US Physical Therapy
Annual Report 2018

Plain-text annual report

TABLE OF CONTENTSUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K(Mark One)☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018OR oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-11151U.S. PHYSICAL THERAPY, INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)NEVADA76-0364866(STATE OR OTHER JURISDICTION OF INCORPORATIONOR ORGANIZATION)(I.R.S. EMPLOYER IDENTIFICATION NO.)1300 WEST SAM HOUSTON PARKWAY SOUTH,SUITE 300,HOUSTON, TEXAS77042(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, $.01 par valueNew York Stock ExchangeSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: NONEIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o 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  o 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 thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ☑ No  oIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No  oIndicate 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 anyamendment to this Form 10-K.  oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting companyor an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growthcompany” in Rule 12b-2 of the Exchange Act.Large accelerated filer oAccelerated filer☑Non-accelerated filer o (Do not check if a smaller reporting company)Smaller reporting company o Emerging growth company oIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No ☑The aggregate market value of the shares of the registrant’s common stock held by non-affiliates of the registrant at June 30, 2018 was $761.9million based on the closing sale price reported on the NYSE for the registrant’s common stock on June 30, 2018, the last business day of the registrant’smost recently completed second fiscal quarter. For purposes of this computation, all executive officers, directors and 5% or greater beneficial owners ofthe registrant were deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and beneficialowners are, in fact, affiliates of the registrant.As of March 15, 2019, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was: 12,761,092.DOCUMENTS INCORPORATED BY REFERENCEDOCUMENTPART OF FORM 10-KPortions of Definitive Proxy Statement for the 2018 Annual Meeting ofShareholdersPart IIITABLE OF CONTENTSTable of Contents PagePART I Item 1.Business 2 Item 1A.Risk Factors 13 Item 1B.Unresolved Staff Comments 21 Item 2.Properties 21 Item 3.Legal Proceedings 21 Item 4.Mine Safety Disclosures 21 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 22 Item 6.Selected Financial Data 23 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Item 7A.Quantitative and Qualitative Disclosures About Market Risk 42 Item 8.Financial Statements and Supplementary Data 43 Notes to Consolidated Financial Statements 50 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 76 Item 9A.Controls and Procedures 76 Item 9B.Other Information 77 PART III Item 10.Directors, Executive Officers and Corporate Governance 77 Item 11.Executive Compensation 77 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 77 Item 13.Certain Relationships and Related Transactions, and Director Independence 77 Item 14.Principal Accountant Fees and Services 77 PART IV Item 15.Exhibits and Financial Statement Schedules 77 Item 16.Form 10-K Summary 77 Signatures 83 TABLE OF CONTENTSFORWARD-LOOKING STATEMENTSWe make statements in this report that are considered to be forward-looking statements within the meaning given such termunder 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 ofour Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” andsimilar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Includedamong such statements are those relating to opening clinics, availability of personnel and the reimbursement environment. Theforward-looking statements are based on our current views and assumptions and actual results could differ materially from thoseanticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are notlimited to:•changes as the result of government enacted national healthcare reform;•changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certificationstatus;•revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;•business and regulatory conditions including federal and state regulations;•governmental and other third party payor inspections, reviews, investigations and audits;•compliance with federal and state laws and regulations relating to the privacy of individually identifiable patientinformation, and associated fines and penalties for failure to comply;•changes in reimbursement rates or payment methods from third party payors including government agencies anddeductibles and co-pays owed by patients;•revenue and earnings expectations;•legal actions, which could subject us to increased operating costs and uninsured liabilities;•general economic conditions;•availability and cost of qualified physical therapists;•personnel productivity and retaining key personnel;•competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certainclinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and otherintangible assets;•acquisitions, purchase of non-controlling interests (minority interests) and the successful integration of the operations ofthe acquired businesses;•maintaining our information technology systems with adequate safeguards to protect against cyber attacks;•maintaining adequate internal controls;•maintaining necessary insurance coverage;•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-lookingstatements. Please see the other sections of this report and our other periodic reports filed with the Securities and ExchangeCommission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates andassumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-lookingstatement, regardless of the reason the statement may no longer be accurate.1TABLE OF CONTENTSPART IITEM 1.BUSINESS.GENERALOur company, U.S. Physical Therapy, Inc. (“we”, “us”, “our” or the “Company”), through its subsidiaries, operates outpatientphysical therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-relatedinjuries, preventative care, rehabilitation of injured workers and neurological-related injuries. We primarily operate through subsidiaryclinic partnerships in which we generally own a 1% general partnership interest and a 49% to 99% limited partnership interest and themanaging therapist(s) of the clinics owns the remaining limited partnership interest in the majority of the clinics (hereinafter referredto as “Clinic Partnerships”). To a lesser extent, we operate some clinics through wholly-owned subsidiaries under profit sharingarrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”). Also, we have a majority interest in a company,which is a leading provider of industrial injury prevention. Services provided include onsite injury prevention and rehabilitation,performance optimization and ergonomic assessments. The majority of these services are contracted with and paid for directly byemployers including a number of Fortune 500 companies.Unless the context otherwise requires, references in this Annual Report on Form 10-K to “we”, “our” or “us” includes theCompany and all of its subsidiaries.Our strategy is to develop outpatient physical therapy clinics and to acquire single and multi-clinic outpatient physical therapypractices on a national basis. At December 31, 2018, we operated 591 clinics in 42 states. The average age of the 591 clinics inoperation at December 31, 2018 was 10.0 years. Our highest concentration of clinics are in the following states: Texas, Tennessee,Michigan, Virginia, Washington, Oregon, Florida, Maryland, Georgia, Pennsylvania and Arizona. In addition to our 591 clinics, atDecember 31, 2018, we also managed 28 physical therapy practices for unrelated physician groups and hospitals and operated theindustrial injury prevention business, as described above.During the last three years, we completed the following multi-clinic acquisitions:AcquisitionDate% InterestAcquiredNumber ofClinicsAugust 2018 AcquisitionAugust 31 70% 4 2017 January 2017 AcquisitionJanuary 1 70% 17 May 2017 AcquisitionMay 31 70% 4 June 2017 AcquisitionJune 30 60% 9 October 2017 AcquisitionOctober 31 70% 9 2016 February 2016 AcquisitionFebruary 29 55% 8 November 2016 AcquisitionNovember 30 60% 12 In March 2017, we purchased a 55% interest in our initial industrial injury prevention business. On April 30, 2018, we made asecond acquisition and subsequently combined the two businesses. After the combination, we own a 59.45% interest in thecombined business. Services provided include onsite injury prevention and rehabilitation, performance optimization and ergonomicassessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune500 companies. Other clients include large insurers and their contractors. We perform these services through Industrial SportsMedicine Professionals, consisting of both physical therapists and highly specialized certified athletic trainers (ATCs).In addition to the multi-clinic acquisitions above, on February 28, 2018, we, through several of our majority owned ClinicPartnerships, acquired five separate clinic practices. These practices operate as satellites of the respective existing Clinic Partnership.2TABLE OF CONTENTSAlso, during the year of 2017, we purchased the assets and business of two physical therapy clinics in separate transactions.One clinic was consolidated with an existing clinic and the other operates as a satellite clinic of one of the existing partnerships. Inaddition to the 2016 multi-clinic acquisitions, we acquired two single clinic practices in separate transactions during 2016.The results of operations of the acquired clinics have been included in our consolidated financial statements since the date oftheir respective acquisition.We continue to seek to attract for employment physical therapists who have established relationships with physicians andother referral sources by offering these therapists a competitive salary and incentives based on the profitability of the clinic that theymanage. We also look for therapists with whom to establish new, de novo clinics to be owned jointly by us and such therapists. Inthese situations, the therapist is typically offered the opportunity to co-invest in the new clinic and also receives a competitive salaryfor managing the clinic. For multi-site clinic practices in which a controlling interest is acquired by us, the prior owners typicallycontinue on as employees to manage the clinic operations, retaining a non-controlling ownership interest in the clinics and receivinga competitive salary for managing the clinic operations. In addition, we have developed satellite clinic facilities as part of existingClinic Partnerships and Wholly-Owned facilities, with the result that a substantial number of Clinic Partnerships and Wholly-Ownedfacilities operate more than one clinic location. In 2019, we intend to continue to acquire clinic practices and continue to focus ondeveloping new clinics and on opening satellite clinics where appropriate along with increasing our patient volume throughmarketing and new programs.Therapists at our clinics initially perform a comprehensive evaluation of each patient, which is then followed by a treatment planspecific to the injury as prescribed by the patient’s physician. The treatment plan may include a number of procedures, includingtherapeutic exercise, manual therapy techniques, ultrasound, electrical stimulation, hot packs, iontophoresis, education onmanagement 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.We were re-incorporated in April 1992 under the laws of the State of Nevada and have operating subsidiaries organized invarious states in the form of limited partnerships, limited liability companies and wholly-owned corporations. This description of ourbusiness should be read in conjunction with our financial statements and the related notes contained in Item 8 in this Annual Reporton 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 CLINICSMost of our clinics are operated as Clinic Partnerships in which we own the general partnership interest and a majority of thelimited partnership interests. The managing healthcare practitioner of the clinics usually owns a portion of the limited partnershipinterests. Generally, the therapist partners have no interest in the net losses of Clinic Partnerships, except to the extent of their capitalaccounts. Since we also develop satellite clinic facilities of existing clinics, most Clinic Partnerships consist of more than one cliniclocation. As of December 31, 2018, through wholly-owned subsidiaries, we owned a 1% general partnership interest in all the ClinicPartnerships. Our limited partnership interests range from 49% to 99% in the Clinic Partnerships. For the vast majority of the ClinicPartnerships, the managing healthcare practitioner is a physical therapist who owns the remaining limited partnership interest in theClinic Partnership.For our Clinic Partnership agreements related to those that we acquired a majority interest, generally, the prior managementcontinues to own a 10% to 50% interest.Typically, each therapist partner or director, including those employed by Clinic Partnerships in which we acquired a majorityinterest, enters into an employment agreement for a term of up to five years with their Clinic Partnership. Each agreement typicallyprovides for a covenant not to compete during the period of his or her employment and for up to two years thereafter. Under eachemployment agreement, the therapist partner receives a base salary and may receive a bonus based on the net revenues or profitsgenerated by their Clinic Partnership or specific clinic. In the case of Clinic Partnerships, the therapist partner receives earningsdistributions based upon their ownership interest. Upon termination of employment, we typically have the right, but not the3TABLE OF CONTENTSobligation, to purchase the therapist’s partnership interest in de novo Clinic Partnerships. In connection with most of our acquiredclinics, in the event that a limited minority partner’s employment ceases and certain requirements are met as detailed in the respectivelimited partnership agreements, we have a call right (the “Call Right”) and the selling entity or individual has a put right (the “PutRight”) with respect to the partner’s limited partnership interests. The Put Right and the Call Right do not expire, even upon anindividual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnershipinterest upon exercise of the Put Right or the Call Right is calculated at a predetermined multiple of earnings performance as detailedin the respective agreements.Each Clinic Partnership maintains an independent local identity, while at the same time enjoying the benefits of nationalpurchasing, negotiated third-party payor contracts, centralized support services and management practices. Under a managementagreement, 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 ofoffice support personnel, processing of accounts payable, operational direction, auditing of regulatory compliance, payroll, benefitsadministration, accounting services, legal services, quality assurance and marketing support.Our typical clinic occupies approximately 1,600 to 3,000 square feet of leased space in an office building or shopping center. Weattempt to lease ground level space for patient ease of access to our clinics.Typical minimum staff at a clinic consists of a licensed physical therapist and an office manager. As patient visits grow, staffingmay also include additional physical therapists, occupational therapists, therapy assistants, aides, exercise physiologists, athletictrainers 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 tothree times a week, typically for two to six weeks. We generally charge for treatment on a per procedure basis. Medicare patients arecharged 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 potentialfor developing new services and expanding the methods of providing our existing services in the most efficient manner whileproviding high quality patient care.FACTORS INFLUENCING DEMAND FOR THERAPY SERVICESWe 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, healthmaintenance organizations, businesses and industries, continuously seek cost savings for traditional healthcare services. We believethat our therapy services provide a cost-effective way to prevent short-term disabilities from becoming chronic conditions, to helpavoid invasive procedures, to speed recovery from surgery and musculoskeletal injuries and eliminate or minimize the need foropioids.Earlier Hospital Discharge. Changes in health insurance reimbursement, both public and private, have encouraged the earlierdischarge of patients to reduce costs. We believe that early hospital discharge practices foster greater demand for outpatientphysical therapy services.Aging Population. In general, the elderly population has a greater incidence of disability compared to the population as awhole. As this segment of the population continues to grow, we believe that demand for rehabilitation services will expand.Increase in Obesity. Two of every three American men are considered to be overweight or obese and the rate continues to grow.The strain on a person’s body can be significant. Physical therapy services help the obese become more active and fit by teachingthem how to move in ways that are pain free.MARKETINGWe focus our marketing efforts primarily on physicians, including orthopedic surgeons, neurosurgeons, physiatrists, internalmedicine physicians, podiatrists, occupational medicine physicians and general practitioners. In marketing to the physiciancommunity, we emphasize our commitment to quality patient care and regular4TABLE OF CONTENTScommunication with physicians regarding patient progress. We employ personnel to assist clinic directors in developing andimplementing marketing plans for the physician community and to assist in establishing relationships with health maintenanceorganizations, preferred provider organizations, industry, case managers and insurance companies.SOURCES OF REVENUEPayor sources for clinic services are primarily managed care programs, commercial health insurance, Medicare/Medicaid andworkers’ compensation insurance. Commercial health insurance, Medicare and managed care programs generally provide coverage topatients utilizing our clinics after payment by the patients of normal deductibles and co-insurance payments. Workers’ compensationlaws generally require employers to provide, directly or indirectly through insurance, costs of medical rehabilitation for theiremployees from work-related injuries and disabilities and, in some jurisdictions, mandatory vocational rehabilitation, usually withoutany deductibles, co-payments or cost sharing. Treatments for patients who are parties to personal injury cases are generally paidfrom 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, 2018December 31, 2017December 31, 2016PayorNetPatientRevenuePercentageNetPatientRevenuePercentageNetPatientRevenuePercentage (Net Patient Revenues in Thousands)Managed Care Programs$134,748 32.3%$120,773 31.0%$94,861 27.2%Commercial Health Insurance 72,786 17.4% 79,968 20.5% 84,784 24.3%Medicare/Medicaid 117,554 28.1% 103,713 26.7% 89,743 25.7%Workers’ Compensation Insurance 59,942 14.4% 55,364 14.2% 56,478 16.2%Other 32,673 7.8% 29,408 7.6% 22,973 6.6%Total$417,703 100.0%$389,226 100.0%$348,839 100.0%Our business depends to a significant extent on our relationships with commercial health insurers, health maintenanceorganizations, preferred provider organizations and workers’ compensation insurers. In some geographical areas, our clinics must beapproved as providers by key health maintenance organizations and preferred provider plans to obtain payments. Failure to obtain ormaintain these approvals would adversely affect financial results.During the year ended December 31, 2018, approximately 29.7% of our visits and 28.1% of our net patient revenues were frompatients with Medicare or Medicaid program coverage. To receive Medicare reimbursement, a facility (Medicare CertifiedRehabilitation Agency) or the individual therapist (Physical/Occupational Therapist in Private Practice) must meet applicableparticipation conditions set by the Department of Health and Human Services (“HHS”) relating to the type of facility, equipment,recordkeeping, personnel and standards of medical care, and also must comply with all state and local laws. HHS, through Centers forMedicare & Medicaid Services (“CMS”) and designated agencies, periodically inspects or surveys clinics/providers for approvaland/or compliance. We anticipate that our newly developed and acquired clinics will become certified as Medicare providers or willbe enrolled as a group of physical/occupation therapists in a private practice. Failure to obtain or maintain this certification wouldadversely affect financial results.The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”).For services provided in 2018, a 0.5% increase has been applied to the fee schedule payment rates; for services provided in 2019, a0.25% increase will be applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. Forservices provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, beforeapplying the mandatory budget neutrality adjustment. Beginning in 2021, payments to individual therapists (Physical/OccupationalTherapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit BasedIncentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningfuluse of electronic health records. Under the MIPS requirements, a5TABLE OF CONTENTSprovider’s performance is assessed according to established performance standards each year and then is used to determine anadjustment factor that is applied to the professional’s payment for the corresponding payment year. The provider’s MIPSperformance in 2019 will determine the payment adjustment in 2021. Each year from 2019 through 2024, professionals who receive asignificant share of their revenues through an alternate payment model (“APM”), (such as accountable care organizations or bundledpayment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus in thecorresponding payment year. The bonus payment for APM participation is intended to encourage participation and testing of newAPMs and to promote the alignment of incentives across payors. The specifics of the MIPS and APM adjustments will be subject tofuture notice and comment rule-making.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 tothese automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented.The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2% reductions to Medicare payments through fiscalyear 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2% reductions to Medicare paymentsthrough fiscal year 2027.Historically, the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/orspeech-language pathology services provided to any Medicare beneficiary was subject to an annual dollar limit (i.e., the “TherapyCap” or “Limit”). For 2017, the annual Limit on outpatient therapy services was $1,980 for combined Physical Therapy and SpeechLanguage Pathology services and $1,980 for Occupational Therapy services. As a result of Bipartisan Budget Act of 2018, theTherapy Caps have been eliminated, effective as of January 1, 2018.Under the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met orexceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whetherapplicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language PathologyServices; a separate $3,700 threshold is applied to the Occupational Therapy. The MACRA directed CMS to modify the manualmedical review process such that those reviews will no longer apply to all claims exceeding the $3,700 threshold and instead will bedetermined on a targeted basis based on a variety of factors that CMS considers appropriate The Bipartisan Budget Act of 2018extends the targeted medical review indefinitely, but reduces the threshold to $3,000 through December 31, 2027. For 2028, thethreshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequentyears the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS forcalendar year 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 expensecomponent of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces thepayment for the practice expense component for the second and subsequent therapy procedures or units of service furnished duringthe same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. Since 2013, thepractice expense component for the second and subsequent therapy service furnished during the same day for the same patient wasreduced by 50%. In addition, the MCTRA directed CMS to implement a claims-based data collection program to gather additionaldata on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practicesettings that provide outpatient therapy services are required to include this data on the claim form. Since 2013, therapists have beenrequired to report new codes and modifiers on the claim form that reflect a patient’s functional limitations and goals at initialevaluation, periodically throughout care, and at discharge. Reporting of these functional limitation codes and modifiers are requiredon the claim for payment.Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2022 must include amodifier indicating the service was furnished by a therapy assistant. CMS is required to develop a6TABLE OF CONTENTSmodifier to mark services provided by a therapy assistant by January 1, 2019, and then submitted claims have to report the modifiermark starting January 1, 2020. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapyassistant will be paid at an amount equal to 85% of the payment amount otherwise applicable for the service.Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex andsubject to interpretation. We believe that we are in compliance in all material respects with all applicable laws and regulations and arenot aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a materialeffect on our financial statements as of December 31, 2018. Compliance with such laws and regulations can be subject to futuregovernment review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from theMedicare program. For 2018, net patient revenue from Medicare accounted for approximately $103.6 million.REGULATION AND HEALTHCARE REFORMNumerous federal, state and local regulations regulate healthcare services and those who provide them. Some states into whichwe may expand have laws requiring facilities employing health professionals and providing health-related services to be licensedand, in some cases, to obtain a certificate of need (that is, demonstrating to a state regulatory authority the need for, and financialfeasibility of, new facilities or the commencement of new healthcare services). Only one of the states in which we currently operaterequires a certificate of need for the operation of our physical therapy business functions. Our therapists and/or clinics, however, arerequired to be licensed, as determined by the state in which they provide services. Failure to obtain or maintain any requiredcertificates, 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 ofhealthcare services. These laws include Section 1128B(b) of the Social Security Act (42 U.S. C. § 1320a-7b[b]) (the “Fraud and AbuseLaw”), under which civil and criminal penalties can be imposed upon persons who, among other things, offer, solicit, pay or receiveremuneration in return for (i) the referral of patients for the rendering of any item or service for which payment may be made, in wholeor in part, by a Federal health care program (including Medicare and Medicaid); or (ii) purchasing, leasing, ordering, or arranging foror recommending purchasing, leasing, ordering any good, facility, service, or item for which payment may be made, in whole or inpart, by a Federal health care program (including Medicare and Medicaid). We believe that our business procedures and businessarrangements are in compliance with these provisions. However, the provisions are broadly written and the full extent of their specificapplication to specific facts and arrangements to which we are a party is uncertain and difficult to predict. In addition, several stateshave enacted state laws similar to the Fraud and Abuse Law, which may be more restrictive than the federal Fraud and Abuse Law.The Office of the Inspector General (“OIG”) of HHS has issued regulations describing compensation financial arrangements thatfall within a “Safe Harbor” and, therefore, are not viewed as illegal remuneration under the Fraud and Abuse Law. Failure to fall withina Safe Harbor does not mean that the Fraud and Abuse Law has been violated; however, the OIG has indicated that failure to fallwithin a Safe Harbor may subject an arrangement to increased scrutiny under a “facts and circumstances” test.The OIG also has issued special fraud alerts and special advisory bulletins to remind the provider community of the importanceand application of certain aspects of the Fraud and Abuse Law. One of the OIG special fraud alerts related to the rental of space inphysician offices by persons or entities to which the physicians refer patients. The OIG’s stated concern in these arrangements isthat rental payments may be disguised kickbacks to the physician-landlords to induce referrals. We rent clinic space for some of ourclinics from referring physicians and have taken the steps that we believe are necessary to ensure that all leases comply to the extentpossible and applicable, with the space rental Safe Harbor to the Fraud and Abuse Law.7TABLE OF CONTENTSOne of the OIG’s special advisory bulletins addressed certain complex contractual arrangements for the provision of items andservices. This special advisory bulletin identified several characteristics commonly exhibited by suspect arrangements, the existenceof one or more of which could indicate a prohibited arrangement to the OIG. Generally, the indicia of a suspect contractual jointventure as identified by the special advisory bulletin and an 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 tothe 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 patientsunder 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 financialor other investment in the business, delegating the entire operation to the Manager/Supplier, while retaining profits generated fromits captive referral base.Status of the Manager/Supplier. The Manager/Supplier is a would-be competitor of the Owner’s new line of business andwould normally compete for the captive referrals. It has the capacity to provide virtually identical services in its own right and billinsurers 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’ keyservices.Remuneration. The practical effect of the arrangement, viewed in its entirety, is to provide the Owner the opportunity to billinsurers 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 fromOwner 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 thesecharacteristics. However, we believe we have taken steps regarding the structure of such arrangements as necessary to sufficientlydistinguish them from these suspect ventures, and to comply with the requirements of the Fraud and Abuse Law. However, if the OIGbelieves we have entered into a prohibited contractual joint venture, it could have an adverse effect on our business, financialcondition and results of operations.Although the business of managing physician-owned physical therapy facilities is regulated by the Fraud and Abuse Law, themanner in which we contract with such facilities often falls outside the complete scope of available Safe Harbors. We believe ourarrangements comply with the Fraud and Abuse Law, even though federal courts provide limited guidance as to the application ofthe Fraud and Abuse Law to these arrangements. If our management contracts are held to violate the Fraud and Abuse Law, it couldhave 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”) prohibitreferrals by a physician of “designated health services” which are payable, in whole or in part, by Medicare or Medicaid, to an entityin which the physician or the physician’s immediate family member has an investment interest or other financial relationship, subjectto several exceptions. Unlike the Fraud and Abuse Law, the Stark Law is a strict liability statute. Proof of intent to violate the StarkLaw is not required. Physical therapy services are among the “designated health services”. Further, the Stark Law has application toour management contracts with individual physicians and physician groups, as well as, any other financial relationship between usand referring physicians, including medical advisor arrangements and 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 tothe Stark Law. These state laws may cover all (not just Medicare and Medicaid) patients. As with the Fraud and Abuse Law, weconsider the Stark Law in planning our clinics, establishing contractual and other arrangements with physicians, marketing and other8TABLE OF CONTENTSactivities, 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-fraudmeasures in the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA created a source of funding forfraud control to coordinate federal, state and local healthcare law enforcement programs, conduct investigations, provide guidance tothe healthcare industry concerning fraudulent healthcare practices, and establish a national data bank to receive and report finaladverse actions. HIPAA also criminalized certain forms of health fraud against all public and private payors. Additionally, HIPAAmandates the adoption of standards regarding the exchange of healthcare information in an effort to ensure the privacy andelectronic security of patient information and standards relating to the privacy of health information. Sanctions for failing to complywith 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 beimplemented 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 themandatory breach notification requirements and a heightened enforcement scheme that includes increased penalties, and which nowapply to business associates as well as to covered entities. In addition to HIPAA, a number of states have adopted laws and/orregulations