated financial statements.
 
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year Ended
December 31, 2014
   
Year Ended
December 31, 2013
   
Year Ended
December 31, 2012
 
OPERATING ACTIVITIES
 
(In thousands)
 
Net income including non-controlling interests
 
$
30,424
   
$
20,996
   
$
26,217
 
Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:
                       
Depreciation and amortization
   
6,740
     
5,562
     
5,287
 
Provision for doubtful accounts
   
4,112
     
4,384
     
4,848
 
Equity-based awards compensation expense
   
3,363
     
2,743
     
2,102
 
Loss on sale of business and fixed assets
   
35
     
7,335
     
175
 
Excess tax benefit from exercise of stock options
   
(948
)
   
(695
)
   
(1,351
)
Deferred income tax
   
6,275
     
2,369
     
3,738
 
Write-off of goodwill - closed clinic
   
135
     
-
     
-
 
Changes in operating assets and liabilities:
                       
Increase in patient accounts receivable
   
(5,388
)
   
(5,389
)
   
(1,663
)
Decrease (increase) in accounts receivable - other
   
341
     
(5
)
   
(561
)
(Increase) decrease in other assets
   
(2,493
)
   
1,803
     
(585
)
Increase (decrease) in accounts payable and accrued expenses
   
1,868
     
4,833
     
(340
)
Increase in other liabilities
   
730
     
859