applicable in the use and disclosure of individually identifiable health information that can be more stringent thancomparable 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 inthe United States. Congress, state legislatures and the private sector continue to review and assess alternative healthcare deliveryand payment systems. Potential alternative approaches could include mandated basic healthcare benefits, controls on healthcarespending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creationof large insurance purchasing groups, and price controls. Legislative debate is expected to continue in the future and market forcesare expected to demand only modest increases or reduced costs. For instance, managed care entities are demanding lowerreimbursement rates from healthcare providers and, in some cases, are requiring or encouraging providers to accept capitatedpayments that may not allow providers to cover their full costs or realize traditional levels of profitability. We cannot reasonablypredict what impact the adoption of federal or state healthcare reform measures or future private sector reform may have on ourbusiness.COMPETITIONThe healthcare industry, including the physical therapy business, is highly competitive. The physical therapy business is highlyfragmented with no company having a significant market share nationally. We believe that we are currently the third largest nationaloutpatient rehabilitation provider.Competitive factors affecting our business include quality of care, cost, treatment outcomes, convenience of location, andrelationships with, and ability to meet the needs of, referral and payor sources. Our clinics compete, directly or indirectly, with manytypes of healthcare providers including the physical therapy departments of hospitals, private therapy clinics, physician-ownedtherapy 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 clinicprofitability provides us with a competitive advantage by helping to ensure the commitment of local management to the success ofthe clinic.We also believe that our competitive position is enhanced by our strategy of locating our clinics, when possible, on the groundfloor of buildings and shopping centers with nearby parking, thereby making the clinics9TABLE OF CONTENTSmore easily accessible to patients. We offer convenient hours. We also attempt to make the decor in our clinics less institutional andmore aesthetically pleasing than traditional hospital clinics.ENFORCEMENT ENVIRONMENTIn recent years, federal and state governments have launched several initiatives aimed at uncovering behavior that violates thefederal civil and criminal laws regarding false claims and fraudulent billing and coding practices. Such laws require providers toadhere to complex reimbursement requirements regarding proper billing and coding in order to be compensated for their services bygovernment payors. Our compliance program requires adherence to applicable law and promotes reimbursement education andtraining; however, a determination that our clinics’ billing and coding practices are false or fraudulent could have a material adverseeffect 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. In addition, ourCorporate Integrity Agreement requires annual audits to be performed by an independent review organization on a small sample ofour clinics, the results of which are reported to the federal government. See “-Compliance Program – Corporate Integrity Agreement”.Managed care payors may also reserve the right to conduct audits. An adverse inspection, review, audit or investigation could resultin: refunding amounts we have been paid; fines penalties and/or revocation of billing privileges for the affected clinics; expansion ofthe scope of our Corporate Integrity Agreement; exclusion from participation in the Medicare or Medicaid programs or one or moremanaged 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 makingclaims 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 providerssuch as us. As such suits are generally filed under seal with a court to allow the government adequate time to investigate anddetermine whether it will intervene in the action, the implicated healthcare providers often are unaware of the suit until thegovernment 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 financialor criminal sanctions, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a largenumber of claims, as each individual claim could be deemed a separate violation. In addition, many states also have enacted similarstatutes, which may include criminal penalties, substantial fines, and treble damages.COMPLIANCE PROGRAMOur Compliance Program. Our ongoing success depends upon our reputation for quality service and ethical businesspractices. We operate in a highly regulated environment with many federal, state and local laws and regulations. We take a proactiveinterest 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 and a set of Corporate GovernanceGuidelines to clarify the ethical standards under which the Board and management carry out their duties. In addition, the Board hascreated a Compliance Committee of the Board (“Compliance Committee”) whose purpose is to assist the Board in discharging theiroversight 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 compliance training materials, hand-outs and an on-line testingprogram. These tools were prepared to ensure that every employee of our Company and subsidiaries has a clear understanding ofour mutual commitment to high standards of professionalism, honesty, fairness and compliance with the law in conducting business.These standards are administered by our Chief 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 ComplianceCommittee review our policies and procedures for our compliance program from time to time in an effort to improve operations and toensure compliance with requirements of standards, laws and regulations and to reflect the on-going compliance focus areas whichhave been identified by management, counsel or the Compliance Committee. We also have established systems for reportingpotential violations, educating our employees, monitoring and auditing compliance and handling enforcement and discipline.10TABLE OF CONTENTSCommittees. Our Compliance Committee, appointed by the Board, consists of four independent directors. The ComplianceCommittee has general oversight of our Company’s compliance with the legal and regulatory requirements regarding healthcareoperations. The Compliance Committee relies on the expertise and knowledge of management, the CO and other compliance and legalpersonnel. The CO regularly communicates with the Chairman of the Compliance Committee. The Compliance Committee meets atleast four times a year or more frequently as necessary to carry out its responsibilities and reports regularly to the Board regarding itsactions and recommendations.We also have an Internal Compliance Committee, which is comprised of Company leaders in the areas of operations, clinicalservices, finance, human resources, legal, information technology and credentialing. The Internal Compliance Committee has theresponsibility for evaluating and assessing Company areas of risk relating to compliance with federal and state healthcare laws, andgenerally to assist the CO. The Internal Compliance Committee meets at least four times a year or more frequently as necessary tocarry out its responsibilities. In addition, management has appointed a team to address our Company’s compliance with HIPAA. TheHIPAA 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 regardingoperational 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 ofour management and the director/administrator of the clinic. The governing body retains legal responsibility for the overall conductof 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 thefacilities and function as advisors.We have in place a Risk Management Committee consisting of, among others, the CO, the Corporate Vice President ofAdministration, and other legal, compliance and operations personnel. This committee reviews and monitors all employee and patientincident 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 retaliationany perceived improper work-related activities, accounting irregularities and other violations of our compliance program, we have setup an independent national compliance hotline. The compliance hotline is available to receive confidential reports of wrongdoingMonday through Friday (excluding holidays), 24 hours a day. The compliance hotline is staffed by experienced third partyprofessionals trained to utilize utmost care and discretion in handling sensitive issues and confidential information. The informationreceived is documented and forwarded timely to the CO, who, together with the Compliance Committee, has the power and resourcesto investigate and resolve matters of improper conduct.Educating Our Employees. We utilize numerous methods to train our employees in compliance related issues. All employeescomplete an initial training program comprised of numerous modules relating to our business and proper practices. Thedirectors/administrators also provide periodic “refresher” training for existing employees and one-on-one comprehensive trainingwith new hires. The corporate compliance group responds to questions from clinic personnel and conducts frequent teleconferencemeetings, webinars and training sessions on a variety of compliance related topics.When a clinic opens, we provide a package of compliance materials containing manuals and detailed instructions for meetingMedicare Conditions of Participation Standards and other compliance requirements. During follow up training with thedirector/administrator of the clinic, compliance department staff explain various details regarding requirements and compliancestandards. Compliance staff will remain in contact with the director/administrator while the clinic is implementing compliancestandards and will provide any assistance required. All new office managers receive training (including Medicare, regulatory andcorporate compliance, insurance billing, charge entry and transaction posting and coding, daily, weekly and monthly accountingreports) from the training staff at the corporate office. The corporate compliance group will assist in continued compliance, includingguidance to the clinic staff with regard to Medicare certifications, state survey requirements and responses to any inquiries fromregulatory agencies.11TABLE OF CONTENTSMonitoring and Auditing Clinic Operational Compliance. We have in place audit programs and other procedures to monitorand audit clinic operational compliance with applicable policies and procedures. We employ internal auditors who, as part of their jobresponsibilities, conduct periodic audits of each clinic. Most clinics are audited at least once every 24 months and additional focusedaudits are performed as deemed necessary. During these audits, particular attention is given to compliance with Medicare andinternal 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 typically are conducted on site and include interviewswith 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 clinicdirector/administrator receives a letter instructing them of any corrective measures required. Each clinic director/administrator thenworks 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 programrequirements or who negligently or deliberately fails to comply with known laws or regulations specifically addressed in ourcompliance program should be subject to disciplinary action up to and including discharge from employment. The ComplianceCommittee, compliance staff, human resources staff and management investigate violations of our compliance program and imposedisciplinary action as considered appropriate.Corporate Integrity Agreement. We also perform certain additional compliance related functions pursuant to the CorporateIntegrity Agreement (“Corporate Integrity Agreement” or “CIA”) that we entered into with the OIG. The CIA, which became effectiveas of December 21, 2015, outlines certain specific requirements relating to compliance oversight and program implementation, as wellas periodic reporting. In addition, pursuant to the CIA, an independent review organization annually will perform a Medicare billingand coding audit on a small group of randomly selected Company clinics. Our Company Compliance Program has been modified soas to comply with the requirements of the CIA. The term of the CIA is five years.The CIA was entered into as part of the settlement by one of our Subsidiaries with the U. S. Department of Justice related tocertain Medicare billings that occurred between 2007 and 2009 at a single outpatient physical therapy clinic. The settlement resolvedclaims relating to whether certain physical therapy services provided to a limited number of Medicare patients at the clinic satisfiedall of the criteria for payment by the Medicare program, including proper supervision of physical therapist assistants. The Subsidiarypaid $718,000 in 2015 to resolve the matter, and we and the Subsidiary entered into the CIA. The Subsidiary no longer conducts anybusiness.EMPLOYEESAt December 31, 2018, we employed approximately 4,600 people, of which approximately 3,100 were full-time employees. At thatdate, no Company employees were governed by collective bargaining agreements or were members of a union. We consider ourrelations 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 belicensed by the state. Based on standard employee screening systems in place, all persons currently employed by us who arerequired to be licensed are licensed. We are not aware of any federal licensing requirements applicable to our employees.AVAILABLE INFORMATIONOur annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reportsfiled or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our internet website atwww.usph.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.12TABLE OF CONTENTSITEM 1A.RISK FACTORS.Our business, operations and financial condition are subject to various risks. Some of these risks are described below, andreaders of this Annual Report on Form 10-K should take such risks into account in evaluating our Company or making any decisionto invest in us. This section does not describe all risks applicable to our Company, our industry or our business, and it is intendedonly as a summary of material factors affecting our business.Risks related to our business and operationsHealthcare reform legislation may affect our business.In recent years, many legislative proposals have been introduced or proposed in Congress and in some state legislatures thatwould affect major changes in the healthcare system, either nationally or at the state level. At the federal level, Congress hascontinued 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 reformlegislation and the impact of potential legislation on us is uncertain and difficult, if not impossible, to predict. That impact may bematerial 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, andphysician 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 stategovernment agencies relating to the healthcare industry. We believe we are in substantial compliance with all laws, but differinginterpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety orillegality or could require us to make changes in our methods of operations, facilities, equipment, personnel, services and capitalexpenditure programs and increase our operating expenses. If we fail to comply with these extensive laws and governmentregulations, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties or be requiredto make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to aninvestigation or other enforcement action under these laws or regulations. For a more complete description of certain of these lawsand regulations, see “Business—Regulation and Healthcare Reform” and “Business – Compliance Program” in Item 1.The healthcare industry is subject to extensive federal, state and local laws and regulations relating to (1) facility andprofessional licensure, including certificates of need, (2) conduct of operations, including financial relationships among healthcareproviders, Medicare fraud and abuse and physician self-referral, (3) addition of facilities and services and enrollment of newlydeveloped 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 andregulations. While our facilities intend to comply with the existing licensing, Medicare certification requirements and accreditationstandards, there can be no assurance that these regulatory authorities will determine that all applicable requirements are fully met atany given time. A determination by any of these regulatory authorities that a facility is not in compliance with these requirementscould lead to the imposition of requirements that the facility takes corrective action, assessment of fines and penalties, or loss oflicensure or Medicare certification of accreditation. These consequences could have an adverse effect on our Company.The Company’s CIA imposes certain compliance related functions and reporting obligations on us. In addition, the CIA requiresus to engage an independent review organization to conduct annual audits of randomly selected Company clinics in order to reviewcompliance with federal requirements relating to the proper billing13TABLE OF CONTENTSand coding for claims. While our facilities intend to comply with the federal requirements for properly coding and billing claims forreimbursement, there can be no assurance that these audits will determine that all applicable requirements are fully met at the clinicsthat are reviewed. In addition, a failure to fully comply with the requirements of the CIA may subject us to the assessment of finesand penalties, or exclusion from participation in the Medicare program. These consequences could have a materially adverse effecton our Company.Decreases in Medicare reimbursement rates and payment reductions applied to the second and subsequent therapy services mayadversely affect our financial results.The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”).For services provided in 2018, a 0.5% increase has been applied to the fee schedule payment rates; for services provided in 2019, a0.25% increase will be applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. Forservices provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, beforeapplying the mandatory budget neutrality adjustment. Beginning in 2021, payments to individual therapists (Physical/OccupationalTherapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit BasedIncentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningfuluse of electronic health records. Under the MIPS requirements, a provider’s performance is assessed according to establishedperformance standards each year and then is used to determine an adjustment factor that is applied to the professional’s payment forthe corresponding payment year. The provider’s MIPS performance in 2019 will determine the payment adjustment in 2021. Each yearfrom 2019 through 2024, professionals who receive a significant share of their revenues through an alternate payment model(“APM”), (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and aquality measurement component will receive a 5% bonus in the corresponding payment year. The bonus payment for APMparticipation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives acrosspayors. The specifics of the MIPS and APM adjustments will be subject to future notice and comment rule-making.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 tothese automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented.The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2% reductions to Medicare payments through fiscalyear 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2% reductions to Medicare paymentsthrough fiscal year 2027.Historically, the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/orspeech-language pathology services provided to any Medicare beneficiary was subject to an annual dollar limit (i.e., the “TherapyCap” or “Limit”). For 2017, the annual Limit on outpatient therapy services was $1,980 for combined Physical Therapy and SpeechLanguage Pathology services and $1,980 for Occupational Therapy services. As a result of Bipartisan Budget Act of 2018, theTherapy Caps have been eliminated, effective as of January 1, 2018.Under the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met orexceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whetherapplicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language PathologyServices; a separate $3,700 threshold is applied to the Occupational Therapy. The MACRA directed CMS to modify the manualmedical review process such that those reviews will no longer apply to all claims exceeding the $3,700 threshold and instead will bedetermined on a targeted basis based on a variety of factors that CMS considers appropriate The Bipartisan Budget Act of 2018extends the targeted medical review indefinitely, but reduces the threshold to $3,000 through December 31, 2027. For 2028, thethreshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequentyears the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS forcalendar year 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 Medicare14TABLE OF CONTENTSprogram pays 100% of the practice expense component of the Relative Value Unit (“RVU”) for the therapy procedure with the highestpractice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapyprocedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services arefurnished in separate sessions. Since 2013, the practice expense component for the second and subsequent therapy servicefurnished during the same day for the same patient was reduced by 50%. In addition, the MCTRA directed CMS to implement aclaims-based data collection program to gather additional data on patient function during the course of therapy in order to betterunderstand patient conditions and outcomes. All practice settings that provide outpatient therapy services are required to includethis data on the claim form. Since 2013, therapists have been required to report new codes and modifiers on the claim form that reflecta patient’s functional limitations and goals at initial evaluation, periodically throughout care, and at discharge. Reporting of thesefunctional limitation codes and modifiers are required on the claim for payment.Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2022 must include amodifier indicating the service was furnished by a therapy assistant. CMS is was required to develop a modifier to mark servicesprovided by a therapy assistant by January 1, 2019, and then submitted claims have to report the modifier mark starting January 1,2020. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapy assistant will be paid at anamount equal to 85% of the payment amount otherwise applicable for the service.Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex andsubject to interpretation. We believe that we are in compliance, in all material respects, with all applicable laws and regulations andare not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a materialeffect on the our financial statements as of December 31, 2018. Compliance with such laws and regulations can be subject to futuregovernment review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from theMedicare program. For year ended December 31, 2018, net patient revenue from Medicare were approximately $103.6 million.Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, we may not continue toreceive reimbursement rates from Medicare that sufficiently compensate us for our services or, in some instances, cover ouroperating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on ourrevenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments inmaking Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect our business, financial conditionand results of operations.We expect the federal and state governments to continue their efforts to contain growth in Medicaid expenditures, which couldadversely affect our revenue and profitability.Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combinedwith slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling thegrowth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. We expect these state and federalefforts to continue for the foreseeable future. Furthermore, not all of the states in which we operate, most notably Texas, have electedto expand Medicaid as part of federal healthcare reform legislation. There can be no assurance that the program, on the current termsor otherwise, will continue for any particular period of time beyond the foreseeable future. If Medicaid reimbursement rates arereduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicaid program that aredisadvantageous to our businesses, our business and results of operations could be materially and adversely affected.Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction.Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlementprocess or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previouslyreimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursablebecause either adequate or additional documentation was not provided or because certain services were not covered or deemed tonot be medically15TABLE OF CONTENTSnecessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated withcomplying with investigative audits by regulatory and governmental authorities, could adversely affect our financial condition andresults of operations.Additionally, from time to time we become aware, either based on information provided by third parties and/or the results ofinternal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have beenpaid for the service provided. Overpayments may result from a variety of factors, including insufficient documentation supportingthe services rendered or medical necessity of the services or other failures to document the satisfaction of the necessary conditionsof payment. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, andfailure to do so within requisite time limits imposed by the law could lead to significant fines and penalties being imposed on us.Furthermore, our initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction ofany other conditions of payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us tosignificant fines and penalties. We, and/or certain of our operating companies, could also be subject to exclusion from participation inthe Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctionsthat we may incur under applicable federal and/or state law. Our repayment of any such amounts, as well as any fines, penalties orother sanctions that we may incur, could be significant and could have a material and adverse effect on our results of operations andfinancial condition.From time to time we are also involved in various external governmental investigations, audits and reviews. Reviews, audits andinvestigations of this sort can lead to government actions, which can result in the assessment of damages, civil or criminal fines orpenalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion fromparticipation in government programs. Failure to comply with applicable laws, regulations and rules could have a material andadverse effect on our results of operations and financial condition. Furthermore, becoming subject to these governmentalinvestigations, audits and reviews can also require us to incur significant legal and document production expenses as we cooperatewith the government authorities, regardless of whether the particular investigation, audit or review leads to the identification ofunderlying issues.As a result of increased post-payment reviews of claims we submit to Medicare for our services, we may incur additional costsand 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 forour services. These post-payment reviews have increased as a result of government cost-containment initiatives. These additionalpost-payment reviews may require us to incur additional costs to respond to requests for records and to pursue the reversal ofpayment 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.An economic downturn, state budget pressures, sustained unemployment and continued deficit spending by the federalgovernment 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 translatedinto reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expectcontinuing cost containment pressures on Medicaid outlays for our services in the states in which we operate. In addition, aneconomic downturn, coupled with sustained unemployment, may also impact the number of enrollees in managed care programs aswell 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 developmentsin the economy or other reasons, can lead to continuing pressure to reduce governmental expenditures for other purposes, includinggovernment-funded programs in which we participate, such as Medicare and Medicaid. Such actions in turn may adversely affect ourresults 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 2018, approximately 71.9% ofour revenues were derived collectively from managed care plans, commercial health16TABLE OF CONTENTSinsurers, workers’ compensation payors, and other private pay revenue sources while approximately 28.1% of our revenues werederived from Medicare and Medicaid. Initiatives undertaken by industry and government to contain healthcare costs affect theprofitability of our clinics. These payors attempt to control healthcare costs by contracting with healthcare providers to obtainservices on a discounted basis. We believe that this trend will continue and may limit reimbursement for healthcare services. Ifinsurers 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. Inaddition, in certain geographical areas, our clinics must be approved as providers by key health maintenance organizations andpreferred 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 variouspayment systems under the Medicare program. See “Business—Sources of Revenue” in Item 1 for more information. PresidentObama signed into law comprehensive reforms to the healthcare system, including changes to Medicare reimbursement. Additionalreforms or other changes to these payment systems may be proposed or adopted, either by the U.S. Congress or by CMS, includingbundled payments, outcomes-based payment methodologies and a shift away from traditional fee-for-service reimbursement. Ifrevised regulations are adopted, the availability, methods and rates of Medicare reimbursements for services of the type furnished atour facilities could change. Some of these changes and proposed changes could adversely affect our business strategy, operationsand financial results.We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These auditscould 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 carepayors 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 payornetworks;•expansion of the scope of our 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 materialadverse 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 identifiableinformation.HIPAA required the HHS to adopt standards to protect the privacy and security of individually identifiable health-relatedinformation. The department released final regulations containing privacy standards in 2000 and published revisions to the finalregulations in 2002. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-relatedinformation. The regulations also provide patients with significant rights related to understanding and controlling how their healthinformation is used or disclosed. The security regulations require healthcare providers to implement administrative, physical andtechnical practices to protect the security of individually identifiable health information that is maintained or transmittedelectronically.17TABLE OF CONTENTSHITECH, which was signed into law in 2009, enhanced the privacy, security and enforcement provisions of HIPAA by, among otherthings establishing security breach notification requirements, allowing enforcement of HIPAA by state attorneys general, andincreasing 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 privacyconcerns, 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 orsecurity breach also can occur.We 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 theimpact of the breach on affected individuals.In conducting our business, we are required to comply with applicable laws regarding fee-splitting and the corporate practice ofmedicine.Some states prohibit the “corporate practice of therapy” that restricts business corporations from providing physical therapyservices through the direct employment of therapist physicians or from exercising control over medical decisions by therapists. Thelaws relating to corporate practice vary from state to state and are not fully developed in each state in which we have facilities.Typically, however, professional corporations owned and controlled by licensed professionals are exempt from corporate practicerestrictions and may employ therapists to furnish professional services. Those professional corporations may be managed bybusiness corporations, such as the Company.Some states also prohibit entities from engaging in certain financial arrangements, such as fee-splitting, with physicians ortherapists. The laws relating to fee-splitting also vary from state to state and are not fully developed. Generally, these laws restrictbusiness arrangements that involve a physician or therapist sharing medical fees with a referral source, but in some states, these lawshave been interpreted to extend to management agreements between physicians or therapists and business entities under somecircumstances.We believe that our current and planned activities do not constitute fee-splitting or the unlawful corporate practice of medicineas contemplated by these state laws. However, there can be no assurance that future interpretations of such laws will not requirestructural and organizational modification of our existing relationships with the practices. If a court or regulatory body determinesthat we have violated these laws or if new laws are introduced that would render our arrangements illegal, we could be subject to civilor criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required torestructure our contractual arrangements with our affiliated physicians and other licensed providers.Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to reportour financial results on a timely and accurate basis.We are required to produce our consolidated financial statements in accordance with the requirements of accounting principlesgenerally accepted in the United States of America. Effective internal control over financial reporting is necessary for us to providereliable financial reports, to help mitigate the risk of fraud and to operate successfully. We are required by federal securities laws todocument and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, whichrequires annual management assessments of the effectiveness of our internal control over financial reporting.Testing and maintaining our internal control over financial reporting can be expensive and divert our management’s attentionfrom other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effectiveinternal control over financial reporting in accordance with applicable law, or our independent registered public accounting firm maynot be able to issue an unqualified attestation report if we conclude that our internal control over financial reporting is not effective.If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unableto provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consumingcorrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/orsanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoingcould also cause investors to lose confidence in our reported18TABLE OF CONTENTSfinancial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raiseadditional financing if needed in the future.We may be adversely affected by a security breach, such as a cyber-attack, which may cause a violation of HIPAA or HITECHand subject us to potential legal and reputational harm.In the normal course of business, our information technology systems hold sensitive patient information including patientdemographic data and other protected health information, which is subject to HIPAA and HITECH. We also contract with third-partyvendors to maintain and store our patient’s individually identifiable health information. Numerous state and federal laws andregulations address privacy and information security concerns resulting from our access to our patient’s and employee’s personalinformation.Our information technology systems and those of our vendors that process, maintain, and transmit such data are subject tocomputer viruses, cyber-attacks, or breaches. We adhere to policies and procedures designed to ensure compliance with HIPAA andother privacy and information security laws and require our third-party vendors to do so as well. If, however, we or our third-partyvendors experience a breach, loss, or other compromise of unsecured protected health information or other personal information,such an event could result in significant civil and criminal penalties, lawsuits, reputational harm, and increased costs to us, any ofwhich could have a material adverse effect on our financial condition and results of operations.Furthermore, while our information technology systems, and those of our third-party vendors, are maintained with safeguardsprotecting against cyber-attacks. A cyber-attack that bypasses our information technology security systems, or those of our third-party vendors, could result in a material adverse effect on our business, financial condition, results of operations, or cash flows. Inaddition, our future results could be adversely affected due to the theft, destruction, loss, misappropriation, or release of protectedhealth information, other confidential data or proprietary business information, operational or business delays resulting from thedisruption of information technology systems and subsequent mitigation activities, or regulatory action taken as a result of suchincident. We provide our employees training and regular reminders on important measures they can take to prevent breaches. Weroutinely identify attempts to gain unauthorized access to our systems. However, given the rapidly evolving nature and proliferationof cyber threats, there can be no assurance our training and network security measures or other controls will detect, prevent, orremediate security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of oursystems and operations. Accordingly, we may be vulnerable to losses associated with the improper functioning, security breach, orunavailability of our information systems as well as any systems used in acquired operations.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 goodrelations with these physicians and other referral sources. Physicians referring patients to our clinics are free to refer their patients toother therapy providers or to their own physician owned therapy practice. If we are unable to successfully cultivate and maintainstrong relationships with physicians and other referral sources, our business may decrease and our net operating revenues maydecline.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 tomaintain good relations with these physicians. Our therapists are the front line for generating these referrals and we are dependenton their talents and skills to successfully cultivate and maintain strong relationships with these physicians. If we cannot recruit andretain our base of experienced and clinically skilled therapists, our business may decrease and our net operating revenues maydecline. Periodically, we have clinics in isolated communities that are temporarily unable to operate due to the unavailability of atherapist who satisfies our standards.We may also experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract andretain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt tomanage overall labor costs in the most efficient way, our efforts to manage them may have limited effectiveness and may lead toincreased turnover and other challenges.19TABLE OF CONTENTSOur 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, asignificant number of our clinics are located in states along the Gulf Coast and Atlantic Coast which are subject to periodic winterstorms, hurricanes and other severe storm systems. Periods of severe weather may cause physical damage to our facilities or preventour 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 competitiveadvantages. Intense competition may adversely affect our business, financial condition or results of operations. For a more completedescription of this competitive environment, see “Business—Competition” in Item 1. An adverse effect on our business, financialcondition 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 toclose certain clinics. In the event a clinic is reorganized or closed, we may incur losses and closure costs. The closure costs andlosses may include, but are not limited to, lease obligations, severance, and write-down or write-off of goodwill and other intangibleassets.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. Acquisitionsmay involve significant cash expenditures, potential debt incurrence and operational losses, dilutive issuances of equity securitiesand expenses that could have an adverse effect on our financial condition and results of operations. Acquisitions involve numerousrisks, 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 failureto comply with healthcare regulations.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, consisting solely of independent directors, isauthorized to grant stock awards to our employees, directors and consultants. Shareholders will incur dilution upon the exercise ofany outstanding stock awards or the grant of any restricted stock. In addition, if we raise additional funds by issuing additionalcommon stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existingstockholders 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, 2018, we had reserved approximately 400,000 shares for future equity grants. We may issue additional restrictedsecurities or register additional shares of common stock under the Securities Act of 1933, as amended (the “Securities Act”), in thefuture. 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, underRule 144 or otherwise, could adversely affect the market price of the common stock.20TABLE OF CONTENTSProvisions in our articles of incorporation and bylaws could delay or prevent a change in control of our company, even if thatchange would be beneficial to our stockholders.Certain provisions of our articles of incorporation and bylaws may delay, discourage, prevent or render more difficult an attemptto obtain control of our company, whether through a tender offer, business combination, proxy contest or otherwise. Theseprovisions include the charter authorization of “blank check” preferred stock and a restriction on the ability of stockholders to call aspecial meeting.ITEM 1B.UNRESOLVED STAFF COMMENTS.NoneITEM 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 inrare instances where leasing is not a cost-effective alternative. Our typical clinic occupies 1,600 to 3,000 square feet.We also lease our executive offices located in Houston, Texas, under a non-cancelable operating lease expiring in April 2023. Wecurrently lease approximately 40,777 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 oflawsuits or other proceedings cannot be predicted with certainty, we do not believe the impact of existing lawsuits or otherproceedings will have a material impact on our business, financial condition or results of operations.ITEM 4.MINE SAFETY DISCLOSURES.Not Applicable.21TABLE OF CONTENTSPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.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 15, 2019,there were 69 holders of record of our outstanding common stock.DIVIDENDSOn March 5, 2019, the Board of Directors declared a dividend of $0.27 per share on all shares of common stock issued andoutstanding to those shareholders of record on March 20, 2019 payable on April 19, 2019. During 2018, we paid a regular quarterlydividend of $0.23 per share totaling $0.92 per share, which amounted to a total of aggregate cash payments of dividend to holders ofour common stock in 2018 of approximately $11.7 million. During 2017, we paid a regular quarterly dividend of $0.20 per share totaling$0.80 per share, which amounted to a total of aggregate cash payments of dividends to holders of our common stock in 2017 ofapproximately $10.1 million. During 2016, we paid a quarterly dividend of $0.17 per share totaling $0.68 per share for 2016, whichamounted to a total of aggregate cash payments of dividends to holders of our common stock in 2016 of approximately $8.5 million.We are currently restricted from paying dividends in excess of $20,000,000 in any fiscal year on our common stock under the CreditAgreement (as defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources”).FIVE YEAR PERFORMANCE GRAPHThe performance graph and related description shall not be deemed incorporated by reference into any filing under theSecurities Act or under the Exchange Act, except to the extent that we specifically incorporate this information by reference. Inaddition, the performance graph and the related description shall not be deemed “soliciting material” or “filed” with the SEC orsubject to Regulation 14A or 14C.On August 14, 2012, our common stock began trading on NYSE. The following performance graph compares the cumulativetotal stockholder return of our common stock to The NYSE Composite Index and the NYSE Health Care Index for the period fromDecember 31, 2013 through December 31, 2018. The graph assumes that $100 was invested in our common stock and the commonstock of each of the companies listed on The NYSE Composite Index and The NYSE Health Care Index on December 31, 2013 and thatany dividends were reinvested.22TABLE OF CONTENTSComparison of Five Years Cumulative Total Return for the Year Ended December 31, 2018  12/1312/1412/1512/1612/1712/18U.S. Physical Therapy, Inc. 100 119 152 199 205 290 NYSE Composite 100 104 98 106 123 109 NYSE Healthcare Index 100 117 121 116 139 148 ITEM 6.SELECTED FINANCIAL DATA.The following selected financial data should be read in conjunction with the description of our critical accounting policies setforth in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated FinancialStatements and Notes included herein. For the Years Ended December 31, 20182017201620152014 ($ in thousands, except per share data)Net revenues$453,911 $414,051 $356,546 $331,302 $305,074 Operating income$60,314 $54,728 $49,533 $47,294 $45,768 Gain on derecognition of debt$1,846 $— $— $— $— Interest expense Mandatorily redeemable non-controlling interests - changein redemption value$— $12,894 $6,169 $2,670 $2,978 Mandatorily redeemable non-controlling interests -earnings allocable$— $6,055 $4,057 $3,538 $3,388 Debt and other$2,042 $2,111 $1,252 $1,031 $1,088 Total interest expense$2,042 $21,060 $11,478 $7,239 $7,454 Net income$48,842 $27,724 $26,268 $26,489 $25,314 Net income attributable to non-controlling interests$13,969 $5,468 $5,717 $5,874 $6,183 Net income attributable to USPH shareholders$34,873 $22,256 $20,551 $20,615 $19,131 23TABLE OF CONTENTS For the Years Ended December 31, 20182017201620152014 ($ in thousands, except per share data)Per share net income attributable to USPH shareholders: Basic and diluted$1.31 $1.76 $1.64 $1.66 $1.57 Dividends declared and paid per common share$0.92 $0.80 $0.68 $0.60 $0.48 On December 31, 20182017201620152014 ($ in thousands)Total assets$443,166 $418,982 $351,231 $303,757 $268,377 Mandatorily redeemable non-controlling interests$— $327 $69,190 $45,974 $40,371 Long-term debt, less current portion$38,402 $56,728 $50,596 $48,335 $34,734 Working capital$37,268 $37,530 $41,347 $41,193 $29,347 Current ratio 1.89 1.95 2.68 3.17 2.15 ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.EXECUTIVE SUMMARYOur Business. We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for avariety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and rehabilitation of injuredworkers. At December 31, 2018, we operated 591 clinics in 42 states. The average age of our clinics at December 31, 2018 was 10.0years. In addition to our ownership and operation of outpatient physical therapy clinics, we also manage physical therapy facilitiesfor third parties, such as physicians and hospitals, with 28 such third-party facilities under management as of December 31, 2018.In March 2017, we purchased a 55% interest in our initial industrial injury prevention business. On April 30, 2018, we made asecond acquisition and subsequently combined the two businesses. After the combination, we own a 59.45% interest in thecombined business. Services provided include onsite injury prevention and rehabilitation, performance optimization and ergonomicassessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune500 companies. Other clients include large insurers and their contractors. We perform these services through Industrial SportsMedicine Professionals, consisting of both physical therapists and highly specialized certified athletic trainers (ATCs).In addition to the above acquired interests in the industrial injury prevention businesses, during 2018, 2017 and 2016, wecompleted the following multi-clinic acquisitions:AcquisitionDate% InterestAcquiredNumber ofClinics 2018 August 2018 AcquisitionAugust 31 70% 4 2017 January 2017 AcquisitionJanuary 1 70% 17 May 2017 AcquisitionMay 31 70% 4 June 2017 AcquisitionJune 30 60% 9 October 2017 AcquisitionOctober 31 70% 9 2016 February 2016 AcquisitionFebruary 29 55% 8 November 2016 AcquisitionNovember 30 60% 12 24TABLE OF CONTENTSBesides the multi-clinic acquisitions above, on February 28, 2018, we, through several of our majority owned Clinic Partnerships,acquired five separate clinic practices. These practices will operate as satellites of the respective existing Clinic Partnership.Also, during the year of 2017, we purchased the assets and business of two physical therapy clinics in separate transactions.One clinic was consolidated with an existing clinic and the other operates as a satellite clinic of one of the existing partnerships. Inaddition to the multi-clinic acquisitions, we acquired two single clinic practices in separate transactions during 2016.The results of operations of the acquired clinics have been included in our consolidated financial statements since the date oftheir respective acquisition. We intend to continue to pursue additional acquisition opportunities, develop new clinics and opensatellite clinics.CRITICAL ACCOUNTING POLICIESCritical accounting policies are those that have a significant impact on our results of operations and financial position involvingsignificant 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 consists of revenues for physicaltherapy and occupational 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. Net patient revenues(patient revenues less estimated contractual adjustments) are recognized at the estimated net realizable amounts from third-partypayors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There isan implied contract between us and the patient upon each patient visit. Generally, this occurs as we provide physical andoccupational therapy services, as each service provided is distinct and future services rendered are not dependent on previouslyrendered services. We have agreements with third-party payors that provide for payments to us at amounts different from itsestablished rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collectionand write-off experience.Management contract revenues, which are included in other revenues in the consolidated statements of net income, are derivedfrom contractual arrangements whereby we manage a clinic owned by a third party. We do not have any ownership interest in theseclinics. Typically, revenues are determined based on the number of visits conducted at the clinic and recognized at the point in timewhen services are performed. Costs, typically salaries for our employees, are recorded when incurred.Revenues from the industrial injury prevention business, which are also included in other revenues in the consolidatedstatements of net income, are derived from onsite services we provide to clients’ employees including injury prevention,rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention business isrecognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to theconsideration we expect to receive in exchange for providing injury prevention services to its clients. The revenue is determined andrecognized based on the number of hours and respective rate for services provided in a given period.Additionally, other revenues include services we provide on-site, such as schools and industrial worksites, for physical oroccupational therapy services, and athletic trainers and gym membership fees. Contract terms and rates are agreed to in advancebetween us and the third parties. Services are typically performed over the contract period and revenue is recorded at the point ofservice. If the services are paid in advance, revenue is recorded as a contract liability over the period of the agreement andrecognized at the point in time, when the services are performed.In May 2014, March 2016, April 2016, and December 2016, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contractswith Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, IdentifyingPerformance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements andPractical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts withCustomer (collectively the “standards”), respectively, which supersede most of the current revenue recognition25TABLE OF CONTENTSrequirements (“ASC 606”). The core principle of the new guidance is that an entity should recognize revenue to depict the transfer ofpromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled inexchange for those goods or services.We implemented the new standards beginning January 1, 2018 using a modified retrospective transition method. The principalchange relates to how the new standard requires healthcare providers to estimate the amount of variable consideration to be includedin the transaction price up to an amount which is probable that a significant reversal will not occur. The most common forms ofvariable consideration we experience are amounts for services provided that are ultimately not realizable from a customer. There wereno changes to revenues or other revenues upon implementation. Under the new standards, our estimate for unrealizable amounts willcontinue to be recognized as a reduction to revenue. The bad debt expense historically reported will not materially change.For ASC 606, there is an implied contract between us and the patient upon each patient visit. Separate contractual arrangementsexist between us and third party payors (e.g. insurers, managed care programs, government programs, workers’ compensation) whichestablish the amounts the third parties pay on behalf of the patients for covered services rendered. While these agreements are notconsidered contracts with the customer, they are used for determining the transaction price for services provided to the patientscovered by the third party payors. The payor contracts do not indicate performance obligations for us, but indicate reimbursementrates for patients who are covered by those payors when the services are provided. At that time, we are obligated to provide servicesfor the reimbursement rates stipulated in the payor contracts. The execution of the contract alone does not indicate a performanceobligation. For self-paying customers, the performance obligation exists when we provide the services at established rates. Thedifference between our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue – contractualallowance.We determine allowances for doubtful accounts based on the specific agings and payor classifications at each clinic. Theprovision for doubtful accounts is included in clinic operating costs in the statements of net income. Patient accounts receivable,which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for doubtful accounts,includes only those amounts we estimate to be collectible.The following table details the revenue related to the various categories. Year Ended December 31, 201820172016Patient revenues$417,703 $389,226 $348,839 Management contract revenues 8,339 6,275 5,535 Industrial injury prevention services revenues 25,466 14,908 — Other revenues 2,403 3,642 2,172 $453,911 $414,051 $356,546 Contractual Allowances. Contractual allowances result from the differences between the rates charged for services performedand 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 multiplereimbursement mechanisms payable for the services provided in our clinics. We estimate contractual allowances based on ourinterpretation of the applicable regulations, payor contracts and historical calculations. Each month we estimate our contractualallowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriatecontractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on ourhistorical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow us to providethe necessary detail and accuracy with our collectability estimates. However, the services authorized and provided and relatedreimbursement are subject to interpretation that could result in payments that differ from our estimates. Payor terms are periodicallyrevised necessitating continual review and assessment of the estimates made by management. Our billing systems may not capturethe exact change in our contractual allowance reserve estimate from period to period. Therefore, in order to assess the accuracy ofour revenues and hence our contractual allowance reserves, our management regularly compares its cash collections tocorresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In26TABLE OF CONTENTSthe aggregate, the historical difference between net revenues and corresponding cash collections has generally reflected a differencewithin approximately 1% of net revenues. Additionally, analysis of subsequent period’s contractual write-offs on a payor basisreflects a difference within approximately 1% between the actual aggregate contractual reserve percentage as compared to theestimated contractual allowance reserve percentage associated with the same period end balance. As a result, we believe that areasonable likely change in the contractual allowance reserve estimate would not be more than 1% at December 31, 2018. Forpurposes of demonstrating the sensitivity of this estimate on our Company’s financial condition, a one percent increase or decreasein our aggregate contractual allowance reserve percentage would decrease or increase, respectively, net patient revenue byapproximately $1,081,410 for the year ended December 31, 2018. Management believes the changes in the estimate of the contractualallowance reserve for the periods ended December 31, 2018, 2017 and 2016 have not been material to the statement of income.The following table sets forth information regarding our patient accounts receivable as of the dates indicated (in thousands): December 31, 20182017Gross patient accounts receivable$108,141 $108,667 Less contractual allowances 60,718 61,687 Subtotal - accounts receivable 47,423 46,980 Less allowance for doubtful accounts 2,672 2,273 Net patient accounts receivable$44,751 $44,707 The following table presents our patient accounts receivable aging by payor class as of the dates indicated (in thousands): December 31, 2018December 31, 2017PayorCurrentto120 Days120+DaysTotalCurrentto120 Days120+DaysTotalManaged Care/ Commercial Plans.$14,852 $2,263 $17,115 $15,150 $2,120 $17,270 Medicare/Medicaid.. 10,026 1,736 11,762 10,021 1,511 11,532 Workers Compensation* 7,056 1,339 8,395 7,767 1,243 9,010 Self-pay 4,497 3,748 8,245 3,837 3,185 7,022 Other** 945 961 1,906 1,586 560 2,146 Totals$37,376 $10,047 $47,423 $38,361 $8,619 $46,980 *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 ofour 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 payorclassifications at each clinic. We review the accounts receivable aging and rely on prior experience with particular payors todetermine an appropriate reserve for doubtful accounts. Historically, clinics that have a large number of aged accounts generallyhave less favorable collection experience, and thus, require a higher provision. Accounts that are ultimately determined to beuncollectible are written off against our bad debt provision. The amount of our aggregate provision for doubtful accounts is regularlyreviewed 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 andliabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amountsof existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differencesare expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in27TABLE OF CONTENTSincome in the period that includes the enactment date. We recognize the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positionsmeeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.The Tax Cuts and Jobs Act of 2017 (the “TCJA”) was passed by Congress on December 20, 2017 and signed into law byPresident Trump on December 22, 2017. The TCJA made significant changes to U.S. corporate income tax laws including a decrease inthe corporate income tax rate to 21% effective January 1, 2018. As a result, we revalued our deferred tax assets and liabilities. Basedon a review and analysis as of December 31, 2017, we estimated a reduction in our net deferred tax liabilities of $4.3 million therebyreducing our provision for income taxes by such amount for the 2017 year.We do not believe that we have any significant uncertain tax positions at December 31, 2018, nor is this expected to changewithin 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 expenserecognized during the twelve months ended December 31, 2018 and 2017.Carrying Value of Long-Lived Assets. Our property and equipment, intangible assets and goodwill (collectively, our “long-livedassets”) comprise a significant portion of our total assets. The accounting standards require that we periodically, and upon theoccurrence of certain events, assess the recoverability of our long-lived assets. If the carrying value of our property and equipmentexceeds 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 andupon the occurrence of certain events, and are written down to fair value if considered impaired. We evaluate goodwill for impairmenton at least an annual basis (in the third quarter) by comparing the fair value of its reporting units to the carrying value of eachreporting unit including related goodwill. We evaluate indefinite lived tradenames using the relief from royalty method in conjunctionwith its annual goodwill impairment test. 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 determiningreporting units when performing the annual goodwill impairment test. In 2018, 2017 and 2016, we had six regions. In addition to the sixregions, in 2017 and 2018, the impairment test included a separate analysis for the industrial injury prevention business.An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive ofgoodwill and other intangible assets, exceeds the estimated fair value of the reporting unit. The estimated fair value of a reportingunit is determined using two factors: (i) earnings prior to taxes, depreciation and amortization for the reporting unit multiplied by aprice/earnings ratio used in the industry and (ii) a discounted cash flow analysis. A weight is assigned to each factor and the sum ofeach weight times the factor is considered the estimated fair value. For 2018, the factors (i.e., price/earnings ratio, discount rate andresidual capitalization rate) were updated to reflect current market conditions. The evaluation of goodwill in 2018, 2017 and 2016 didnot result in any goodwill amounts that were deemed impaired. In 2017, we wrote off the goodwill of $0.5 million related to the closureof a single clinic acquired partnership due to the loss of a significant management contract.Redeemable Non-Controlling Interests – The non-controlling interests that are reflected as redeemable non-controllinginterests in our consolidated financial statements consist of those owners, including us, who have certain redemption rights, whethercurrently exercisable or not, and which currently, or in the future, require that we purchase or the owner sell the non-controllinginterest held by the owner, if certain conditions are met and the owners request the purchase (“Put Right”). We also have a call right(“Call Right”). The Put Right or Call Right may be triggered by the owner or us, respectively, at such time as both of the followingevents have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage ofspecified number of years after the closing of the transaction, typically three to five years, as defined in the limited partnershipagreement. The Put Rights and Call Rights are not automatic (even upon death) and require either the owner or us to exercise ourrights when the conditions triggering the Put or Call Rights have been satisfied. The purchase price is derived at a predeterminedformula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnershipagreements.28TABLE OF CONTENTSOn the date we acquire a controlling interest in a partnership and the limited partnership agreement for such partnershipscontains redemption rights not under our control, the fair value of the non-controlling interest is recorded in the consolidatedbalance sheet under the caption – Redeemable non-controlling interests. Then, in each reporting period thereafter until it ispurchased by us, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initialvalue, based on the predetermined formula defined in the respective limited partnership agreement. As a result, the value of the non-controlling interest is not adjusted below its initial value. We record any adjustment in the redemption value, net of tax, directly toretained earnings and not in the consolidated statements of income. Although the adjustments are not reflected in the consolidatedstatements of income, current accounting rules require that we reflect the adjustments, net of tax, in the earnings per sharecalculation. The amount of net income attributable to redeemable non-controlling interest owners is included in consolidated netincome on the face of the consolidated income statement. We believe the redemption value (i.e. the carrying amount) and fair valueare the same.Mandatorily Redeemable Non-Controlling Interests – The non-controlling interests that were reflected as mandatorilyredeemable non-controlling interests in the consolidated financial statements are subject to Required Redemption (as defined inFootnote 6 – Mandatorily Redeemable Non-Controlling Interest), whether currently exercisable or not, and which currently, or in thefuture, require that we purchase the non-controlling interest of those owners at a predetermined formula based on a multiple oftrailing twelve months earnings performance as defined in the respective limited partnership agreements. The Required Redemption istriggered at such time as both of the following events have occurred: 1) termination of the holder’s employment with NewCo (asdefined in Footnote 6– Mandatorily Redeemable Non-Controlling Interest), regardless of the reason for such termination, and 2) thepassage of specified number of years after the closing of the transaction, typically three to five years, as defined in the applicablelimited partnership agreement.Effective December 31, 2017, we entered into amendments to our limited partnership agreements for our acquired partnershipsreplacing the mandatory redemption feature. No monetary consideration was paid to the partners to amend the agreements. Theamended limited partnership agreements provide that, upon the triggering events, we have a Call Right and the selling entity orindividual has a Put Right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the PutRight and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. Thepurchase price of the partner’s limited partnership interest upon the exercise of either the Put Right or the Call Right is calculated perthe terms of the respective agreements. We accounted for the amendment of the limited partnership agreements as an extinguishmentof the outstanding mandatorily redeemable non-controlling interests, which were classified as liabilities, through the issuance of newredeemable non-controlling interests classified in temporary equity. Pursuant to Accounting Standards Codification (“ASC”) 470-50-40-2, we removed the outstanding liabilities at their carrying amounts, recognized the new temporary equities at their fair value, andrecorded no gain or loss on extinguishment as management believes the redemption value (i.e. the carrying amount) and fair value arethe same. In summary, the redemption values of the mandatorily redeemable non-controlling interest (previously classified asliabilities) were reclassified as redeemable non-controlling interest (temporary equity) at fair value on the December 31, 2017consolidated balance sheet. On December 31, 2017, the remaining balance of $327,000 in the line item – Mandatorily redeemable non-controlling interests – relates to one limited partnership agreement that was not amended as the non-controlling interest waspurchased by us in January 2018.Non-Controlling Interests – We recognize non-controlling interests, in which we have no obligation but the right to purchasethe non-controlling interests, as equity in the consolidated financial statements separate from the parent entity’s equity. The amountof net income attributable to non-controlling interests is included in consolidated net income on the face of the consolidatedstatements of income. Operating losses are allocated to non-controlling interests even when such allocation creates a deficit balancefor the non-controlling interest partner. When we purchase a non-controlling interest and the purchase price exceeds the book valueat the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.29TABLE OF CONTENTSSELECTED OPERATING AND FINANCIAL DATAThe following table and discussion relates to continuing operations unless otherwise noted. The defined terms with theirrespective description used in the following discussion are listed below:2018Year ended December 31, 20182017Year ended December 31, 20172016Year ended December 31, 2016New ClinicsClinics opened or acquired during the year ended December 31, 2018Mature ClinicsClinics opened or acquired prior to January 1, 20182017 New ClinicsClinics opened or acquired during the year ended December 31, 20172017 Mature ClinicsClinics opened or acquired prior to January 1, 20172016 New ClinicsClinics opened or acquired during the year ended December 31, 20162016 Mature ClinicsClinics opened or acquired prior to January 1, 20162015 New ClinicsClinics opened or acquired during the year ended December 31, 2015The following table presents selected operating and financial data, used by management as key indicators of our operatingperformance: For the Years Ended December 31, 201820172016Number of clinics, at the end of period 591 578 540 Working Days 255 254 255 Average visits per day per clinic 26.6 25.9 25.0 Total patient visits 3,957,534 3,705,226 3,316,729 Net patient revenue per visit$105.55 $105.05 $105.18 RESULTS OF OPERATIONSFISCAL YEAR 2018 COMPARED TO FISCAL 2017•Net revenues increased $39.8 million, or 9.6%, from $414.1 million in 2017 to $453.9 million in 2018, primarily due to anincrease in net patient revenues from physical therapy operations from both internal growth and acquisitions, an increasein the revenue from the industrial injury prevention business from a combination of internal growth plus an acquisition andan increase in revenue from management contracts due to acquired contracts. Our first company in the industrial injuryprevention business was acquired in March 2017 and, on April 30, 2018, the Company made a second acquisition.•For the year ended December 31, 2018, our Operating Results increased 28.1% to $33.5 million, or $2.65 per diluted share, ascompared to $26.2 million, or $2.08 per diluted share, for the 2017 year. Operating Results (as defined below), a non-generally accepted accounting principles (“non-GAAP”) measure, for the 2018 fourth quarter and for the 2018 year, equalsnet income attributable to our shareholders excluding gain on derecognition of debt, net of taxes. For the 2017 fourthquarter and 2017 year, Operating Results is defined as net income attributable to our shareholders prior to the benefit due tothe revaluation of deferred tax assets and liabilities due to the 2017 Tax Cuts and Jobs Act (“TCJA”), and prior to chargesfor interest expense – mandatorily redeemable non-controlling interests – change in redemption value and charges for costsrelated to restatement of financials – legal and accounting, both charges net of tax. See table below.•For the year ended December 31, 2018, our net income attributable to its shareholders, in accordance with GAAP, was $34.9million, $1.31 per share, as compared to $22.3 million, or $1.76 per share, for the 2017 year. For both periods of 2018, inaccordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is notincluded in net income but rather charged directly to retained earnings, but is included in the earnings per basic and dilutedshare calculation. See table below.30TABLE OF CONTENTS•For 2018, our Adjusted EBITDA increased by 7.1% to $62.1 million from $57.9 million in 2017. See definition andreconciliation of Adjusted EBITDA in the following table. Year Ended December 31, 20182017Computation of earnings per share - USPH shareholders Net income attributable to USPH shareholders$34,873 $22,256 Charges to retained earnings: Revaluation of redeemable non-controlling interest (24,770) (201)Tax effect at statutory rate (federal and state) of 26.25% 6,502 75 $16,605 $22,130 Basic and diluted per share 1.31 $1.76 Adjustments: Tax benefit - revaluation of deferred tax assets and liabilities — (4,325)Gain on derecognition of debt (1,846) — Interest expense MRNCI* - change in redemption value — 12,894 Cost related to restatement of financials - legal and accounting — 670 Revaluation of redeemable non-controlling interest 24,770 201 Tax effect at statutory rate (federal and state) of 26.25% and 39.25%, respectively (6,018) (5,405)Operating results$33,511 $26,165 Basic and diluted operating results per share$2.65 $2.08 Shares used in computation: Basic and diluted 12,666 12,570 Year Ended December 31, 20182017Net income attributable to USPH shareholders$34,873 $22,256 Adjustments: Depreciation and amortization 9,755 9,710 Gain on derecognition of debt (1,846) — Interest income (93) (88)Interest expense MRNCI* - change in redemption value — 12,894 Interest expense - debt and other 2,042 2,111 Provision for income taxes 11,369 6,032 Equity-based awards compensation expense 5,939 5,032 Adjusted EBITDA$62,039 $57,947 *Mandatorily redeemable non-controlling interestsThe above table details the calculation of basic and diluted earnings per share attributable to our shareholders and reconcilesnet income attributable to our shareholders calculated in accordance with GAAP to Adjusted EBITDA and Operating Results, non-GAAP measures defined below. We believe providing Operating Results and Adjusted EBITDA are useful information to ourinvestors for the purposes of comparing our period-to-period results. In addition, we believe that providing Operating Results allowsour investors to compare31TABLE OF CONTENTSour results with other similar businesses since most do not have redeemable instruments and therefore have different liability andequity structures. We use Operating Results, which eliminates the MRNCI – change in redemption which is a current non-cash itemthat can be subject to volatility and unusual costs, as one of the principal measures to evaluate and monitor financial performanceperiod over period. Adjusted EBITDA is defined as earnings before gain on derecognition of debt, interest income, interest expense –mandatorily redeemable non-controlling interests – change in redemption value, interest expense – debt and other, taxes,depreciation, amortization and equity-based awards compensation expense.Operating Results and Adjusted EBITDA are not measures of financial performance under GAAP. Operating Results andAdjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income attributable to USPHshareholders presented in the consolidated financial statements.Net Patient Revenues•Net patient revenues increased to $417.7 million for 2018 from $389.2 million for 2017, an increase of $28.5 million, or 7.3%.The increase in net patient revenues of $28.5 million consisted of an increase of $4.7 million from New Clinics and $23.8million from Mature Clinics. During 2018, we acquired one multi-clinic group consisting of four clinics and five other singleclinic practices for a total of 9 clinics. The net patient revenues from acquired clinics are included in our results ofoperations since the respective date of their acquisition. See above table and discussion under “—Executive Summary”detailing our multi-clinic acquisitions.•Total patient visits increased to 3,958,000 for 2018 from 3,705,000 for 2017. The growth in patient visits was attributable to43,000 visits in New Clinics and an increase of 210,000 visits for Mature Clinics primarily due to 2017 New Clinics.•The average net patient revenue per visit slightly increased to $105.55 in 2018 from $105.05 in 2017.•Net patient revenues are based on established billing rates less allowances and discounts for patients covered bycontractual programs and workers’ compensation. Net patient revenues reflect contractual and other adjustments, which weevaluate monthly, relating to patient discounts from certain payors. Payments received under these contractual programsand workers’ compensation are based on predetermined rates and are generally less than the established billing rates of theclinics.Other RevenuesOther revenues, consisting primarily of industrial injury prevention business and management fees revenue, increased by $11.4million, from $24.8 million in 2017 to $36.2 million in 2018. The revenues from the recently acquired industrial injury preventionbusiness were $25.5 million in 2018 and $14.9 million in 2017. Revenues from management contracts were $8.3 million for 2018 ascompared to $7.4 million for 2017. Other miscellaneous revenue was $2.4 million for 2018 and $2.5 million for 2017.Operating CostsOperating costs were $352.2 million, or 77.6% of net revenues, for 2018 and $323.4 million, or 78.1% of net revenues, for 2017.The dollar increase was attributable to $5.3 million in operating costs for New Clinics, an additional $15.1 million related to a MatureClinics, $7.4 million related to the addition of the industrial injury prevention business, and an increase of $1.0 million related tomanagement contracts. The 2017 closure costs of $0.6 million, included in operating costs, are primarily due to the closure of a singleclinic acquired partnership due to the loss of a significant management contract. (See table detailing acquisition dates above under –“Executive Summary”). Each component of clinic operating costs is discussed below:Operating Costs—Salaries and Related CostsSalaries and related costs increased to $259.2 million for 2018 from $237.1 million for 2017, an increase of $22.1 million, or 9.3%.Approximately $3.3 million of the increase was attributable to New Clinics, $12.6 million of the increase was due to higher costs atvarious Mature Clinics primarily due to an increase in salaries and related costs in 2017 New Clinics which had a full year of activityin 2018, $5.4 million was due to higher salary costs at the industrial injury prevention businesses primarily due to the acquisition inApril of 2018 and $0.8 million related to management contracts. Salaries and related costs as a percentage of net revenues was 57.1%for 2018 and 57.3% for 2017.32TABLE OF CONTENTSOperating Costs—Rent, Supplies, Contract Labor and OtherRent, supplies, contract labor and other costs increased to $88.4 million for 2018 from $82.1 million for 2017, an increase of $6.3million, or 7.7%. Approximately $1.9 million of the increase was attributable to New Clinics, $1.7 million of the increase was due tohigher costs at various Mature Clinics, $1.7 million was due to the industrial injury prevention businesses primarily due to theacquisition in April of 2018 and $1.0 million related to management contracts. For 2018, New Clinics accounted for approximately $1.9million of the increase, the industrial injury prevention business accounted for approximately $0.7 million and 2017 New Clinicsaccounted for approximately $3.7 million of the increase due to a full year of activity. Rent, supplies, contract labor and other costs asa percent of net revenues was 19.5% for 2018 and 19.8% for 2017.Operating Costs—Provision for Doubtful AccountsThe provision for doubtful accounts for net patient receivables was $4.6 million for 2018 and $3.7 million for 2017. As apercentage of net patient revenues, the provision for doubtful accounts was 1.0% for 2018 and 0.9% for 2017.Our provision for doubtful accounts as a percentage of total patient accounts receivable was 5.6% at December 31, 2018 and4.9% at December 31, 2017. The provision for doubtful accounts at the end of each period is based on a detailed, clinic-by-clinicreview of overdue accounts and is regularly reviewed in the aggregate in light of historical experience.The average accounts receivable days outstanding were 37 days at December 31, 2018 and 36 days at December 31, 2017. Netpatient receivables in the amount of $3.9 million and $3.3 million were written-off in 2018 and 2017, respectively.Closure CostsFor 2018 and 2017, closure costs amounted to a credit of $9,000 and a charge of $599,000, respectively. As previously mentioned,the 2017 closure costs are primarily due to the closure of a single clinic acquired partnership due to the loss of a significantmanagement contract.Gross ProfitThe gross profit in 2018 grew by 12.2% or $11.1 million to $101.7 million, as compared to $90.6 million in 2017. The gross profitpercentage grew to 22.4% of net revenue in the recent year as compared to 21.9% for 2017. The gross profit percentage for ourphysical therapy clinics was 22.7% for 2018 as compared to 22.5% for 2017. The gross profit percentage on management contractswas 12.1% for 2018 as compared to 14.9% for 2017. The gross profit percentage for the industrial injury prevention business was20.4% for 2018 as compared to 13.3% for 2017.Corporate Office CostsCorporate office costs, consisting primarily of salaries, benefits and equity based compensation of corporate office personneland directors, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruitingfees, were $41.3 million for 2018 and $35.9 million for 2017. The dollar increase is primarily due to increases in salaries, benefits andequity based compensation. Corporate office costs as a percentage of net revenues were 9.1% for 2018 and 8.7% in 2017.Interest Expense—mandatorily redeemable non-controlling interest – change in redemption value.We no longer have mandatorily redeemable non-controlling interests. As previously mentioned, due to amended partnershipsagreements, the redemption values of the mandatorily redeemable non-controlling interests (previously classified as liabilities) werereclassified as redeemable non-controlling interest (temporary equity) at fair value on the December 31, 2017 consolidated balancesheet. For 2017, the earnings and liabilities attributable to mandatorily redeemable non-controlling interests were recorded within theconsolidated statements of income line item: Interest expense—mandatorily redeemable non-controlling interests—earnings allocableand in the consolidated balance sheet line item: Mandatorily redeemable non-controlling interests. For 2018, any33TABLE OF CONTENTSadjustments in the redemption value, net of tax, are recorded directly to retained earnings and are not reflected in the consolidatedstatements of income. Although the redemption adjustments are not reflected in the consolidated statements of income, currentaccounting rules require that we reflect these adjustments, net of tax, in the earnings per share calculation.Interest Expense mandatorily redeemable non-controlling interest – change in redemption value for the 2017 year was $12.9million. The change in redemption value for acquired partnerships was based on the redemption amount (which is derived from aformula based on a specified multiple times the underlying business’ trailing twelve months of earnings before interest, taxes,depreciation, amortization and our internal management fee) at the end of the reporting period compared to the end of the previousperiod. This change is directly related to an increase or decrease in the profitability and underlying value of our partnerships ascompared to the prior year.compared to the prior year.Interest Expense—mandatorily redeemable non-controlling interest – earnings allocable.For 2018, the amount of net income attributable to redeemable non-controlling interest owners is included in consolidated netincome on the face of the consolidated statement of income in the line item – Net income attributable to non-controlling interests. For2017, interest expense – mandatorily redeemable non-controlling interest – earnings allocable, which represent the portion ofearnings allocable to the holders of mandatorily redeemable non-controlling interests, was $6.1 million.Interest Expense—debt and otherInterest expense – debt and other was $2.0 million for 2018 and $2.1 million for 2017. At December 31, 2018, $38.0 million wasoutstanding under our Amended Credit Agreement (as defined below under “—Liquidity and Capital Resources”). See “—Liquidityand Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.Gain on Derecognition of DebtGain on derecognition of debt was $1.8 million for the year 2018 as a liability relating to some former physical therapy partners isno longer deemed payable.Provision for Income TaxesThe provision for income tax in 2018 was $11.4 million, inclusive of a $0.5 million benefit related to the reconciliation of the 2017federal and state returns to our book provision. Without this benefit, the provision for income taxes as a percentage of income beforetaxes less net income attributable to non-controlling interest was 25.7%. The income tax expense in 2017 was $6.0 million. Included in2017 is a tax benefit of $4.3 million due to the revaluation of deferred tax assets and liabilities due to the TCJA. Also, included in 2017was a charge of $0.3 million related to a detailed reconciliation of the federal and state taxes payable and receivable accounts alongwith federal and state deferred tax assets and liability accounts at December 31, 2016. Without this reconciliation charge and prior tothe $4.3 million tax benefit, the provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest was 35.6%. As reported, the provision for income tax as a percentage of income before taxes less net incomeattributable to non-controlling interest was 24.6% in 2018 and 21.3% in 2017.Net Income Attributable to Non-controlling InterestsNet income attributable to non-controlling interests was $13.9 million in 2018 and $5.5 million in 2017. Net income attributable tonon-controlling interests (permanent equity) was $5.5 million in 2018 as compared to $5.2 million in 2017. Net income attributable toredeemable non-controlling interests (temporary equity) was $8.4 million in 2018 and $0.2 million in 2017.34TABLE OF CONTENTSFISCAL YEAR 2017 COMPARED TO FISCAL 2016•Net revenues increased 16.1% from $356.5 million in 2016 to $414.1 million in 2017, primarily due to an increase in totalpatient visits of 11.7% from 3,317,000 to 3,705,000, higher revenues from management contracts and revenues from theindustrial injury prevention business acquired in March 2017.•For the year ended December 31, 2017, Operating Results increased 7.7% to $26.2 million as compared to $24.3 million in2016. Diluted earnings per share from Operating Results was $2.08 in 2017 as compared to $1.94 in 2016. Operating Results,a non-generally accepted accounting principles (“non-GAAP”) measure, are defined as net income attributable to commonshareholders prior to interest expense – mandatorily redeemable non-controlling interests – change in redemption valueand costs related to restatement of financials, both net of tax, and the tax benefit of revaluation of deferred tax assets andliabilities due to the TCJA. See table below.•For the year ended December 31, 2017, our net income attributable to our shareholders, in accordance with generallyaccepted accounting principles (“GAAP”), was $22.3 million, or $1.76 per diluted share, as compared to $20.6 million, or$1.64 per diluted share, for the 2016 year. Included in the quarter and year ended December 31, 2017 is a tax benefit of $4.3million related to the revaluation of deferred tax assets and liabilities due to the TCJA. See table on next page.•For 2017, the Company’s Adjusted EBITDA increased by 8.2% to $57.9 million from $53.5 million in 2016. See definition andreconciliation of Adjusted EBITDA below. Year Ended December 31, 20172016Computation of earnings per share - USPH shareholders Net income attributable to USPH shareholders$22,256 $20,551 Charges to retained earnings: Revaluation of redeemable non-controlling interest (201) — Tax effect at statutory rate (federal and state) of 26.25% 75 — $22,130 $20,551 Basic and diluted per share$1.76 $1.64 Adjustments: Tax benefit - revaluation of deferred tax assets and liabilities (4,325) — Gain on derecognition of debt — — Interest expense MRNCI* - change in redemption value 12,894 6,169 Cost related to restatement of financials - legal and accounting 670 — Revaluation of redeemable non-controlling interest 201 — Tax effect at statutory rate (federal and state) of 26.25% and 39.25%, respectively (5,405) (2,421)Operating results$26,165 $24,299 Basic and diluted operating results per share$2.08 $1.94 Shares used in computation: Basic and diluted 12,570 12,500 35TABLE OF CONTENTS 20172016Net income attributable to USPH shareholders$22,256 $20,551 Adjustments: Depreciation and amortization 9,710 8,779 Gain on derecognition of debt — — Interest income (88) (93)Interest expense MRNCI* - change in redemption value 12,894 6,169 Interest expense - debt and other 2,111 1,252 Provision for income taxes 6,032 11,880 Equity-based awards compensation expense 5,032 4,962 Adjusted EBITDA$57,947 $53,500 *Mandatorily redeemable non-controlling interestsThe above table details the calculation of basic and diluted earnings per share attributable to our shareholders and reconcilesnet income attributable to our shareholders calculated in accordance with GAAP to Adjusted EBITDA and Operating Results, a non-GAAP measure defined below. We believe providing Operating Results and Adjusted EBITDA is useful information to our investorsfor the purposes of comparing our period-to-period results. In addition, we believe that providing Operating Results allows ourinvestors to compare our results with other similar businesses since most do not have mandatorily redeemable instruments andtherefore have different liability and equity structures. We use Operating Results, which eliminates the MRNCI – change inredemption which is a current non-cash item that can be subject to volatility and unusual costs, as one of the principal measures toevaluate and monitor financial performance period over period. Adjusted EBITDA is defined as earnings before gain onderecognition of debt, interest income, interest expense – mandatorily redeemable non-controlling interests – change in redemptionvalue, interest expense – debt and other, taxes, depreciation, amortization and equity-based awards compensation expense.Operating Results and Adjusted EBITDA are not measures of financial performance under GAAP. Operating Results andAdjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income attributable to USPHshareholders presented in our consolidated financial statements.Net Patient Revenues•Net patient revenues increased to $389.2 million for 2017 from $348.8 million for 2016, an increase of $40.4 million, or 11.6%.The increase in net patient revenues of $40.4 million consisted of an increase of $19.3 million from 2017 New Clinics and$21.1 million from 2017 Mature Clinics. During 2017, we acquired four multi-clinic groups for a total of 39 clinics. The netpatient revenues from these multi-clinic groups are included in our results of operations since the respective date of theiracquisition. See above table under “—Executive Summary” detailing our multi-clinic acquisitions.•Total patient visits increased to 3,705,000 for 2017 from 3,317,000 for 2016. The growth in patient visits was attributable to229,000 visits in 2017 New Clinics primarily due to the acquisitions in 2016 and an increase of 159,000 visits for 2017 MatureClinics primarily due to 2016 New Clinics.•The average net patient revenue per visit slightly decreased to $105.05 in 2017 from $105.18 in 2016.Net patient revenues are based on established billing rates less allowances and discounts for patients covered by contractualprograms 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 aregenerally less than the established billing rates of the clinics.Other RevenuesOther revenues, consisting primarily of management fees, increased by $1.9 million, from $5.5 million in 2016 to $7.4 million in2017.36TABLE OF CONTENTSOperating CostsOperating costs were $323.4 million, or 78.1% of net revenues, for 2017 and $274.5 million, or 77.0% of net revenues, for 2016.The increase was attributable to $17.3 million in operating costs for 2017 New Clinics, an additional $15.6 million related to a full yearof activity in 2017 for 2016 New Clinics, $12.9 million related to the addition of the industrial injury prevention business, $2.6 millionrelated to 2016 Mature Clinics and an additional $0.5 million in closure costs. The 2017 closure costs are primarily due to the closureof a single clinic acquired partnership due to the loss of a significant management contract. Each component of clinic operating costsis discussed below:Operating Costs—Salaries and Related CostsSalaries and related costs increased to $237.1 million for 2017 from $198.5 million for 2016, an increase of $38.6 million, or 19.4%.Approximately $14.2 million of the increase was attributable to 2017 New Clinics, $11.6 million of the increase was due to higher costsat various 2016 New Clinics due to a full year of activity, $10.6 million was due to the ten months of activity for the industrial injuryprevention business and higher costs of $2.2 million at 2016 Mature Clinics. Salaries and related costs as a percentage of netrevenues was 57.3% for 2017 and 55.7% for 2016.Operating Costs—Rent, Supplies, Contract Labor and OtherRent, supplies, contract labor and other costs increased to $82.1 million for 2017 from $71.9 million for 2016, an increase of $10.2million, or 14.2%. For 2017, 2017 New Clinics accounted for approximately $5.9 million of the increase, the industrial injury preventionbusiness accounted for approximately $2.3 million and 2016 New Clinics accounted for approximately $4.2 million of the increase dueto a full year of activity. Rent, supplies, contract labor and other costs for 2016 Mature Clinics decreased $2.2 million in 2017 ascompared to 2016. Rent, supplies, contract labor and other costs as a percent of net revenues was 19.8% for 2017 and 20.2% for 2016.Operating Costs—Provision for Doubtful AccountsThe provision for doubtful accounts for net patient receivables was $3.7 million for 2017 and $4.0 million for 2016. As apercentage of net patient revenues, the provision for doubtful accounts was 0.9% for 2017 and 1.1% for 2016.Our provision for doubtful accounts as a percentage of total patient accounts receivable was 4.9% at December 31, 2017 and4.4% at December 31, 2016. The provision for doubtful accounts at the end of each period is based on a detailed, clinic-by-clinicreview of overdue accounts and is regularly reviewed in the aggregate in light of historical experience.The average accounts receivable days outstanding were 36 days for December 31, 2017 and for December 31, 2016. Net patientreceivables in the amount of $3.3 million and $3.6 million were written-off in 2017 and 2016, respectively.Closure CostsFor 2017 and 2016, closure costs amounted to $0.5 million and $0.1 million, respectively. As previously mentioned, the 2017closure costs are primarily due to the closure of a single clinic acquired partnership due to the loss of a significant managementcontract.Gross ProfitIn 2017, the gross profit (net revenues less total clinic operating costs) increased by 4.7% to $90.6 million from $82.0 million in2016. The gross profit percentage for 2017 was 22.0% as compared to 23% for 2016.Corporate Office CostsCorporate office costs, consisting primarily of salaries, benefits and equity based compensation of corporate office personneland directors, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruitingfees, were $35.9 million for 2017 and $32.5 million for 2016. The dollar increase is primarily due to increases in salaries, benefits andequity based compensation. Corporate office costs as a percentage of net revenues were 8.7% for 2017 and 9.1% in 2016.37TABLE OF CONTENTSInterest Expense—mandatorily redeemable non-controlling interest – change in redemption value.Interest Expense – mandatorily redeemable non-controlling interest – change in redemption value increased to $12.9 million forthe year 2017 from $6.2 million in 2016. This increase is primarily due to the increased earnings performance of the underlyingbusinesses. The change in redemption value is based on the redemption amount (which is derived from a formula based on aspecified multiple times the underlying business’ trailing twelve months of earnings before interest, taxes, depreciation, amortizationand our internal management fee) at the end of the reporting period compared to the end of the previous period.Interest Expense—mandatorily redeemable non-controlling interest – earnings allocable.Interest Expense – mandatorily redeemable non-controlling interest – earnings allocable represent the portion of earningsallocable to the holders of the mandatorily redeemable non-controlling interest. This expense increased to $6.1 million in 2017 ascompared to $4.1 million in 2016. The increase is the result of new business acquisitions and increased performance of existingbusinesses.Interest Expense—debt and otherInterest expense – debt and other was $2.1 million for 2017 and $1.3 million for 2016. At December 31, 2017, $54.0 million wasoutstanding under our Amended Credit Agreement (as defined below under “—Liquidity and Capital Resources”). See “—Liquidityand Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.Provision for Income TaxesThe provision for income taxes was $6.0 million for 2017 and $11.9 million for 2016. Included in 2017 is an estimated tax benefit of$4.3 million due to the revaluation of deferred tax assets and liabilities, as previously discussed. The provision for income taxes, priorto the $4.3 million tax benefit, as a percentage of income before taxes less net income attributable to non-controlling interest was35.6% and 36.6% in 2017 and in 2016, respectively. The reconciliation of the 2016 federal and state returns to our book provision was$312,000 which is included in the 2017 provision. The reconciliation of the 2015 federal and state returns to our book provision was$34,000 which is included in the 2016 provision.Net Income Attributable to Non-controlling InterestsNet income attributable to non-controlling interests was $5.5 million in 2017 and $5.7 million in 2016. Net income attributable tonon-controlling interests (permanent equity) was $5.2 million in 2017 as compared to $5.7 million in 2016. Net income attributable toredeemable non-controlling interests (temporary equity) was $0.2 million in 2017.LIQUIDITY AND CAPITAL RESOURCESWe believe that our business is generating sufficient cash flow from operating activities to allow us to meet our short-term andlong-term cash requirements, other than those with respect to future significant acquisitions. At December 31, 2018, we had $23.4million in cash and cash equivalents compared to $21.9 million at December 31, 2017. Although the start-up costs associated withopening new clinics and our planned capital expenditures are significant, we believe that our cash and cash equivalents andavailability under our Amended Credit Agreement are sufficient to fund the working capital needs of our operating subsidiaries,future clinic development and acquisitions and investments through at least December 2019. Significant acquisitions would likelyrequire financing under our Amended Credit Agreement.Effective December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 millionrevolving credit facility. This agreement was amended in August 2015, January 2016, March 2017 and November 2017 (hereafterreferred to as “Amended Credit Agreement”). The Amended Credit Agreement is unsecured and has loan covenants, includingrequirements that we comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceeds from theAmended Credit Agreement may be used for working capital, acquisitions, purchases of our common stock, dividend payments toour common stockholders, capital expenditures and other corporate purposes. The pricing grid is based on our consolidated leverageratio with the applicable spread over LIBOR ranging from 1.25% to 2.0% or the applicable38TABLE OF CONTENTSspread over the Base Rate ranging from 0.1% to 1%. Fees under the Amended Credit Agreement include an unused commitment feeranging from 0.25% to 0.3% depending on our consolidated leverage ratio and the amount of funds outstanding under the AmendedCredit Agreement.The January 2016 amendment to the Amended Credit Agreement increased the cash and noncash consideration that we couldpay with respect to acquisitions permitted under the Amended Credit Agreement to $50,000,000 for any fiscal year, and increased theamount we may pay in cash dividends to our shareholders in an aggregate amount not to exceed $10,000,000 in any fiscal year. TheMarch 2017 amendment, among other items, increased the amount we may pay in cash dividends to our shareholders in an aggregateamount not to exceed $15,000,000 in any fiscal year. The November 2017 amendment, among other items, adjusted the pricing grid asdescribed above, increased the aggregate amount we may pay in cash dividends to $20,000,000 to our shareholders and extended thematurity date to November 30, 2021.On December 31, 2018, $38.0 million was outstanding on the Amended Credit Agreement resulting in $87.0 million of availability.As of the date of this report, we were in compliance with all of the covenants thereunder.The increase in cash and cash equivalents of $1.4 million from December 31, 2018 to December 31, 2017 was due primarily to$73.0 million provided by operations and $16.0 million net proceeds from our Amended Credit Agreement. The major uses of cash forinvesting and financing activities included: purchase of businesses ($16.4 million), payments of cash dividends to our shareholders($11.7 million), purchases of fixed assets ($7.2 million), distributions to non-controlling interests ($15.6 million), acquisitions of non-controlling interests through settlements of liabilities related to mandatorily redeemable non-controlling interests ($0.2 million) andpayments on notes payable ($4.0 million)On February 28, 2018, through one of our majority owned partnerships, we acquired the assets and business of two physicaltherapy clinics, for an aggregate purchase price of $760,000 in cash and $150,000 in seller note that is payable, plus accrued interest,on August 31, 2019.On April 30, 2018, we purchased a 65% interest in the assets and business of industrial injury prevention services, for anaggregate purchase price of $8.6 million in cash and $400,000 in seller note that is payable, plus accrued interest, on April 30, 2019.The initial industrial injury prevention business was acquired in March 2017 and, on April 30, 2018, we made a second acquisitionwith the two businesses then combined. After the combination, we own a 59.45% interest in the combined business.On August 31, 2018 we acquired a 70% interest in a four-clinic physical therapy practice. The purchase price for the 70% interestwas $7.3 million in cash and $400,000 in a seller note that is payable in two principal installments totaling $200,000 each, plus accruedinterest, in August 2019 and August 2020.In addition to the multi-clinic acquisitions above in 2018, we through several of our majority owned Clinic Partnerships, acquiredfive separate clinic practices. These practices will operate as satellites of the respective existing clinic partnership.On January 1, 2017, we acquired a 70% interest in a seventeen-clinic physical therapy practice. The purchase price for the 70%interest was $10.7 million in cash and $0.5 million in a seller note that is payable in two principal installments totaling $250,000 each,plus accrued interest. The first installment was paid in January 2018 and the second installment was paid in January 2019.In March 2017, we acquired a 55% interest in a company which is a leading provider of industrial injury prevention solutions.Services provided include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments. Themajority of these services are contracted with and paid for directly by employers including a number of Fortune 500 companies. Otherclients include large insurers and their contractors. The purchase price for the 55% interest was $6.2 million in cash and $0.4 million ina seller note that was paid, principal plus accrued interest, in September 2018.On May 31, 2017, we acquired a 70% interest in a four-clinic physical therapy practice. The purchase price for the 70% interestwas $2.3 million in cash and $250,000 in a seller note that is payable in two principal installments totaling $125,000 each plus accruedinterest. The first installment was paid in May 2018 and the second installment is due in May 2019.39TABLE OF CONTENTSOn June 30, 2017, we acquired a 60% interest in a nine-clinic physical therapy practice. The purchase price for the 60% interestwas $15.8 million in cash and $0.5 million in a seller note payable in two equal installments. The first installment of $250,000 was paidin June 2018 and the second installment is due in June 2019.On October 31, 2017, we acquired a 70% interest in a nine-clinic physical therapy practice and two management contracts withthird party providers. The purchase price for the 70% interest was $4.0 million in cash and $0.5 million in a seller note payable in twoequal installments. The first installment of $250,000 was paid in October 2018 and the second installment is due in October 2019.On November 30, 2016, we acquired a 60% interest in a 12 clinic physical therapy practice. The purchase price for the 60%interest was $11.0 million in cash and $0.5 million in a seller note that is payable in two principal installments of $250,000 each, plusaccrued interest, one of which was paid in November 2017 and one of which was paid in November 2018. On February 29, 2016, weacquired a 55% interest in an eight-clinic physical therapy practice. The purchase price for the 55% interest was $13.2 million in cashand $0.5 million in a seller note that was payable in two principal installments totaling $250,000 each, plus accrued interest. The firstinstallment was paid in February 2017 and the next installment was paid in February 2018.Historically, we have generated sufficient cash from operations to fund our development activities and to cover operationalneeds. We plan to continue developing new clinics and making additional acquisitions. We have from time to time purchased thenon-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in thefuture. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination ofcash and financing. Any large acquisition would likely require financing.We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-paymentamounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. Whenpossible, we submit our claims electronically. The collection process is time consuming and typically involves the submission ofclaims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigationand vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMSapproval 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-paypayor 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, 2018 are summarized as follows (in thousands): Total20192020202120222023ThereafterCredit Agreement$38,000 $— $— $38,000 $— $— $— Notes Payable 1,836 1,434 402 — — — — Interest Payable 69 59 10 — — — — Employee Agreements 43,259 33,760 7,143 1,178 1,178 — — Operating Leases 102,554 34,139 27,475 18,968 11,592 6,488 3,892 $185,718 $69,392 $35,030 $58,146 $12,770 $6,488 $3,892 We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payablerelate only to certain of the acquisitions of businesses. At December 31, 2018, our remaining outstanding balance on these notesaggregated $1.8 million. Generally, the notes are payable in equal annual installments of principal over two years plus any accruedand unpaid interest. See above table for a detail of future principal payments. Interest accrues at various interest rates ranging from3.75% to 5.00% per annum, subject to adjustment. In addition, we assumed leases with remaining terms of 1 month to 6 years for theoperating facilities.40TABLE OF CONTENTSIn conjunction with the above mentioned acquisitions, in the event that a limited minority partner’s employment ceases,typically after three to five years, from the original date the interest was acquired, we have agreed to repurchase that individual’snon-controlling interest at a predetermined multiple of earnings before interest, taxes, depreciation, amortization and certainintercompany charges.Effective December 31, 2017, we entered into amendments to our limited partnership agreements for our acquired partnershipsreplacing the mandatory redemption feature. No monetary consideration was paid to the partners to amend the agreements. Theamended limited partnership agreements provide that, upon the triggering events, we have a Call Right and the selling entity orindividual has a Put Right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the PutRight and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. Thepurchase price of the partner’s limited partnership interest upon the exercise of either the Put Right or the Call Right is calculated perthe terms of the respective agreements. We accounted for the amendment of our limited partnership agreements as an extinguishmentof the outstanding Seller Entity Interests classified as liabilities through the issuance of new Seller Entity Interests classified intemporary equity. Pursuant to ASC 470-50-40-2, we removed the outstanding liability-classified Seller Entity Interests at their carryingamounts, recognized the new temporary-equity-classified Seller Entity Interests at their fair value, and recorded no gain or loss onextinguishment as management believes the redemption value (i.e. the carrying amount) and fair value are the same. In summary, theredemption values of the mandatorily redeemable non-controlling interest (previously classified as liabilities) were reclassified asredeemable non-controlling interest (temporary equity) at fair value on the December 31, 2017 consolidated balance sheet. Theremaining balance of $327,000 in the line item – Mandatorily redeemable non-controlling interests – relates to one limitedpartnership agreement that was not amended as the non-controlling interest was purchased by us in January 2018. The fair value ofthe redeemable non-controlling interest at December 31, 2018 was $133.9 million.As of December 31, 2018, we have accrued $7.3 million related to credit balances and overpayments due to patients and payors.This amount is expected to be paid in 2019.From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the openmarket or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March 2009, the Board authorized therepurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). Our Amended CreditAgreement permits share repurchases of up to $15,000,000, subject to compliance with covenants. We are required to retire sharespurchased under the March 2009 Authorization.There is no expiration date for the share repurchase program. As of December 31, 2018, there are currently an additionalestimated 146,555 shares (based on the closing price of $102.35 on December 31, 2018) that may be purchased from time to time in theopen market or private transactions depending on price, availability and our cash position. We did not purchase any shares of ourcommon stock during the year ended December 31, 2018 and 2017.Off Balance Sheet ArrangementsWith the exception of operating leases for our executive offices and clinic facilities discussed in Note 16 to our consolidatedfinancial statements included in Item 8, we have no off-balance sheet debt or other off-balance sheet financing arrangements.FACTORS AFFECTING FUTURE RESULTSThe risks related to our business and operations include:•changes as the result of government enacted national healthcare reform;•changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certificationstatus;•revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;•business and regulatory conditions including federal and state regulations;•governmental and other third party payor inspections, reviews, investigations and audits;41TABLE OF CONTENTS•compliance with federal and state laws and regulations relating to the privacy of individually identifiable patientinformation, and associated fines and penalties for failure to comply;•changes in reimbursement rates or payment methods from third party payors including government agencies anddeductibles and co-pays owed by patients;•revenue and earnings expectations;•legal actions, which could subject us to increased operating costs and uninsured liabilities;•general economic conditions;•availability and cost of qualified physical therapists;•personnel productivity and retaining key personnel;•competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certainclinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and otherintangible assets;•acquisitions, purchase of non-controlling interests (minority interests) and the successful integration of the operations ofthe acquired businesses;•maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;•maintaining adequate internal controls;•maintaining necessary insurance coverage;•availability, terms, and use of capital; and•weather and other seasonal factors.See also 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 orthe like. Our only indebtedness as of December 31, 2018 was the outstanding balance of seller notes of $1.8 million and anoutstanding balance on our Amended Credit Agreement of $38.0 million. The outstanding balance under our Amended CreditAgreement is subject to fluctuating interest rates. A 1% change in the interest rate would yield an additional $380,000 of interestexpense. See Note 10 to our consolidated financial statements included in Item 8.42TABLE OF CONTENTSITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATIONReports of Independent Registered Public Accounting Firm—Grant Thornton LLP 44 Audited Financial Statements: Consolidated Balance Sheets as of December 31, 2018 and 2017 46 Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 47 Consolidated Statements of Changes in Equity for the years ended December 31, 2018, 2017 and 2016 48 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 49 Notes to Consolidated Financial Statements 50 43TABLE OF CONTENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersU.S. Physical Therapy, Inc.Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of U.S. Physical Therapy, Inc. (a Nevada corporation) andsubsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, changes in equity,and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statementschedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statementspresent fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accountingprinciples 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)(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”), and our report dated March 15, 2019 expressed an unqualified opinion.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required tobe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error orfraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whetherdue to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accountingprinciples used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2004.Houston, TXMarch 15, 201944TABLE OF CONTENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersU.S. Physical Therapy, Inc.Opinion on internal control over financial reportingWe 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, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, inall material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the2013 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)(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our reportdated March 15, 2019 expressed an unqualified opinion on those financial statements.Basis for opinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessmentof the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on InternalControl over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financialreporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securitiesand Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.Definition and limitations of internal control over financial reportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets ofthe company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets thatcould 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 becauseof changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ GRANT THORNTON LLPHouston, TXMarch 15, 201945TABLE OF CONTENTSU.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except share data) December 31,2018December 31,2017ASSETS Current assets: Cash and cash equivalents$23,368 $21,933 Patient accounts receivable, less allowance for doubtful accounts of $2,672 and $2,273,respectively 44,751 44,707 Accounts receivable - other 6,742 5,655 Other current assets 4,353 4,786 Total current assets 79,214 77,081 Fixed assets: Furniture and equipment 52,611 51,100 Leasehold improvements 31,712 29,760 Fixed assets, gross 84,323 80,860 Less accumulated depreciation and amortization 64,154 60,475 Fixed assets, net 20,169 20,385 Goodwill 293,525 271,338 Other identifiable intangible assets, net 48,828 48,954 Other assets 1,430 1,224 Total assets$443,166 $418,982 LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS, USPHSHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS Current liabilities: Accounts payable - trade$2,019 $2,165 Accrued expenses 38,493 33,342 Current portion of notes payable 1,434 4,044 Total current liabilities 41,946 39,551 Notes payable, net of current portion 402 2,728 Revolving line of credit 38,000 54,000 Mandatorily redeemable non-controlling interests — 327 Deferred taxes 9,012 10,875 Deferred rent 2,159 2,116 Other long-term liabilities 829 743 Total liabilities 92,348 110,340 Redeemable non-controlling interests 133,943 102,572 Commitments and contingencies U.S. Physical Therapy, Inc. (“USPH”) shareholders’ equity: Preferred stock, $.01 par value, 500,000 shares authorized, no shares issued andoutstanding — — Common stock, $.01 par value, 20,000,000 shares authorized, 14,899,233 and 14,809,299shares issued, respectively and 12,684,496 and 12,594,562 shares outstanding,respectively 149 148 Additional paid-in capital 80,028 73,940 Retained earnings 167,396 162,406 Treasury stock at cost, 2,214,737 shares (31,628) (31,628)Total USPH shareholders’ equity 215,945 204,866 Non-controlling interests 930 1,204 Total USPH shareholders’ equity and non-controlling interests 216,875 206,070 Total liabilities, redeemable non-controlling interests, USPH shareholders’ equityand non-controlling interests$443,166 $418,982 See notes to consolidated financial statements.46TABLE OF CONTENTSU.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data) Year Ended December 31,2018December 31,2017December 31,2016 Net patient revenues$417,703 $389,226 $348,839 Other revenues 36,208 24,825 7,707 Net revenues 453,911 414,051 356,546 Operating costs: Salaries and related costs 259,228 237,067 198,495 Rent, supplies, contract labor and other 88,426 82,096 71,868 Provision for doubtful accounts 4,603 3,672 4,040 Closure costs (9) 599 131 Total operating costs 352,248 323,434 274,534 Gross profit 101,663 90,617 82,012 Corporate office costs 41,349 35,889 32,479 Operating income 60,314 54,728 49,533 Gain on derecognition of debt 1,846 — — Interest and other income, net 93 88 93 Interest expense: Mandatorily redeemable non-controlling interests - change in redemptionvalue — (12,894) (6,169)Mandatorily redeemable non-controlling interests - earnings allocable — (6,055) (4,057)Debt and other (2,042) (2,111) (1,252)Total interest expense (2,042) (21,060) (11,478) Income before taxes 60,211 33,756 38,148 Provision for income taxes 11,369 6,032 11,880 Net income 48,842 27,724 26,268 Less: net income attributable to non-controlling interests Non-controlling interests - permanent equity (5,536) (5,224) (5,717)Redeemable non-controlling interests - temporary equity (8,433) (244) — (13,969) (5,468) (5,717) Net income attributable to USPH shareholders$34,873 $22,256 $20,551 Basic and diluted earnings per share attributable to USPH shareholders$1.31 $1.76 $1.64 Shares used in computation - basic and diluted 12,666 12,570 12,500 Dividends declared per common share$0.92 $0.80 $0.68 See notes to consolidated financial statements.47TABLE OF CONTENTSU.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(In thousands) U.S.Physical Therapy, Inc. Common StockAdditionalPaid-InCapitalRetainedEarningsTreasury StockTotalShareholders’EquityNon-ControllingInterestsTotal SharesAmountSharesAmountBalance January 1, 2016 14,636 $146 $64,238 $138,301 (2,215)$(31,628)$171,057 $1,253 $172,310 Issuance of restricted stock 97 1 — — — — 1 — 1 Compensation expense - equity-basedawards — — 4,962 — — — 4,962 — 4,962 Transfer of compensation liabilityfor certain stock issued pursuant tolong-term incentive plans — — 211 — — — 211 — 211 Acquisitions of non-controllinginterests, net of tax — — (533) — — — (533) (112) (645)Adjustment for prior yearacquisitions of non-controllinginterest - tax true up — — (191) — — — (191) — (191)Dividends payable to USPTshareholders — — — (8,510) — — (8,510) — (8,510)Distributions to non-controllinginterest partners — — — — — — — (5,718) (5,718)Net income — — — 20,551 — — 20,551 5,717 26,268 Balance December 31, 2016 14,733 147 68,687 150,342 (2,215) (31,628)$187,548 1,140 188,688 Issuance of restricted stock 76 1 — — — — 1 — 1 Revaluation of redeemable non-controlling interest, net of tax — — — (126) — — (126) — (126)Compensation expense - equity-basedawards — — 5,032 — — — 5,032 — 5,032 Transfer of compensation liabilityfor certain stock issued pursuant tolong-term incentive plans — — 165 — — — 165 — 165 Sale of non-controlling interest, netof tax and purchases — — 56 — — — 56 (20) 36 Dividends payable to USPTshareholders — — — (10,066) — — (10,066) — (10,066)Distributions to non-controllinginterest partners — — — — — — — (5,300) (5,300)Other — — — — — — — 160 160 Net income attributable to non-controlling interets - permanentequity — — — — — — — 5,224 5,224 Net income attributable to USPHshareholders — — — 22,256 — — 22,256 — 22,256 Balance December 31, 2017 14,809 148 73,940 162,406 (2,215) (31,628) 204,866 1,204 206,070 Issuance of restricted stock 90 1 — — — — 1 — 1 Revaluation of redeemable non-controlling interest, net of tax — — — (18,268) — — (18,268) — (18,268)Compensation expense - equity-basedawards — — 5,939 — — — 5,939 — 5,939 Transfer of compensation liabilityfor certain stock issued pursuant tolong-term incentive plans — — 373 — — — 373 — 373 Sale of non-controlling interest, netof purchases and tax — — (224) — — — (224) (48) (272)Dividends payable to USPTshareholders — — — (11,664) — — (11,664) — (11,664)Distributions to non-controllinginterest partners — — — — — — — (5,812) (5,812)Other — — — 49 — — 49 50 99 Net income attributable to non-controlling interets - permanentequity — — — — — — — 5,536 5,536 Net income attributable to USPHshareholders — — — 34,873 — — 34,873 — 34,873 Balance December 31, 2018 14,899 $149 $80,028 $167,396 (2,215)$(31,628)$215,945 $930 $216,875 See notes to consolidated financial statements.48TABLE OF CONTENTSU.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December31,2018December31,2017December31,2016OPERATING ACTIVITIES Net income including non-controlling interests$48,842 $27,724 26,268 Adjustments to reconcile net income including non-controlling interests to net cashprovided by operating activities: Depreciation and amortization 9,755 9,710 8,779 Provision for doubtful accounts 4,603 3,672 4,040 Equity-based awards compensation expense 5,939 5,032 4,962 Deferred income taxes 4,813 (4,864) 2,979 Other 167 621 152 Gain on derecognition of Debt (1,846) — — Changes in operating assets and liabilities: Increase in patient accounts receivable (3,434) (3,447) (3,275)Increase in accounts receivable - other (1,087) (3,022) (400)Decrease (increase) in other assets 345 2,086 (1,399)Increase in accounts payable and accrued expenses 4,876 6,979 2,994 Increase in mandatorily redeemable non-controlling interests — 11,579 5,598 Increase in other liabilities 32 456 352 Net cash provided by operating activities 73,005 56,526 51,050 INVESTING ACTIVITIES Purchase of fixed assets (7,193) (7,095) (8,260)Purchase of businesses, net of cash acquired (16,367) (36,682) (23,623)(Purchase) Sale of non-controlling interest (350) 121 (670)Proceeds on sale of fixed assets 1 81 61 Net cash used in investing activities (23,909) (43,575) (32,492) FINANCING ACTIVITIES Distributions to non-controlling interests, permanent and temporary equity (15,646) (5,572) (5,718)Cash dividends paid to shareholders (11,664) (10,066) (8,510)Proceeds from revolving line of credit 103,000 93,000 168,000 Payments on revolving line of credit (119,000) (85,000) (166,000)Payments to settle mandatorily redeemable non-controlling interests (265) (2,361) (1,262)Principal payments on notes payable (4,044) (1,227) (800)Other (42) 161 1 Net cash used in financing activities (47,661) (11,065) (14,289) Net increase in cash and cash equivalents 1,435 1,886 4,269 Cash and cash equivalents - beginning of period 21,933 20,047 15,778 Cash and cash equivalents - end of period$23,368 $21,933 20,047 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes$9,183 $8,543 $10,584 Interest$2,357 $2,113 $784 Non-cash investing and financing transactions during the period: Purchase of business - seller financing portion$950 $2,150 $1,000 Acquisition of non-controlling interest - seller financing portion$— $— $387 Payment to settle redeemable non-controlling interest -financing portion$— $— $127 Receivable from sale of non-controlling interests$— $— $(138)See notes to consolidated financial statements.49TABLE OF CONTENTSU.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2018, 2017 and 20161. Organization, Nature of Operations and Basis of PresentationU.S. Physical Therapy, Inc. and its subsidiaries (together, the “Company”) operate outpatient physical therapy clinics thatprovide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventative care,rehabilitation of injured workers and neurological-related injuries. As of December 31, 2018, the Company owned and/or operated 591clinics in 42 states. The clinics’ business primarily originates from physician referrals. The principal sources of payment for theclinics’ services are managed care programs, commercial health insurance, Medicare/Medicaid, workers’ compensation insurance andproceeds from personal injury cases. In addition to the Company’s ownership and operation of outpatient physical therapy clinics, italso manages physical therapy facilities for third parties, such as physicians and hospitals, with 28 such third-party facilities undermanagement as of December 31, 2018.On April 30, 2018, the Company acquired a 65% interest in a business in the industrial injury prevention business. Previously a55% interest in the initial industrial injury prevention business was acquired by the Company in March 2017. On April 30, 2018, theCompany combined the two businesses. After the combination, the Company owns a 59.45% interest in the combined business.Services provided include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments. Themajority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies.Other clients include large insurers and their contractors. The Company performs these services through Industrial Sports MedicineProfessionals, consisting of both physical therapists and specialized certified athletic trainers (ATCs).The consolidated financial statements include the accounts of U.S. Physical Therapy, Inc. and its subsidiaries. All significantintercompany transactions and balances have been eliminated. The Company primarily operates through subsidiary clinicpartnerships, in which the Company generally owns a 1% general partnership interest and a 49% to 99% limited partnership interest.The managing therapist of each clinic owns the remaining limited partnership interest in the majority of the clinics (hereinafterreferred to as “Clinic Partnership”). To a lesser extent, the Company operates some clinics through wholly-owned subsidiaries underprofit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”).In addition to the above acquired interests in the industrial injury prevention business, during the last three years, the Companycompleted the following multi-clinic acquisitions: Date% InterestAcquiredNumber ofClinics 2018 August 2018 AcquisitionAugust 31 70% 4 2017 January 2017 AcquisitionJanuary 1 70% 17 May 2017 AcquisitionMay 31 70% 4 June 2017 AcquisitionJune 30 60% 9 October 2017 AcquisitionOctober 31 70% 9 2016 February 2016 AcquisitionFebruary 29 55% 8 November 2016 AcquisitionNovember 30 60% 12 Besides the multi-clinic acquisitions above, in 2018, the Company through several of its majority owned Clinic Partnerships,acquired five separate clinic practices. These practices will operate as satellites of the respective existing Clinic Partnerships.50TABLE OF CONTENTSAlso, during 2017, the Company purchased the assets and business of two physical therapy clinics in separate transactions.One clinic was consolidated with an existing clinic and the other operates as a satellite clinic of one of the existing partnerships. In2016, the Company acquired two single clinic practices in separate transactions.The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements sincethe date of their respective acquisition. The Company intends to continue to pursue additional acquisition opportunities, developnew clinics and open satellite clinics.Clinic PartnershipsFor non-acquired Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned bythe managing therapist, directly or indirectly, are recorded within the balance sheets and income statements as non-controllinginterests. For acquired Clinic Partnerships with redeemable non-controlling interests, the earnings attributable to the redeemable non-controlling interests are recorded within the consolidated statements of income line item – net income attributable to non-controlling interests and the equity interests are recorded on the consolidated balance sheet as redeemable non-controllinginterests.Prior to 2018, for acquired Clinic Partnerships with mandatorily redeemable non-controlling interests, the earnings and liabilitiesattributable to the non-controlling interest are recorded within the consolidated statements of income line item: Interest expense –mandatorily redeemable non-controlling interests – earnings allocable and in the consolidated balance sheet line item:Mandatorily redeemable non-controlling interests.Effective December 31, 2017, the Company entered into amendments to its acquired limited partnership agreements replacing themandatory redemption feature. No monetary consideration was paid to the partners to amend the agreements. The amended limitedpartnership agreements provide that, upon certain events, the Company has a call right (the “Call Right”) and the selling entity has aput right (the “Put Right”) for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the PutRight and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. Thepurchase price of the partner’s limited partnership interest upon the exercise of either the Put Right or the Call Right is calculated perthe terms of the respective agreements. The Company accounted for the amendment of its limited partnership agreements as anextinguishment of the outstanding Seller Entity Interests, as defined in Footnote 5, classified as liabilities through the issuance ofnew Seller Entity Interests classified in temporary equity. Pursuant to ASC 470-50-40-2, the Company removed the outstandingliability-classified Seller Entity Interests at their carrying amounts, recognized the new temporary-equity-classified Seller EntityInterests at their fair value, and recorded no gain or loss on extinguishment as management believes the redemption value (i.e. thecarrying amount) and fair value are the same. In summary, the redemption values of the mandatorily redeemable non-controllinginterest (previously classified as liabilities) were reclassified as redeemable non-controlling interest (temporary equity) at fair value onthe December 31, 2017 consolidated balance sheet. On December 31, 2017, the remaining balance of $327,000 in the line item –Mandatorily redeemable non-controlling interests – relates to one limited partnership agreement that was not amended as the non-controlling interest was purchased by the Company in January 2018. See Footnote 5 - Redeemable non-controlling interests –Footnote 6 – Mandatorily Redeemable non-controlling interests – for further discussion.Wholly-Owned FacilitiesFor Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profitsharing due the clinic partners/directors. The amount is expensed as compensation and included in clinic operating costs—salariesand related costs. The respective liability is included in current liabilities—accrued expenses on the consolidated balance sheets.2. Significant Accounting PoliciesCash EquivalentsThe Company maintains its cash and cash equivalents at financial institutions. The Company considers all highly liquidinvestments with a maturity of three months or less when purchased to be cash equivalents. The combined account balances atseveral institutions typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is aconcentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management believes that this riskis not significant.51TABLE OF CONTENTSLong-Lived AssetsFixed assets are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of therelated assets. Estimated useful lives for furniture and equipment range from three to eight years and for software purchased fromthree to seven years. Leasehold improvements are amortized over the shorter of the related lease term or estimated useful lives of theassets, which is generally three to five years.Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed OfThe Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence ofcertain events or circumstances that indicate the related amounts may be impaired. Assets to be disposed of are reported at the lowerof the carrying amount or fair value less costs to sell.GoodwillGoodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of theacquired business assets, which include certain identifiable intangible assets. Historically, goodwill has been derived fromacquisitions and, prior to 2009, from the purchase of some or all of a particular local management’s equity interest in an existing clinic.Effective January 1, 2009, if the purchase price of a non-controlling interest by the Company exceeds or is less than the book value atthe time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.The fair value of goodwill and other identifiable intangible assets with indefinite lives are tested for impairment annually andupon the occurrence of certain events, and are written down to fair value if considered impaired. The Company evaluates goodwill forimpairment on at least an annual basis (in its third quarter) by comparing the fair value of its reporting units to the carrying value ofeach reporting unit including related goodwill. The Company evaluates indefinite lived tradenames using the relief from royaltymethod in conjunction with its annual goodwill impairment test. The Company operates a one segment business which is made up ofvarious clinics within partnerships. The partnerships are components of regions and are aggregated to the operating segment levelfor the purpose of determining the Company’s reporting units when performing its annual goodwill impairment test. In 2018, 2017 and2016, there were six regions. In addition to the six regions, in 2017 and 2018, the impairment test included a separate analysis for theindustrial injury prevention business, a separate reporting unit.An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive ofgoodwill and other identifiable intangible assets, exceeds the estimated fair value of the reporting unit. The estimated fair value of areporting unit is determined using two factors: (i) earnings prior to taxes, depreciation and amortization for the reporting unitmultiplied by a price/earnings ratio used in the industry and (ii) a discounted cash flow analysis. A weight is assigned to each factorand the sum of each weight times the factor is considered the estimated fair value. For 2018, 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 2018,2017 and 2016 did not result in any goodwill amounts that were deemed impaired.The Company has not identified any triggering events occurring after the testing date that would impact the impairment testingresults obtained. The Company will continue to monitor for any triggering events or other indicators of impairment.Redeemable Non-Controlling InterestsThe non-controlling interests that are reflected as redeemable non-controlling interests in the consolidated financial statementsconsist of those owners and the Company which have certain redemption rights, whether currently exercisable or not, and whichcurrently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, ifcertain conditions are met. The purchase price is derived at a predetermined formula based on a multiple of trailing twelve monthsearnings performance as defined in the respective limited partnership agreements. The redemption rights can be triggered by theowner or the Company at such time as both of the following events have occurred: 1) termination of the owner’s employment,regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction,typically three to five years, as defined in the limited partnership agreement. The redemption rights are not automatic or mandatory(even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemptionrights have been satisfied.52TABLE OF CONTENTSOn the date the Company acquires a controlling interest in a partnership and the limited partnership agreement for suchpartnership contains redemption rights not under the control of the Company, the fair value of the non-controlling interest isrecorded in the consolidated balance sheet under the caption – Redeemable non-controlling interests. Then, in each reporting periodthereafter until it is purchased by the Company, the redeemable non-controlling interest is adjusted to the greater of its then currentredemption value or initial value, based on the predetermined formula defined in the respective limited partnership agreement. As aresult, the value of the non-controlling interest is not adjusted below its initial value. The Company records any adjustment in theredemption value, net of tax, directly to retained earnings. The adjustments are not reflected in the consolidated statements ofincome. Although the adjustments are not reflected in the consolidated statements of income, current accounting rules require thatthe Company reflects the adjustments, net of tax, in the earnings per share calculation. The amount of net income attributable toredeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statement ofincome. Management believes the redemption value (i.e. the carrying amount) and fair value are the same.Mandatorily Redeemable Non-Controlling InterestsThe non-controlling interests that are reflected as mandatorily redeemable non-controlling interests in the consolidated financialstatements consist of those owners who have certain redemption rights, whether currently exercisable or not, and which currently, orin the future, require that the Company purchase the non-controlling interest of those owners at a predetermined formula based on amultiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements. The redemptionrights are triggered at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardlessof the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically threeto five years, as defined in the limited partnership agreement.On the date the Company acquires a controlling interest in a partnership and the limited partnership agreement for suchpartnership contains mandatory redemption rights, the fair value of the non-controlling interest is recorded in the long-term liabilitiessection of the consolidated balance sheet under the caption – Mandatorily redeemable non-controlling interests. Then, in eachreporting period thereafter until purchased by the Company, the redeemable non-controlling interest is adjusted to its then currentredemption value, based on the predetermined formula defined in the respective partnership agreement. The Company reflects anyadjustment in the redemption value and any earnings attributable to the mandatorily redeemable non-controlling interest in itsconsolidated statements of income by recording the adjustments and earnings to other income and expense in the captions − Interestexpense – mandatorily redeemable non-controlling interests – change in redemption value and Interest expense – mandatorilyredeemable non-controlling interests – earnings allocable.As previously mentioned due to amendments of the limited partnership agreements entered into by the Company, theredemption values of the mandatorily redeemable non-controlling interest (previously classified as liabilities) were amended and arenow classified as redeemable non-controlling interest (temporary equity) at fair value on the December 31, 2018 consolidated balancesheet.Non-Controlling InterestsThe Company recognizes non-controlling interests, in which the Company has no obligation but the right to purchase the non-controlling interests, as equity in the consolidated financial statements separate from the parent entity’s equity. The amount of netincome attributable to non-controlling interests is included in consolidated net income on the face of the statements of net income.Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equitytransactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income when asubsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling equity investment on thedeconsolidation date.When the purchase price of a non-controlling interest by the Company exceeds the book value at the time of purchase, anyexcess or shortfall is recognized as an adjustment to additional paid-in capital. Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner.53TABLE OF CONTENTSRevenue RecognitionRevenues are recognized in the period in which services are rendered. Net patient revenues consists of revenues for physicaltherapy and occupational 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. Net patient revenues(patient revenues less estimated contractual adjustments) are recognized at the estimated net realizable amounts from third-partypayors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There isan implied contract between us and the patient upon each patient visit. Generally, this occurs as the Company provides physical andoccupational therapy services, as each service provided is distinct and future services rendered are not dependent on previouslyrendered services. The Company has agreements with third-party payors that provide for payments to the Company at amountsdifferent from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts andhistorical collection and write-off experience.Management contract revenues, which are included in other revenues in the consolidated statements of net income, are derivedfrom contractual arrangements whereby we manage a clinic owned by a third party. The Company does not have any ownershipinterest in these clinics. Typically, revenues are determined based on the number of visits conducted at the clinic and recognized atthe point in time when services are performed. Costs, typically salaries for our employees, are recorded when incurred.Revenues from the industrial injury prevention business, which are also included in other revenues in the consolidatedstatements of net income, are derived from onsite services we provide to clients’ employees including injury prevention,rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention business isrecognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to theconsideration the company expects to receive in exchange for providing injury prevention services to its clients. The revenue isdetermined and recognized based on the number of hours and respective rate for services provided in a given period.Additionally, other revenues include services the Company provides on-site, such as schools and industrial worksites, forphysical or occupational therapy services, and athletic trainers and gym membership fees. Contract terms and rates are agreed to inadvance between the Company and the third parties. Services are typically performed over the contract period and revenue isrecorded at the point of service. If the services are paid in advance, revenue is recorded as a contract liability over the period of theagreement and recognized at the point in time, when the services are performed.In May 2014, March 2016, April 2016, and December 2016, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contractswith Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, IdentifyingPerformance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements andPractical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts withCustomer (collectively the “standards”), respectively, which supersede most of the current revenue recognition requirements (“ASC606”). The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods orservices to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for thosegoods or services.The Company implemented the new standards beginning January 1, 2018 using a modified retrospective transition method. Theprincipal change relates to how the new standard requires healthcare providers to estimate the amount of variable consideration to beincluded in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common formsof variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from acustomer. There were no changes to revenues or other revenues upon implementation. Under the new standards, the Company’sestimate for unrealizable amounts will continue to be recognized as a reduction to revenue. The bad debt expense historicallyreported will not materially change.For ASC 606, there is an implied contract between us and the patient upon each patient visit. Separate contractual arrangementsexist between us and third party payors (e.g. insurers, managed care programs, government programs, workers’ compensation) whichestablish the amounts the third parties pay on behalf of the54TABLE OF CONTENTSpatients for covered services rendered. While these agreements are not considered contracts with the customer, they are used fordetermining the transaction price for services provided to the patients covered by the third party payors. The payor contracts do notindicate performance obligations for us, but indicate reimbursement rates for patients who are covered by those payors when theservices are provided. At that time, the Company is obligated to provide services for the reimbursement rates stipulated in the payorcontracts. The execution of the contract alone does not indicate a performance obligation. For self-paying customers, theperformance obligation exists when we provide the services at established rates. The difference between the Company’s establishedrate and the anticipated reimbursement rate is accounted for as an offset to revenue – contractual allowance.The Company determines allowances for doubtful accounts based on the specific agings and payor classifications at eachclinic. The provision for doubtful accounts is included in clinic operating costs in the statements of net income. Patient accountsreceivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for doubtfulaccounts, includes only those amounts the Company estimates to be collectible.The following table details the revenue related to the various categories. Year Ended December 31, 201820172016Patient revenues$417,703 389,226 348,839 Management contract revenues 8,339 6,275 5,535 Industrial injury prevention services revenues 25,466 14,908 — Other revenues 2,403 3,642 2,172 $453,911 $414,051 $356,546 Medicare ReimbursementThe Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”).For services provided in 2018, a 0.5% increase has been applied to the fee schedule payment rates; for services provided in 2019, a0.25% increase will be applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. Forservices provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, beforeapplying the mandatory budget neutrality adjustment. Beginning in 2021, payments to individual therapists (Physical/OccupationalTherapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit BasedIncentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningfuluse of electronic health records. Under the MIPS requirements, a provider’s performance is assessed according to establishedperformance standards each year and then is used to determine an adjustment factor that is applied to the professional’s payment forthe corresponding payment year. The provider’s MIPS performance in 2019 will determine the payment adjustment in 2021. Each yearfrom 2019 through 2024, professionals who receive a significant share of their revenues through an alternate payment model(“APM”), (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and aquality measurement component will receive a 5% bonus in the corresponding payment year. The bonus payment for APMparticipation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives acrosspayors. The specifics of the MIPS and APM adjustments will be subject to future notice and comment rule-making.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 tothese automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented.The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2% reductions to Medicare payments through fiscalyear 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2% reductions to Medicare paymentsthrough fiscal year 2027.55TABLE OF CONTENTSHistorically, the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/orspeech-language pathology services provided to any Medicare beneficiary was subject to an annual dollar limit (i.e., the “TherapyCap” or “Limit”). For 2017, the annual Limit on outpatient therapy services was $1,980 for combined Physical Therapy and SpeechLanguage Pathology services and $1,980 for Occupational Therapy services. As a result of Bipartisan Budget Act of 2018, theTherapy Caps have been eliminated, effective as of January 1, 2018.Under the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met orexceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whetherapplicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language PathologyServices; a separate $3,700 threshold is applied to the Occupational Therapy. The MACRA directed CMS to modify the manualmedical review process such that those reviews will no longer apply to all claims exceeding the $3,700 threshold and instead will bedetermined on a targeted basis based on a variety of factors that CMS considers appropriate The Bipartisan Budget Act of 2018extends the targeted medical review indefinitely, but reduces the threshold to $3,000 through December 31, 2027. For 2028, thethreshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequentyears the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS forcalendar year 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 expensecomponent of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces thepayment for the practice expense component for the second and subsequent therapy procedures or units of service furnished duringthe same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. Since 2013, thepractice expense component for the second and subsequent therapy service furnished during the same day for the same patient wasreduced by 50%. In addition, the MCTRA directed CMS to implement a claims-based data collection program to gather additionaldata on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practicesettings that provide outpatient therapy services are required to include this data on the claim form. Since 2013, therapists have beenrequired to report new codes and modifiers on the claim form that reflect a patient’s functional limitations and goals at initialevaluation, periodically throughout care, and at discharge. Reporting of these functional limitation codes and modifiers are requiredon the claim for payment.Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2022 must include amodifier indicating the service was furnished by a therapy assistant. CMS was required to develop a modifier to mark servicesprovided by a therapy assistant by January 1, 2019, and then submitted claims have to report the modifier mark starting January 1,2020. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapy assistant will be paid at anamount equal to 85% of the payment amount otherwise applicable for the service.Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex andsubject to interpretation. We believe that we are in compliance, in all material respects, with all applicable laws and regulations andare not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a materialeffect on the our financial statements as of December 31, 2018. Compliance with such laws and regulations can be subject to futuregovernment review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from theMedicare program. Net patient revenue from Medicare were approximately $103.6 million, $92.6 million and $81.8 million, respectively,for 2018, 2017 and 2016.Management Contract RevenuesManagement contract revenues, which are included in other revenues, are derived from contractual arrangements whereby theCompany manages a clinic for third party owners. The Company does not have any ownership interest in these clinics. Typically,revenues are determined based on the number of visits conducted at the clinic and recognized at a point in time when services areperformed. Costs, typically salaries for the Company’s employees, are recorded when incurred.56TABLE OF CONTENTSIndustrial Injury Prevention RevenueRevenues from the industrial injury prevention business, which are also included in other revenues in the consolidatedstatements of net income, are derived from onsite services we provide to clients’ employees including injury prevention,rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention business isrecognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to theconsideration the company expects to receive in exchange for providing injury prevention services to its clients. The revenue isdetermined and recognized based on the number of hours and respective rate for services provided in a given period.Contractual AllowancesContractual allowances result from the differences between the rates charged for services performed and expectedreimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicareregulations and the various third party payors and managed care contracts are often complex and may include multiplereimbursement mechanisms payable for the services provided in Company clinics. The Company estimates contractual allowancesbased on its interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Companyestimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic andapplies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of theclinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level issufficient to allow the Company to provide the necessary detail and accuracy with its collectability estimates. However, the servicesauthorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from theCompany’s estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made bymanagement. The Company’s billing system does not capture the exact change in its contractual allowance reserve estimate fromperiod to period in order to assess the accuracy of its revenues and hence its contractual allowance reserves. Management regularlycompares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In theaggregate, historically the difference between net revenues and corresponding cash collections has generally reflected a differencewithin approximately 1% of net revenues. Additionally, analysis of subsequent periods’ contractual write-offs on a payor basisreflects a difference within approximately 1% between the actual aggregate contractual reserve percentage as compared to theestimated contractual allowance reserve percentage associated with the same period end balance. As a result, the Company believesthat a change in the contractual allowance reserve estimate would not likely be more than 1% at December 31, 2018.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilitiesand their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoveredor settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includesthe enactment date.The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authoritywould more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, theamount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of beingrealized upon ultimate settlement with the relevant tax authority.The Tax Cuts and Jobs Act of 2017 (the “TCJA”) was passed by Congress on December 20, 2017 and signed into law byPresident Trump on December 22, 2017. The TCJA made significant changes to U.S. corporate income tax laws including a decrease inthe corporate income tax rate to 21% effective January 1, 2018. As a result, the Company revalued its deferred tax assets andliabilities. Based on a review and analysis as of December 31, 2017, the Company estimated a reduction of its net deferred taxliabilities by $4.3 million thereby reducing its provision for income taxes by such amount for the 2017 year.57TABLE OF CONTENTSThe Company did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interestexpense recognized during the twelve months ended December 31, 2018, 2017 and 2016. The Company will book any interest orpenalties, if required, in interest and other expense, as appropriate.Fair Values of Financial InstrumentsThe carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accountspayable and notes payable approximate their fair values due to the short-term maturity of these financial instruments. The carryingamount under the Amended Credit Agreement (as defined in Note 10) approximates its fair value. The interest rate on the CreditAgreement, which is tied to the Eurodollar Rate, is set at various short-term intervals, as detailed in the Credit Agreement.Segment ReportingOperating segments are components of an enterprise for which separate financial information is available that is evaluatedregularly by chief operating decision makers in determining the allocation of resources and in assessing performance. The Companyidentifies operating segments based on management responsibility and believes it meets the criteria for aggregating its operatingsegments into a single reportable segment.Use of EstimatesIn preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions,especially in relation to, but not limited to, goodwill impairment, tradenames, allocations of purchase price, allowance for receivables,tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and relateddisclosures. Actual results may differ from these estimates.Self-Insurance ProgramThe Company utilizes a self-insurance plan for its employee group health and dental insurance coverage administered by a thirdparty. Predetermined loss limits have been arranged with the insurance company to minimize the Company’s maximum liability andcash outlay. Accrued expenses include the estimated incurred but unreported costs to settle unpaid claims and estimated futureclaims. Management believes that the current accrued amounts are sufficient to pay claims arising from self-insurance claims incurredthrough December 31, 2018.Restricted StockRestricted stock issued to employees and directors is subject to continued employment or continued service on the board,respectively. Generally, restrictions on the stock granted to employees lapse in equal annual installments on the following fouranniversaries of the date of grant. For those shares granted to directors, the restrictions will lapse in equal quarterly installmentsduring the first year after the date of grant. For those granted to officers, the restriction will lapse in equal quarterly installmentsduring the four years following the date of grant. Compensation expense for grants of restricted stock is recognized based on the fairvalue per share on the date of grant amortized over the vesting period. The restricted stock issued is included in basic and dilutedshares for the earnings per share computation.Recently Adopted Accounting GuidanceIn May 2014, March 2016, April 2016, and December 2016, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contractswith Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, IdentifyingPerformance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements andPractical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts withCustomer (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. Thecore principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. New disclosures about the nature, amount,58TABLE OF CONTENTStiming and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standardswere effective for fiscal years beginning after December 15, 2016; However, in July 2015, the FASB approved a one-year deferral ofthese standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of aretrospective or cumulative effect transition method.The Company implemented the new standards beginning January 1, 2018 using a modified retrospective transition method.Adoption of the new standard did not result in material changes to the presentation of net revenues and bad debt expense in theconsolidated statements of income, and the presentation of the amount of income from operations and net income will be unchangedupon adoption of the new standards. The principal change relates to how the new standard requires healthcare providers to estimatethe amount of variable consideration to be included in the transaction price up to an amount which is probable that a significantreversal will not occur. The most common forms of variable consideration the Company experiences are amounts for servicesprovided that are ultimately not realizable from a customer. Under the new standards, the Company’s estimate for unrealizableamounts will continue to be recognized as a reduction to revenue. The bad debt expense historically reported will not materiallychange.Recently Issued Accounting GuidanceIn August 2018, the Securities Exchange Commission (“SEC”) issued Final Rule 33-10532, Disclosure Update and Simplification,which amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded by other SEC disclosurerequirements. The amendments generally eliminated or otherwise reduced certain disclosure requirements of various SEC rules andregulations. However, in some cases, the amendments require additional information to be disclosed, including changes instockholders’ equity in interim periods. The rule is effective 30 days after its publication in the Federal Register. The rule was postedon October 4, 2018. On September 25, 2018, the SEC released guidance advising it will not object to a registrant adopting therequirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of therule. The Company is currently assessing the impact that this standard will have on its consolidated financial statements uponadoption and expects to adopt the guidance in its Form 10-Q for the period ended March 31, 2019.In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates therequirement to calculate the implied fair value of goodwill to measure a goodwill impairment change. ASU 2017-04 is effectiveprospectively for fiscal years, and the interim periods within those years, beginning after December 15, 2019. The Company does notexpect adoption of this ASU to have a material impact.In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which added a new impairment model(known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the newguidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debtinstruments, including trade receivables. The CECL model does not have a minimum threshold for recognition of impairment lossesand entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective forthe Company on January 1, 2020. Management is currently evaluating the potential impact of these changes on the ConsolidatedFinancial Statements.In February 2016, the FASB issued amended accounting guidance (ASU 2016-02, Leases) which replaced most existing leaseaccounting guidance under U. S. generally accepted accounting principles. Among other changes, the amended guidance requiresthat a right-to-use asset, which is an asset that represents the lessee’s right to use, and a lease liability, which is a lessee’s obligationto make lease payments arising for a lease measured on a discounted basis, be recognized on the balance sheet by lessees for thoseleases with a term of greater than 12 months. The amended guidance is effective for reporting periods beginning after December 15,2018; However, early adoption is permitted. Entities can use a modified retrospective approach for leases that exist or are entered intoafter the beginning of the earliest comparative period in the financial statements or recognize the cumulative effect of applying thenew standard as an adjustment to the opening balance of retained earnings.59TABLE OF CONTENTSSince the Company leases all but one of its clinic facilities, upon adoption, the Company will recognize significant assets andliabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. Operating lease expensewill still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements ofincome.The Company has implemented the new standard beginning January 1, 2019. As part of our implementation process, theCompany has assessed lease arrangements, evaluated practical expedient and accounting policy elections, and implemented softwareto meet the reporting requirements of this standard. The Company has also evaluated the changes in controls and processes that arenecessary to implement the new standard. The standard provides a number of optional practical expedients in the transition. TheCompany elected the package of practical expedients, which permits the Company not to reassess under Topic 842 the Company’sprior conclusion about lease identification, lease classification, and initial direct costs. The Company elected the short-term leaserecognition exemption for its facilities and equipment leases. Consequently, the Company will not recognize right-of-use assets orlease liabilities for these leases which have terms of less than twelve months. The Company also elected the practical expedient toseparate lease and non-lease components for all its leases. The Company elected the transition method in ASU 2018-11 which allowsthe Company to forego any prior year comparisons. Instead the Company will recognize a cumulative effect adjustment, which isimmaterial, to the opening balance of retained earnings at the adoption date. The Company has completed its efforts focused onpopulating and verifying the data in a lease accounting software package and on developing internal controls in order to account forits leases under the new standard. We have evaluated the effect of adopting this guidance on our consolidated financial statementsand related disclosures and we estimate the adoption will result in the addition of approximately $78.0 million of assets and $ 82.6million of liabilities to our consolidated balance sheet, with no significant change to our consolidated statements of income or cashflows.Subsequent EventThe Company has evaluated events occurring after the balance sheet date for possible disclosure as a subsequent eventthrough the date that these consolidated financial statements were issued. No such disclosures were required.3. Acquisitions of BusinessesDuring 2018, 2017 and 2016, the Company acquired a majority interest in the following multi-clinic physical therapy practices:AcquisitionDate% InterestAcquiredNumber ofClinics 2018 August 2018 AcquisitionAugust 31 70% 4 2017 January 2017 AcquisitionJanuary 1 70% 17 May 2017 AcquisitionMay 31 70% 4 June 2017 AcquisitionJune 30 60% 9 October 2017 AcquisitionOctober 31 70% 9 2016 February 2016 AcquisitionFebruary 29 55% 8 November 2016 AcquisitionNovember 30 60% 12 On August 31, 2018, the Company acquired a 70% interest in a four-clinic physical therapy practice. The purchase price for the70% interest was $7.2 million in cash and $0.4 million in a seller note that is payable in two principal installments totaling $200,000each, plus accrued interest, in August 2019 and 2020.On April 30, 2018, the Company acquired a 65% interest in a business in the industrial injury prevention market. A 55% interestin the initial industrial injury prevention business acquired by the Company was purchased in March 2017. The purchase price for the55% interest was $6.2 million in cash and $0.4 million in a60TABLE OF CONTENTSseller note that is payable, principal plus accrued interest, in September 2018. On April 30, 2018, the Company combined the twobusinesses. After the combination, the Company owns a 59.45% interest in the combined business. Services provided include onsiteinjury prevention and rehabilitation, performance optimization and ergonomic assessments. The majority of these services arecontracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurersand their contractors. The Company performs these services through Industrial Sports Medicine Professionals, consisting of bothphysical therapists and highly specialized certified athletic trainers (ATCs).During 2018, the Company, through several of its majority owned Clinic Partnerships, acquired five separate clinic practices.These practices operate as satellites of the existing Clinic Partnership. The aggregate purchase price was $1.0 million inclusive ofcash of $850,000 and a note payable of $150,000. The note accrues interest at 4.5% and is payable, principal and accrued interest, onAugust 31, 2019.The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements sincethe date of their respective acquisition. The Company intends to continue to pursue additional acquisition opportunities, developnew clinics and open satellite clinics.The purchase price for the 2018 acquisitions has been preliminarily allocated as follows (in thousands):Cash paid, net of cash acquired$16,367 Seller notes 950 Total consideration$17,317 Estimated fair value of net tangible assets acquired: Total current assets$1,691 Total non-current assets 42 Total liabilities (486)Net tangible assets acquired$1,247 Referral relationships 1,879 Non-compete 386 Tradename 2,172 Goodwill 19,778 Fair value of non-controlling interest (classified as redeemablenon-controlling interests) (8,145) $17,317 On January 1, 2017, the Company acquired a 70% interest in a seventeen-clinic physical therapy practice. The purchase price forthe 70% interest was $10.7 million in cash and $0.5 million in a seller note that was payable in two principal installments totaling$250,000 each, plus accrued interest. The first installment was paid in January 2018 and the second installment in January 2019.On May 31, 2017, the Company acquired a 70% interest in a four-clinic physical therapy practice. The purchase price for the 70%interest was $2.3 million in cash and $250,000 in a seller note that is payable in two principal installments totaling $125,000 each, plusaccrued interest. The first installment was paid in May 2018 and the second is due in May 2019.On June 30, 2017, the Company acquired a 60% interest in a nine-clinic physical therapy practice. The purchase price for the60% interest was $15.8 million in cash and $0.5 million in a seller note that is payable in two principal installments totaling $250,000each, plus accrued interest. The first installment was paid in June 2018 and the second is due in June 2019.On October 31, 2017, the Company acquired a 70% interest in a nine-clinic physical therapy practice and two managementcontracts with third party providers. The purchase price for the 70% interest was $4.0 million in cash and $0.5 million in a seller notethat is payable in two principal installments totaling $250,000 each, plus accrued interest. The first installment was paid in October2018 and the second is due in October 2019.61TABLE OF CONTENTSAlso, in 2017, the Company purchased the assets and business of two physical therapy clinics in separate transactions. Oneclinic was consolidated with an existing clinic and the other operates as a satellite clinic of one of the existing partnerships.The purchase price for the 2017 acquisitions were allocated as follows (in thousands):Cash paid, net of cash acquired$36,682 Seller notes 2,150 Total consideration$38,832 Estimated fair value of net tangible assets acquired: Total current assets$5,853 Total non-current assets 1,527 Total liabilities (2,865)Net tangible assets acquired$4,515 Referral relationships 4,250 Non-compete 660 Tradename 6,850 Goodwill 46,722 Fair value of non-controlling interest (classified as redeemablenon-controlling interests) (13,883)Fair value of non-controlling interest (originally classified as mandatorily redeemable non-controlling interests) (10,282) $38,832 On November 30, 2016, the Company acquired a 60% interest in a 12 clinic physical therapy practice. The purchase price for the60% interest was $11.0 million in cash and $0.5 million in a seller note that is payable in two principal installments of $250,000 each,plus accrued interest. The first installment was paid in November 2017 and the second installment in November 2018. On February 29,2016, the Company acquired a 55% interest in an eight-clinic physical therapy practice. The purchase price for the 55% interest was$13.2 million in cash and $0.5 million in a seller note that is payable in two principal installments of $250,000 each, plus accruedinterest. The first installment was paid in February 2017 and the second was paid in February 2018. During 2016, two subsidiaries ofthe Company each acquired a single clinic therapy practice for an aggregate purchase price of $75,000.The purchase prices for the 2016 acquisitions have been allocated as follows (in thousands):Cash paid, net of cash acquired$23,623 Seller notes 1,000 Total consideration$24,623 Fair value of net tangible assets acquired: Total current assets$1,372 Total non-current assets 839 Total liabilities (399)Net tangible assets acquired$1,812 Referral relationships 4,919 Non-compete 847 Tradename 3,802 Goodwill 32,123 Fair value of non-controlling interest (originally classified as mandatorily redeemable non-controlling interests) (18,880) $24,623 62TABLE OF CONTENTSThe purchase prices plus the fair value of the non-controlling interests for the acquisition in 2017 and 2016, were allocated to thefair value of the assets acquired, inclusive of identifiable intangible assets, i.e. trade names, referral relationships and non-competeagreements, and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values beingrecorded as goodwill are finalized. For the acquisitions in 2018, the Company is in the process of completing its formal valuationanalysis to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed.Thus, the final allocation of the purchase price may differ from the preliminary estimates used at December 31, 2018 based onadditional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimatedvaluation of the tangible assets acquired, the completion of the valuation of identifiable intangible assets and the completion by theCompany of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can bereasonably estimated, will likely result in adjustments to goodwill. The Company does not expect the adjustments to be material.For the acquisitions in 2018 and 2017, the values assigned to the referral relationships and non-compete agreements are beingamortized to expense equally over the respective estimated lives. For referral relationships, the weighted average amortization periodwas 10.54 and 10.10 years at December 31, 2018 and December 31, 2017, respectively. For non-compete agreements, the weightedaverage amortization period was 6.00 and 5.16 years at December 31, 2018 and December 31, 2017, respectively. Generally, the valuesassigned to tradenames are tested annually for impairment, however with regards to one acquisition in 2013, the tradename was beingamortized over the term of the six year agreement in which the Company has acquired the rights to use the specific tradename. In2016, the remaining value of the tradename was charged to earnings as the Company decided to combine two acquired operations inGeorgia; therefore, the tradename under this six year agreement will no longer be used.For the 2018, 2017 and 2016 acquisitions, total current assets primarily represent patient accounts receivable. Total non-currentassets are fixed assets, primarily equipment, used in the practices.The consideration paid for each of the acquisitions was derived through arm’s length negotiations. Funding for the cashportions was derived from proceeds from the Company’s revolving credit facility. The results of operations of the acquisitions havebeen included in the Company’s consolidated financial statements since their respective date of acquisition. Unaudited proformaconsolidated financial information for the acquisitions in 2018, 2017 and 2016 acquisitions have not been included as the results,individually and in the aggregate, were not material to current operations.4. Acquisitions and Sale of Non-Controlling InterestsDuring 2018, the Company acquired additional interests in three partnerships included in non-controlling interest. Theadditional interests purchased in each of the partnerships ranged from 5.5% and 35%. The net after-tax difference of $224,000 wascredited to additional paid-in capital.During 2017, the Company acquired additional interests in two partnerships included in non-controlling interest. The additionalinterests purchased in each of the partnerships was 35%. The aggregate purchase price paid was $13,000. Also, during 2017, theCompany sold a 2% interest in a partnership for $138,000. The net after-tax difference of $56,000 was credited to additional paid-incapital.During 2016, the Company acquired additional interests in six partnerships included in non-controlling interest. The interests inthe partnerships purchased ranged from 2% to 35%. The aggregate purchase price paid was $0.9 million in cash and $0.4 million in aseller note that was paid in two principal installments of $194,000 each in February 2017 and 2018. The purchase price included$112,000 of undistributed earnings. The remaining $1.2 million, less future tax benefits of $0.5 million, was recognized as anadjustment to additional paid-in capital.During 2016, the Company sold a 4% interest in one partnership and 35% in another. The sales prices included aggregate cashof $138,000 plus notes receivable of $148,000 with payments due monthly based on percentages of distributions and bonuses earnedby the purchasers. The total sales price of $286,000, less the tax effect of $110,000, was charged to additional paid-in capital.63TABLE OF CONTENTS5. Redeemable Non-Controlling InterestSince October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic business(referred to as “Therapy Practice”), these Acquisitions occur in a series of steps which are described below.1.Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity isowned by one or more individuals (the “Selling Shareholders”) most of whom are physical therapists that work in theTherapy Practice and provide physical therapy services to patients.2.In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limitedpartnership (“NewCo”), in exchange for one hundred percent (100%) of the limited and general partnership interests inNewCo. Therefore, in this step, NewCo becomes a wholly-owned subsidiary of the Seller Entity.3.The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (rangesfrom 50% to 90%) of the limited partnership interest and in all cases 100% of the general partnership interest in NewCo. TheCompany does not purchase 100% of the limited partnership interest because the Selling Shareholders, through the SellerEntity, want to maintain an ownership percentage. The consideration for the Acquisition is primarily payable in the form ofcash at closing and a small two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement does notcontain any future earn-out or other contingent consideration that is payable to the Seller Entity or the SellingShareholders.4.The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo thatsets forth the rights and obligations of the limited and general partners of NewCo. After the Acquisition, the Company isthe general partner of NewCo.5.As noted above, the Company does not purchase 100% of the limited partnership interests in NewCo and the Seller Entityretains a portion of the limited partnership interest in NewCo (“Seller Entity Interest”).6.In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”)with NewCo with an initial term that ranges from three to five years (the “Employment Term”), with automatic one-yearrenewals, unless employment is terminated prior to the end of the Employment Term. As a result, a Selling Shareholderbecomes an employee (“Employed Selling Shareholder”) of NewCo. The employment of an Employed Selling Shareholdercan be terminated by the Employed Selling Shareholder or NewCo, with or without cause, at any time. In a few situations, aSelling Shareholder does not become employed by NewCo and is not involved with NewCo following the closing; in thosesituations, such Selling Shareholders sell their entire ownership interest in the Seller Entity as of the closing of theAcquisition.7.The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary andcommensurate with his or her responsibilities based on other employees in similar capacities within NewCo, the Companyand the industry.8.The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders notemployed by NewCo) execute a non-compete agreement (the “Non-Compete Agreement”) which restricts the SellingShareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). ANon-Compete Agreement is executed with the Selling Shareholders in all cases. That is, even if the Selling Shareholderdoes not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competingbusiness during the Non-Compete Term.9.The Non-Compete Term commences as of the date of the Acquisition and expires on the later of :a.Two years after the date an Employed Selling Shareholders’ employment is terminated (if the Selling Shareholderbecomes an Employed Selling Shareholder) orb.Five to six years from the date of the Acquisition, as defined in the Non-Compete Agreement, regardless of whetherthe Selling Shareholder is employed by NewCo.64TABLE OF CONTENTS10.The Non-Compete Agreement applies to a restricted region which is defined as a 15-mile radius from the Therapy Practice.That is, an Employed Selling Shareholder is permitted to engage in competing businesses or activities outside the 15-mileradius (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is notemployed by NewCo immediately is permitted to engage in the competing business or activities outside the 15-mile radius.The Partnership Agreement contains provisions for the redemption of the Seller Entity Interest, either at the option of theCompany (the “Call Right”) or at the option of the Seller Entity (the “Put Right”) as follows:1.Put Righta.In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to the fifthanniversary of the Closing Date, the Seller Entity thereafter may have an irrevocable right to cause the Company topurchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at thepurchase price described in “3” below.b.In the event that any Selling Shareholder is not employed by NewCo as of the fifth anniversary of the Closing Dateand the Company has not exercised its Call Right with respect to the Terminated Selling Shareholder’s AllocablePercentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company topurchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at thepurchase price described in “3” below.c.In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the fifthanniversary of the Closing Date, the Seller Entity shall have the Put Right, and upon the exercise of the Put Right, theTerminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company atthe purchase price described in “3” below.2.Call Righta.If any Selling Shareholder’s employment by NewCo is terminated prior to the fifth anniversary of the Closing Date, theCompany thereafter shall have an irrevocable right to purchase from Seller Entity the Terminated Selling Shareholder’sAllocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below.b.In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the fifthanniversary of the Closing Date, the Company shall have the Call Right, and upon the exercise of the Call Right, theTerminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company atthe purchase price described in “3” below.3.For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’strailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internalmanagement fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”).NewCo’s earnings are distributed monthly based on available cash within NewCo; therefore, the undistributed earningsamount is small, if any.4.The Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple ofthe trailing twelve-month earnings that is used in the Put Right and the Call Right noted above.5.The Put Right and the Call Right do not have an expiration date, but the Seller Entity Interest is not required to bepurchased by the Company or sold by the Seller Entity.6.The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since theCompany requires that such Selling Shareholders sell their entire ownership interest in the Seller Entity at the closing of theAcquisition.65TABLE OF CONTENTSAn Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and theCompany’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do notcontain any provision to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling Shareholder,nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even ifthe Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder does not forfeit his or herright to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any portion of the SellerEntity Interest. The Company’s only recourse against the Employed Selling Shareholder for breach of either the EmploymentAgreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements. There are noconditions in any of the arrangements with an Employed Selling Shareholder that would result in a forfeiture of the equity interestheld in the Seller Entity or of the Seller Entity Interest.For the year ended December 31, 2018 and 2017, the following table details the changes in the carrying amount (fair value) of theredeemable non-controlling interests (in thousands): Year EndedDecember 31,2018Year EndedDecember 31, 2017Beginning balance$102,572 $— Operating results allocated to redeemable non-controlling interest partners 8,433 244 Distributions to redeemable non-controlling interest partners (9,835) (272)Changes in the fair value of redeemable non-controlling interest 24,770 201 Purchases of businesses - initial equity related to redeemable non-controlling interest 8,145 13,883 Fair value of redeemable non-controlling interest - amended partnership agreements — 88,516 Other (142) — Ending balance$133,943 $102,572 As previously mentioned due to amended partnership agreements, the redemption values of the mandatorily redeemable non-controlling interest (previously classified as liabilities) were reclassified as redeemable non-controlling interest (temporary equity) atfair value on the December 31, 2017 consolidated balance sheet.The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interests (in thousands): December 31,2018December 31, 2017Contractual time period has lapsed but holder’s employment has not been terminated$42,624 $31,821 Contractual time period has not lapsed and holder’s employment has not been terminated$91,319 $70,751 Holder’s employment has terminated and contractual time period has expired$— $— Holder’s employment has terminated and contractual time period has not expired$— $— $133,943 $102,572 66TABLE OF CONTENTS6. Mandatorily Redeemable Non-Controlling InterestPrior to the October 2017, when the Company acquired a majority interest in a Therapy Practice, those Acquisitions occurred ina series of steps as described in numbers 1 through 10 of Footnote 5 –Redeemable Non-Controlling Interests.1.The Partnership Agreement contained provisions for the redemption of the Seller Entity Interest, either at the option of theCompany (the “Call Option”) or on a required basis (the “Required Redemption”):a.Required Redemptioni.Once the Required Redemption is triggered, the Company was obligated to purchase from the Seller Entity andthe Seller Entity was obligated to sell to the Company, the allocable portion of the Seller Entity Interest based onthe terminated Selling Shareholder’s pro rata ownership interest in the Seller Entity (the “Allocable Portion”).Required Redemption was triggered when both of the following events have occurred:1.Termination of an Employed Selling Shareholder’s employment with NewCo, regardless of the reason forsuch termination, and2.The expiration of an agreed upon period of time, typically three to five years, as set forth in the relevantPartnership Agreement (the “Holding Period”).ii.In the event an Employed Selling Shareholder’s employment terminated prior to the expiration of the HoldingPeriod, the Required Redemption would occur only upon expiration of the Holding Period.b.Call Optioni.In the event that an Employed Selling Shareholder’s employment terminated prior to expiration of the HoldingPeriod, the Company has the contractual right, but not the obligation, to acquire the Employed SellingShareholder’s Allocable Portion of the Seller Entity Interest from the Seller Entity through exercise of the CallOption.c.For the Required Redemption and the Call Option, the purchase price was derived from a formula based on a specifiedmultiple of NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and theCompany’s internal management fee, plus an Allocable Portion of any undistributed earnings of NewCo (the“Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within NewCo; thereforethe undistributed earnings amount is small, if any.d.The Purchase Price for the initial equity interest purchased by the Company was also based on the same specifiedmultiple of the trailing twelve-month earnings that is used in the Required Redemption noted above.e.Although, the Required Redemption and the Call Option do not have an expiration date, the Seller Entity Interesteventually will be purchased by the Company.f.The Required Redemption and the Call Option never apply to Selling Shareholders who do not become employed byNewCo, since the Company requires that such Selling Shareholders sell their entire ownership interest in the SellerEntity at the closing of the Acquisition.2.An Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition andthe Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-CompeteAgreement do not contain any provision to escrow or “claw back” the equity interest in the Seller Entity held by suchEmployed Selling Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Selling Shareholder is terminated for “cause” by NewCo, suchEmployed Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Seller Entity and theSeller Entity does not forfeit its right to any portion of the Seller Entity Interest. The Company’s only recourse against theEmployed Selling Shareholder for breach of either the67TABLE OF CONTENTSEmployment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under suchagreements. There are no conditions in any of the arrangements with an Employed Selling Shareholder that would result ina forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest.As previously mentioned due to amended partnership agreements, the redemption values of the mandatorily redeemable non-controlling interest (previously classified as liabilities) were reclassified as redeemable non-controlling interest (temporary equity) atfair value on the December 31, 2017 consolidated balance sheet. Year EndedDecember 31, 2018Year EndedDecember 31, 2017Contractual time period has lapsed but holder’s employment has not been terminated$— $327 Contractual time period has not lapsed and holder’s employment has not beenterminated — — Holder’s employment has terminated and contractual time period has expired — — Holder’s employment has terminated and contractual time period has not expired — — Redemption value prior to excess distributed earnings$— $327 Excess distributions over earnings and losses — — $— $327 7. GoodwillThe changes in the carrying amount of goodwill as of December 31, 2018 and 2017 consisted of the following (in thousands): Year EndedDecember 31, 2018Year EndedDecember 31, 2017 Beginning balance$271,338 $226,806 Goodwill acquired during the year 19,778 44,292 Goodwill adjustments for purchase price allocation of businesses acquired in prior year 2,409 706 Goodwill written-off - closed clinic — (466)Ending balance$293,525 $271,338 In 2017, the Company wrote off the goodwill related to the closure of a single clinic acquired partnership due to the loss of asignificant management contract.8. Intangible Assets, netIntangible assets, net as of December 31, 2018 and 2017 consisted of the following (in thousands): December 31, 2018December 31, 2017Tradenames$30,256 $29,673 Referral relationships, net of accumulated amortization of $9,370 and $7,209,respectively 16,895 16,811 Non-compete agreements, net of accumulated amortization of $4,716 and $4,100,respectively 1,677 2,470 $48,828 $48,954 Tradenames, referral relationships and non-compete agreements are related to the businesses acquired. The value assigned totradenames has an indefinite life and is tested at least annually for impairment using the relief from royalty method in conjunctionwith the Company’s annual goodwill impairment test. The value assigned to68TABLE OF CONTENTSreferral relationships is being amortized over their respective estimated useful lives which range from 6 to 16 years. Non-competeagreements are amortized over the respective term of the agreements which range from 5 to 6 years.The following table details the amount of amortization expense recorded for intangible assets for the years ended December 31,2018, 2017 and 2016 (in thousands): Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016 December 31, 2018December 31, 2017December 31, 2016Tradenames$— $— $330 Referral relationships 2,161 1,934 1,512 Non-compete agreements 616 720 525 $2,777 $2,654 $2,367 For one acquisition, the value assigned to tradename was being amortized over the term of the six year agreement in which theCompany had acquired the right to use the specific tradename. In 2016, the remaining value of this tradename was charged toearnings and included in amortization expense in the above table as the Company decided to combine two acquired operations inGeorgia and the tradename under this six year agreement will no longer be used.The remaining balances of the referral relationships and non-compete agreements is expected to be amortized as follows (inthousands):Referral RelationshipsNon-Compete AgreementsYearsEnding December 31,Annual AmountYearsEnding December 31,Annual Amount2019$2,133 2019$632 2020$2,133 2020$418 2021$2,133 2021$340 2022$2,084 2022$163 2023$1,977 2023$94 2024$1,791 2024$30 Thereafter$4,644 9. Accrued ExpensesAccrued expenses as of December 31, 2018 and 2017 consisted of the following (in thousands): December 31, 2018December 31, 2017Salaries and related costs$21,726 $16,828 Credit balances due to patients and payors 7,293 4,158 Group health insurance claims 3,124 2,929 Income taxes payable — 2,833 Other 6,350 6,594 Total$38,493 $33,342 10. Notes PayableNotes payable as of December 31, 2018 and 2017 consisted of the following (in thousands): December 31,2018December 31,2017Credit Agreement average effective interest rate of 4.1% inclusive of unused fee$38,000 $54,000 Various notes payable with $1,434 plus accrued interest due in the next year, interestaccrues in the range of 3.25% through 5.0% per annum 1,836 6,772 39,836 60,772 Less current portion (1,434) (4,044)Long term portion$38,402 $56,728 69During the twelve months ended December 31, 2019$1,434 During the twelve months ended December 31, 2020 402 During the twelve months ended December 31, 2021 38,000 During the twelve months ended December 31, 2022 — $39,836 TABLE OF CONTENTSEffective December 5, 2013, the Company entered into an Amended and Restated Credit Agreement with a commitment for a$125.0 million revolving credit facility. This agreement was amended in August 2015, January 2016, March 2017 and November 2017(hereafter referred to as “Amended Credit Agreement”). The Amended 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 Amended Credit Agreement may be used for working capital, acquisitions, purchases of the Company’s commonstock, dividend payments to the Company’s common stockholders, capital expenditures and other corporate purposes. The pricinggrid which is based on the Company’s consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.25% to 2.0%or the applicable spread over the Base Rate ranging from 0.1% to 1%. Fees under the Amended Credit Agreement include an unusedcommitment fee ranging from 0.25% to 0.3% depending on the Company’s consolidated leverage ratio and the amount of fundsoutstanding under the Amended Credit Agreement.The January 2016 amendment to the Amended Credit Agreement increased the cash and noncash consideration that theCompany could pay with respect to acquisitions permitted under the Amended Credit Agreement to $50,000,000 for any fiscal year,and increased the amount the Company may pay in cash dividends to its shareholders in an aggregate amount not to exceed$10,000,000 in any fiscal year. The March 2017 amendment, among other items, increased the amount the Company may pay in cashdividends to its shareholders in an aggregate amount not to exceed $15,000,000 in any fiscal year. The November 2017 amendment,among other items, adjusted the pricing grid as described above, increased the aggregate amount the Company may pay in cashdividends to its shareholders to an amount not to exceed $20,000,000 and extended the maturity date to November 30, 2021.On December 31, 2018, $38.0 million was outstanding on the Credit Agreement resulting in $87.0 million of availability. As ofDecember 31, 2018, the Company was in compliance with all of the covenants thereunder.The Company generally enters into various notes payable as a means of financing a portion of its acquisitions and purchasingof non-controlling interests. In conjunction with the transactions related to these in 2018, the Company entered into notes payable inthe aggregate amount of $1.0 million of which an aggregate principal payment of $0.6 million which is due in 2019 and $0.4 million in2020. Interest accrues in the range of 4.5% to 5.00% per annum and is payable with each principal installment.Gain on derecognition of debt was $1.8 million for the year 2018, as a liability relating to some former physical therapy partners isno longer deemed payable. The debt derecognition transaction resulted in after-tax positive impacts on net income of $1.4 million andon per share earnings of $0.11.Aggregate annual payments of principal required pursuant to the Credit Agreement and the various notes payable subsequentto December 31, 2018 are as follows (in thousands):70TABLE OF CONTENTS11. Income TaxesSignificant components of deferred tax assets and liabilities included in the consolidated balance sheets at December 31, 2018and 2017 were as follows (in thousands): December 31, 2018December 31, 2017Deferred tax assets: Compensation$1,842 $1,529 Allowance for doubtful accounts 600 478 Lease obligations - closed clinics 34 54 Deferred tax assets$2,476 $2,061 Deferred tax liabilities: Depreciation and amortization$(11,309)$(12,590)Other (179) (346)Deferred tax liabilities (11,488) (12,936)Net deferred tax liability$(9,012)$(10,875)The deferred tax assets and liabilities related to purchased interests not yet finalized may result in an immaterial adjustment.During 2018, the Company recorded deferred tax assets of $6.6 million related to the revaluation of redeemable non-controllinginterests and acquisitions of non-controlling interests. In addition, during 2018, the Company recorded an adjustment to the deferredtax assets of $0.1 million as a result of a detailed reconciliation of its federal and state taxes payable and receivable accounts alongwith its federal and state deferred tax asset and liability accounts with its federal and state tax returns for 2017. The offset to thisadjustment was a reduction in the previously report federal income tax payable of $1.2 million, a decrease in the previously reportedstate income tax receivable of $0.8 million and a decrease in the current year provision for income taxes of $0.5 million. As ofDecember 31, 2018, the Company has a federal income tax receivable of $0.9 million and state tax receivables of $1.3 million. The taxreceivables are included in other current assets on the accompanying consolidated balance sheets.As a result of TCJA, the Company revalued its deferred tax assets and liabilities as of December 31, 2017. Based on a review andanalysis as of December 31, 2017, the Company estimated a reduction of its net deferred tax liabilities by $4.3 million thereby reducingits provision for income taxes by such amount for the 2017 year. Also during 2017, the Company recorded an adjustment to thedeferred tax assets having the effect of reducing its net deferred tax liability of $1.2 million related to acquisitions of non-controllinginterests in 2017 based on a detailed reconciliation of its federal and state taxes payable and receivable accounts along with itsfederal and state deferred tax asset and liability accounts. The offset to this adjustment was a reduction in the previously reported taxreceivable of approximately $1.7 million and a charge to current year provision for income taxes of $0.3 million. At December 31, 2017,the Company had a federal income tax payable of $2.8 million (included in current liabilities – accrued expenses on the accompanyingconsolidated balance sheet) and a state income tax receivable of $2.2 million. The tax receivables are included in other current assetson the accompanying consolidated balance sheets.The differences between the federal tax rate and the Company’s effective tax rate for the years ended December 31, 2018, 2017and 2016 were as follows (in thousands): December 31, 2018December 31, 2017December 31, 2016U. S. tax at statutory rate$9,710 21.0%$9,900 35.0%$11,351 35.0%Tax legislation adjustment — 0.0% (4,325) (15.3)% — — State income taxes, net of federal benefit and tax reform 1,722 3.7% 1,060 3.7% 945 2.9%Excess equity compensation deduction (806) (1.7)% (1,139) (4.0)% (911) (2.8)%Non-deductible expenses 743 1.6% 560 2.0% 495 1.5%Other — 0.0% (24) (0.1)% — — $11,369 24.6%$6,032 21.3%$11,880 36.6%71TABLE OF CONTENTSSignificant components of the provision for income taxes for the years ended December 31, 2018, 2017 and 2016 were as follows(in thousands): December 31, 2018December 31, 2017December 31, 2016Current: Federal$5,357 $9,332 $7,620 State 1,199 1,564 1,281 Total current 6,556 10,896 8,901 Deferred: Federal 3,771 (5,233) 2,548 State 1,042 369 431 Total deferred 4,813 (4,864) 2,979 Total income tax provision$11,369 $6,032 $11,880 For 2018, 2017 and 2016, the Company performed a detailed reconciliation of its federal and state taxes payable and receivableaccounts along with its federal and state deferred tax asset and liability accounts. As a result of this detailed analysis, the Companyrecorded a decrease in the income tax provision of $500,000, and an increase in the income tax provision of $312,000 and $34,000 for2018, 2017, and 2016, respectively. The Company considers this reconciliation process to be an annual control.The Company is required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence,it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during the periods in which those temporary differences becomedeductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Basedupon the level of historical taxable income and projections for future taxable income in the periods which the deferred tax assets aredeductible, management believes that a valuation allowance is not required, as it is more likely than not that the results of futureoperations will generate sufficient taxable income to realize the deferred tax assets.The Company’s U.S. federal returns remain open to examination for 2015 through 2017 and U.S. state jurisdictions are open forperiods ranging from 2014 through 2017.The Company does not believe that it has any significant uncertain tax positions at December 31, 2018, nor is this expected tochange within the next twelve months due to the settlement and expiration of statutes of limitation.The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interestexpense recognized during the years ended December 31, 2018, 2017 and 2016.12. Equity Based PlansThe Company has the following equity based plans with outstanding equity grants:The Amended and Restated 1999 Employee Stock Option Plan (the “Amended 1999 Plan”) permits the Company to grant to non-employee directors and employees of the Company up to 600,000 non-qualified options to purchase shares of common stock andrestricted stock (subject to proportionate adjustments in the event of stock dividends, splits, and similar corporate transactions). Theexercise prices of options granted under the Amended 1999 Plan are determined by the Compensation Committee. The period withinwhich each option will be exercisable is determined by the Compensation Committee. The Amended 1999 Plan was approved by theshareholders of the Company at the 2008 Shareholders Meeting on May 20, 2008.The Amended and Restated 2003 Stock Option Plan (the “Amended 2003 Plan”) permits the Company to grant to key employeesand outside directors of the Company incentive and non-qualified options and shares of restricted stock covering up to 2,100,000shares of common stock (subject to proportionate adjustments in the event of stock dividends, splits, and similar corporatetransactions). The material terms of the Amended 2003 Plan was reapproved by the shareholders of the Company at the 2015Shareholders Meeting on May 19, 2015 and an increase in the number of shares authorized for issuance from 1,750,000 to 2,100,000was approved at the 2016 Shareholders Meeting on March 17, 2016.72TABLE OF CONTENTSA cumulative summary of equity plans as of December 31, 2018 follows: AuthorizedRestrictedStockIssuedOutstandingStockOptionsStockOptionsExercisedStockOptionsExercisableSharesAvailablefor GrantEquity Plans Amended 1999 Plan 600,000 416,402 — 139,791 — 7,775 Amended 2003 Plan 2,100,000 929,891 — 778,300 — 391,809 2,700,000 1,346,293 — 918,091 — 399,584 During 2018, 2017 and 2016, the Company granted the following shares of restricted stock to directors, officers and employeespursuant to its equity plans as follows:Year GrantedNumber of SharesWeighted Average FairValue Per Share2018 93,801 $78.63 2017 79,475 $62.19 2016 101,790 $51.59 During 2018, 2017 and 2016, the following shares were cancelled due to employee terminations prior to restrictions lapsing:Year CancelledNumber of SharesWeighted Average FairValue Per Share2018 3,867 $59.51 2017 2,875 $63.12 2016 4,965 $35.78 Generally, restrictions on the stock granted to employees lapse in equal annual installments on the following four anniversariesof the date of grant. For those shares granted to directors, the restrictions will lapse in equal quarterly installments during the firstyear after the date of grant. For those granted to officers, the restriction will lapse in equal quarterly installments during the fouryears following the date of grant.As of December 31, 2018, there were 152,926 shares outstanding for which restrictions had not lapsed. The restrictions will lapsein 2019 through 2022.Compensation expense for grants of restricted stock is recognized based on the fair value on the date of grant. Compensationexpense for restricted stock grants was $5.9 million, $5.0 million and $5.0 million, respectively, for 2018, 2017 and 2016. As ofDecember 31, 2018, the remaining $9.0 million of compensation expense will be recognized from 2019 through 2022.13. Preferred StockThe Board is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or moreseries and to establish the number of shares to be included in each such series and the rights, powers, preferences and limitations ofeach series. There are no provisions in the Company’s Articles of Incorporation specifying the vote required by the holders ofpreferred stock to take action. All such provisions would be set out in the designation of any series of preferred stock established bythe Board. The bylaws of the Company specify that, when a quorum is present at any meeting, the vote of the holders of at least amajority of the outstanding shares entitled to vote who are present, in person or by proxy, shall decide any question brought beforethe meeting, unless a different vote is required by law or the Company’s Articles of Incorporation.Because the Board has the power to establish the preferences and rights of each series, it may afford the holders of any seriesof preferred stock, preferences, powers, and rights, voting or otherwise, senior to the right of holders of common stock. The issuanceof the preferred stock could have the effect of delaying or preventing a change in control of the Company.14. Common StockFrom September 2001 through December 31, 2008, the Board authorized the Company to purchase, in the open market or inprivately negotiated transactions, up to 2,250,000 shares of the Company’s common stock. In73TABLE OF CONTENTSMarch 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of its common stock (“March 2009Authorization”). The Amended Credit Agreement permits share repurchases of up to $15,000,000, subject to compliance withcovenants. The Company is required to retire shares purchased under the March 2009 Authorization.Under the March 2009 Authorization, the Company has purchased a total of 859,499 shares. There is no expiration date for theshare repurchase program. There are currently an additional estimated 146,555 shares (based on the closing price of $102.35 onDecember 31, 2018, the last business day in 2018) that may be purchased from time to time in the open market or private transactionsdepending on price, availability and the Company’s cash position. The Company did not purchase any shares of its common stockduring 2018 or 2017.15. Defined Contribution PlanThe Company has several 401(k) profit sharing plans covering all employees with three months of service. For certain plans, theCompany makes matching contributions. The Company may also make discretionary contributions of up to 50% of employeecontributions. The Company did not make any discretionary contributions for the years ended December 31, 2018, 2017 and 2016.The Company matching contributions totaled $1.8 million, $1.5 million and $1.1 million, respectively, for the years ended December 31,2018, 2017 and 2016.16. Commitments and ContingenciesOperating LeasesThe Company has entered into operating leases for its executive offices and clinic facilities. In connection with theseagreements, the Company incurred rent expense of $37.1 million, $34.8 million and $30.3 million for the years ended December 31,2018, 2017 and 2016, respectively. Several of the leases provide for an annual increase in the rental payment based upon theConsumer Price Index. The majority of the leases provide for renewal periods ranging from one to five years. The agreements toextend the leases typically specify that rental rates would be adjusted to market rates as of each renewal date.The future minimum operating lease commitments for each of the next five years and thereafter and in the aggregate as ofDecember 31, 2018 are as follows (in thousands):2019$34,139 2020 27,475 2021 18,968 2022 11,592 2023 6,488 Thereafter 3,892 Total$102,554 Employment AgreementsAt December 31, 2018, the Company had outstanding employment agreements with four of its executive officers. Theseagreements, which presently expire on December 31, 2019, provide for automatic two year renewals at the conclusion of each expiringterm or renewal term. All of the agreements contain a provision for annual adjustment of salaries.In addition, the Company has outstanding employment agreements with most of the managing physical therapist partners of theCompany’s physical therapy clinics and with certain other clinic employees which obligate subsidiaries of the Company to paycompensation of $31.6 million in 2019 and $7.4 million in the aggregate from 2020 through 2022. In addition, many of the employmentagreements with the managing physical therapists provide for monthly bonus payments calculated as a percentage of each clinic’snet revenues (not in excess of operating profits) or operating profits.74TABLE OF CONTENTS17. Earnings Per ShareThe computations of basic and diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 are as follows(in thousands, except per share data): Year EndedDecember 31,2018Year EndedDecember 31,2017Year EndedDecember 31,2016Net income attributable to USPH shareholders$34,873 $22,256 $20,551 Charges to additional paid-in capital Revaluation of redeemable non-controlling interests (24,770) (201) — Tax effect at statutory rate (federal and state) of 26.25% 6,502 75 — $16,605 $22,130 $20,551 Basic and diluted net income per share attributable to USPHshareholders$1.31 $1.76 $1.64 Shares used in computation: Basic and diluted earnings per share - weighted-average shares 12,666 12,570 12,500 18. Reclassification of prior year presentationCertain prior year amounts have been reclassified for consistency with the current year presentation. These reclassificationshad no effect on the reported results of operations. A reclassification adjustment has been made to allocate net income attributable tonon-controlling interests for the year ended December 31, 2017 between non-controlling interests – permanent equity and redeemablenon-controlling interests – temporary equity. A reclassification adjustment has also been made to Note 5 where amounts from the lineredemption value prior to excess distributed earnings were reclassed to different lines within the same table.19. Selected Quarterly Financial Data (Unaudited) Q1 2018Q2 2018Q3 2018Q4 2018Net patient revenues$100,552 $105,989 $103,354 $107,808 Net revenues$108,342 $115,098 $113,122 $117,349 Operating income$13,051 $17,026 $15,433 $14,804 Net income$10,054 $13,236 $11,879 $13,673 Net income attributable to USPH shareholders$7,117 $9,246 $8,102 $10,408 Basic and diluted earnings per share attributable to commonshareholders:$0.27 $0.48 $0.13 $0.43 Shares used in computation - basic and diluted 12,616 12,677 12,685 12,685 Q1 2017Q2 2017Q3 2017Q4 2017Net patient revenues$93,654 $97,657 $96,273 $101,642 Net revenues$97,565 $104,251 $103,032 $109,203 Operating income$12,200 $15,678 $12,888 $13,962 Net income$6,034 $6,390 $6,594 $8,706 Net income attributable to USPH shareholders$4,816 $4,941 $5,150 $7,349 Basic and diluted earnings per share attributable to commonshareholders:$0.38 $0.39 $0.41 $0.57 Shares used in computation - basic and diluted 12,528 12,579 12,581 12,593 75TABLE OF CONTENTSITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.Not applicable.ITEM 9A.CONTROLS AND PROCEDURES.Evaluation of Disclosure Controls and ProceduresOur management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of theend of the fiscal period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures are effective in ensuring that the information required to be disclosed inthe reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the SEC and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.Management’s Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as such term isdefined in Rule 13a-15(f) under the Exchange Act. U.S. Physical Therapy, Inc. and subsidiaries’ (the “Company”) internal control overfinancial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles.Internal control over financial reporting includes those policies and procedures that:•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company;•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that our receipts and expenditures are being made only inaccordance with authorizations of the Company’s management and directors; and•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition ofthe Company’s assets that could have a material effect on the financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives becauseof its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and issubject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also becircumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatementsmay not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features ofthe financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, therisk.Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31,2018. In making this assessment, management used the criteria described in Internal Control — Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded thatour internal control over financial reporting was effective as of December 31, 2018.The Company’s internal control over financial reporting has been audited by Grant Thornton LLP, an independent registeredpublic accounting firm, as stated in their report included on page 44.76TABLE OF CONTENTSChanges in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting during the quarter ended December 31, 2018 thathave materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B.OTHER INFORMATION.Not applicable.PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.The information required in response to this Item 10 is incorporated herein by reference to our definitive proxy statementrelating to our 2019 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 daysafter the end of our fiscal year covered by this report.ITEM 11.EXECUTIVE COMPENSATION.The information required in response to this Item 11 is incorporated herein by reference to our definitive proxy statement relatingto our 2019 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after theend of our fiscal year covered by this report.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.The information required in response to this Item 12 is incorporated herein by reference to our definitive proxy statementrelating to our 2019 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 daysafter the end of our fiscal year covered by this report.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.The information required in response to this Item 13 is incorporated herein by reference to our definitive proxy statementrelating to our 2019 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 daysafter the end of our fiscal year covered by this report.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.The information required in response to this Item 14 is incorporated herein by reference to our definitive proxy statementrelating to our 2019 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 daysafter the end of our fiscal year covered by this report.PART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.(a)Documents filed as a part of this report:1.Financial Statements. Reference is made to the Index to Financial Statements and Related Information under Item 8 inPart II hereof, where these documents are listed.2.Financial Statement Schedules. See page 82 for Schedule II — Valuation and Qualifying Accounts. All otherschedules are omitted because of the absence of conditions under which they are required or because the requiredinformation is shown in the financial statements or notes thereto.3.Exhibits. The exhibits listed in List of Exhibits on the next page are filed or incorporated by reference as part of thisreport.ITEM 16.Form 10-K Summary –None.77TABLE OF CONTENTSEXHIBIT INDEXLIST OF EXHIBITSNumberDescription3.1Articles of Incorporation of the Company [filed as an exhibit to the Company’s Form 10-Q for the quarterly periodended June 30, 2001 and incorporated herein by reference]. 3.2Amendment to the Articles of Incorporation of the Company [filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended June 30, 2001 and incorporated herein by reference]. 3.3Bylaws of the Company, as amended [filed as an exhibit to the Company’s Form 10-KSB for the year ended December31, 1993 and incorporated herein by reference—Commission File Number—1-11151]. 10.1+1999 Employee Stock Option Plan (as amended and restated May 20, 2008) [incorporated by reference to Appendix A tothe Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 17, 2008]. 10.2+U.S. Physical Therapy, Inc. 2003 Stock Incentive Plan, (as amended and restated effective March 26, 2016)[incorporated herein by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filedwith the SEC on April 7, 2016.] 10.3+U. S. Physical Therapy, Inc. Long-Term Incentive Plan for Senior Management for 2013, effective March 27, 2013[incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on April 1,2013]. 10.4+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for 2013, effective March 27, 2013 [incorporated by reference toExhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC on April 1, 2013]. 10.5+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for 2013, effective March 27, 2013 [incorporated byreference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on April 1, 2013]. 10.6+U. S. Physical Therapy, Inc. Long-Term Incentive Plan for Senior Management for 2014, effective March 21, 2014[incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on March 27,2014]. 10.7+U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for 2014, effective March21, 2014 [incorporated by reference to Exhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC onMarch 27, 2014]. 10.8+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2014, effective March 21, 2014[incorporated by reference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on March 27,2014]. 10.9+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2014, effective March 21, 2014[incorporated by reference to Exhibit 99.4 to the Company Current Report on Form 8-K filed with the SEC on March 27,2014]. 10.10+U. S. Physical Therapy, Inc. Long Term Incentive Plan for Senior Management for 2015, effective March 23, 2015[incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on March27, 2015.] 78TABLE OF CONTENTSNumberDescription10.11+U. S. Physical Therapy, Inc. Discretionary Long Term Incentive Plan for Senior Management for 2015, effective March23, 2015 [incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 27, 2015.] 10.12+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2015, effective March 23, 2015[incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on March27, 2015.] 10.13+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2015, effective March 23, 2015[incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC on March27, 2015.] 10.14+U. S. Physical Therapy, Inc. Objective Long Term Incentive Plan for Senior Management for 2016, effective March 10,2016 [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 16, 2016]. 10.15+U. S. Physical Therapy, Inc. Discretionary Long Term Incentive Plan for Senior Management for 2016, effective March10, 2016 [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 16, 2016]. 10.16+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2016, effective March 10, 2016[incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March16, 2016]. 10.17+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2016, effective March 10, 2016[incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March16, 2016]. 10.18+Form of Restricted Stock Agreement [incorporated by reference to Exhibit 10.5 to the Company’s Current Report onForm 8-K filed with the SEC on March 16, 2016]. 10.19+U. S. Physical Therapy, Inc. Long-Term Incentive Plan for Senior Management for 2017, effective March 24, 2017[incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K/A filed with the SEC onFebruary 9, 2018.] 10.20+U. S. Physical Therapy, Inc. Discretionary Long –Term Incentive Plan for Senior Management for 2017, effective March24, 2017 [incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 30, 2017.] 10.21+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2017, effective March 24, 2017[incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on March30, 2017.] 10.22+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2017, effective March 24, 2017[incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC on March30, 2017.] 10.23+U. S. Physical Therapy, Inc. Objective Long-Term Incentive Plan for Senior Management for 2018, effective April 9,2018 [incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC onApril 12, 2018.] 79TABLE OF CONTENTSNumberDescription10.24+U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for 2018, effective April 9,2018 [incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC onApril 12, 2018.] 10.25+U. S. Physical Therapy, Inc. Objective Cash/RSA Bonus Plan for Senior Management for 2018, effective April 9, 2018[incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 12,2018.] 10.26+U. S. Physical Therapy, Inc. Discretionary Cash/RSA Bonus Plan for Senior Management for 2018, effective April 9,2018 [incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC onApril 12, 2018.] 10.27+Second Amended and Restated Credit Agreement dated as of November 10, 2017 among the Company, as Borrower,Bank of America, N.A. as Administrative Agent and the Lenders Patty (incorporated by reference to Exhibit 99.2 to theCompany’s Current Report on Form 8-K filed with the SEC on November 14, 2017). 10.28+Second Amended and Restated Employment Agreement by and between the Company and Christopher J. Readingdated effective February 9, 2016 [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on February 12, 2016]. 10.29+Second Amended and Restated Employment Agreement by and between the Company and Lawrance W. McAfeedated effective February 9, 2016 [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on February 12, 2016]. 10.30+Amended and Restated Employment Agreement by and between the Company and Glenn D. McDowell dated effectiveFebruary 9, 2016 [incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with theSEC on February 12, 2016]. 10.31+Employment Agreement commencing on March 1, 2018 by and between the Company and Graham Reeve [incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2018]. 21.1*Subsidiaries of the Registrant 23.1*Consent of Independent Registered Public Accounting Firm—Grant Thornton LLP 31.1*Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.2*Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.3*Certification of Controller pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 32.1*Certification of Periodic Report of the Chief Executive Officer, Chief Financial Officer and Controller pursuant to Rule13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 80TABLE OF CONTENTSNumberDescription101.INS*XBRL Instance Document 101.SCH*XBRL Taxonomy Extension Schema Document 101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF*XBRL Taxonomy Extension Definition Linkbase Document 101.LAB*XBRL Taxonomy Extension Label Linkbase Document 101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document*Filed herewith+Management contract or compensatory plan or arrangement.81TABLE OF CONTENTSFINANCIAL STATEMENT SCHEDULE*SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTSU.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES Balance atBeginning ofPeriodAdditions Chargedto Costs andExpensesAdditionsChargedto Other AccountsDeductionsBalance atEnd of PeriodYEAR ENDED DECEMBER 31, 2018: Reserves and allowances deducted fromasset accounts: Allowance for doubtful accounts(1)$2,273 $4,603 — $4,204(2)$2,672 YEAR ENDED DECEMBER 31, 2017: Reserves and allowances deducted fromasset accounts: Allowance for doubtful accounts$1,792 $3,672 — $3,191(2)$2,273 YEAR ENDED DECEMBER 31, 2016: Reserves and allowances deducted fromasset accounts: Allowance for doubtful accounts$1,642 $3,906 — $3,756(2)$1,792 (1)Related to patient accounts receivable and accounts receivable—other.(2)Uncollectible accounts written off, net of recoveries.*All other schedules are omitted because of the absence of conditions under which they are required or because the requiredinformation is shown in the financial statements or notes thereto.82TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. PHYSICAL THERAPY, INC. (Registrant) By:/s/ Lawrance W. McAfee Lawrance W. McAfee Chief Financial Officer By:/s/ Jon C. Bates Jon C. Bates Vice President/ControllerDate: March 15, 2019Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities indicated as of the date indicated above./s/ Chris J. ReadingChief Executive Officer, President and Director (PrincipalExecutive Officer)March 15, 2019Chris J. Reading /s/ Lawrance W. McAfeeExecutive Vice President, Chief Financial Officer and Director(Principal Financial Officer and Principal Accounting Officer)March 15, 2019Lawrance W. McAfee /s/ Jerald L. PullinsChairman of the BoardMarch 15, 2019Jerald L. Pullins /s/ Mark J. BrooknerDirectorMarch 15, 2019Mark J. Brookner /s/ Harry S. ChapmanDirectorMarch 15, 2019Harry S. Chapman /s/ Bernard A. HarrisDirectorMarch 15, 2019Dr. Bernard A. Harris, Jr. /s/ Kathleen A. GilmartinDirectorMarch 15, 2019Kathleen A. Gilmartin /s/ Edward L. KuntzDirectorMarch 15, 2019Edward L. Kuntz /s/ Reginald E. SwansonDirectorMarch 15, 2019Reginald E. Swanson /s/ Clayton K. TrierDirectorMarch 15, 2019Clayton K. Trier83TABLE OF CONTENTSEXHIBIT INDEX (NOT UPDATED)LIST OF EXHIBITSNumberDescription3.1Articles of Incorporation of the Company [filed as an exhibit to the Company’s Form 10-Q for the quarterly periodended June 30, 2001 and incorporated herein by reference]. 3.2Amendment to the Articles of Incorporation of the Company [filed as an exhibit to the Company’s Form 10-Q for thequarterly period ended June 30, 2001 and incorporated herein by reference]. 3.3Bylaws of the Company, as amended [filed as an exhibit to the Company’s Form 10-KSB for the year ended December31, 1993 and incorporated herein by reference—Commission File Number—1-11151]. 10.1+1999 Employee Stock Option Plan (as amended and restated May 20, 2008) [incorporated by reference to Appendix A tothe Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 17, 2008]. 10.2+Form of Restricted Stock Agreement [incorporated by reference to Exhibit 10.17 to the Company’s Annual Report onForm 10-K filed with the SEC on March 12, 2013.] 10.3+U. S. Physical Therapy, Inc. Long-Term Incentive Plan for Senior Management for 2013, effective March 27, 2013[incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on April 1,2013]. 10.4+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for 2013, effective March 27, 2013 [incorporated by reference toExhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC on April 1, 2013]. 10.5+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for 2013, effective March 27, 2013 [incorporated byreference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on April 1, 2013]. 10.6+U. S. Physical Therapy, Inc. Long-Term Incentive Plan for Senior Management for 2014, effective March 21, 2014[incorporated by reference to Exhibit 99.1 to the Company Current Report on Form 8-K filed with the SEC on March 27,2014]. 10.7+U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for 2014, effective March21, 2014 [incorporated by reference to Exhibit 99.2 to the Company Current Report on Form 8-K filed with the SEC onMarch 27, 2014]. 10.8+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2014, effective March 21, 2014[incorporated by reference to Exhibit 99.3 to the Company Current Report on Form 8-K filed with the SEC on March 27,2014]. 10.9+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2014, effective March 21, 2014[incorporated by reference to Exhibit 99.4 to the Company Current Report on Form 8-K filed with the SEC on March 27,2014]. 10.10+U. S. Physical Therapy, Inc. Long Term Incentive Plan for Senior Management for 2015, effective March 23, 2015[incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on March27, 2015.] 10.11+U. S. Physical Therapy, Inc. Discretionary Long Term Incentive Plan for Senior Management for 2015, effective March23, 2015 [incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 27, 2015.] 84TABLE OF CONTENTSNumberDescription10.13+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2015, effective March 23, 2015[incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC on March27, 2015.] 10.14+U. S. Physical Therapy, Inc. Objective Long Term Incentive Plan for Senior Management for 2016, effective March 10,2016 [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 16, 2016]. 10.15+U. S. Physical Therapy, Inc. Discretionary Long Term Incentive Plan for Senior Management for 2016, effective March10, 2016 [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 16, 2016]. 10.16+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2016, effective March 10, 2016[incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March16, 2016]. 10.17+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2016, effective March 10, 2016[incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March16, 2016]. 10.18+Form of Restricted Stock Agreement [incorporated by reference to Exhibit 10.5 to the Company’s Current Report onForm 8-K filed with the SEC on March 16, 2016]. 10.19+U. S. Physical Therapy, Inc. Long-Term Incentive Plan for Senior Management for 2017, effective March 24, 2017[incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K/A filed with the SEC onFebruary 9, 2018.] 10.20+U. S. Physical Therapy, Inc. Discretionary Long –Term Incentive Plan for Senior Management for 2017, effective March24, 2017 [incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC onMarch 30, 2017.] 10.21+U. S. Physical Therapy, Inc. Objective Cash Bonus Plan for Senior Management for 2017, effective March 24, 2017[incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on March30, 2017.] 10.22+U. S. Physical Therapy, Inc. Discretionary Cash Bonus Plan for Senior Management for 2017, effective March 24, 2017[incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC on March30, 2017.] 10.23+U. S. Physical Therapy, Inc. Objective Long-Term Incentive Plan for Senior Management for 2018, effective April 9,2018 [incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC onApril 12, 2018.] 10.24+U. S. Physical Therapy, Inc. Discretionary Long-Term Incentive Plan for Senior Management for 2018, effective April 9,2018 [incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC onApril 12, 2018.] 10.25+U. S. Physical Therapy, Inc. Objective Cash/RSA Bonus Plan for Senior Management for 2018, effective April 9, 2018[incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 12,2018.] 10.26+U. S. Physical Therapy, Inc. Discretionary Cash/RSA Bonus Plan for Senior Management for 2018, effective April 9,2018 [incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC onApril 12, 2018.] 85TABLE OF CONTENTSNumberDescription10.27+Second Amended and Restated Credit Agreement dated as of November 10, 2017 among the Company, as Borrower,Bank of America, N.A. as Administrative Agent and the Lenders Patty (incorporated by reference to Exhibit 99.2 to theCompany’s Current Report on Form 8-K filed with the SEC on November 14, 2017). 10.28+Second Amended and Restated Employment Agreement by and between the Company and Christopher J. Readingdated effective February 9, 2016 [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on February 12, 2016]. 10.29+Second Amended and Restated Employment Agreement by and between the Company and Lawrance W. McAfeedated effective February 9, 2016 [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on February 12, 2016]. 10.30+Amended and Restated Employment Agreement by and between the Company and Glenn D. McDowell dated effectiveFebruary 9, 2016 [incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with theSEC on February 12, 2016]. 10.31+Employment Agreement commencing on March 1, 2018 by and between the Company and Graham Reeve [incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2018]. 21.1*Subsidiaries of the Registrant 23.1*Consent of Independent Registered Public Accounting Firm—Grant Thornton LLP 31.1*Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.2*Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.3*Certification of Controller pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 32.1*Certification of Periodic Report of the Chief Executive Officer, Chief Financial Officer and Controller pursuant to Rule13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 101.INS*XBRL Instance Document 101.SCH*XBRL Taxonomy Extension Schema Document 101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF*XBRL Taxonomy Extension Definition Linkbase Document 101.LAB*XBRL Taxonomy Extension Label Linkbase Document 101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document*Filed herewith+Management contract or compensatory plan or arrangement.86Exhibit 21.1NameDBAEntityTypeState ofFormationForeignQualificationAbility Health PT Management GP, LLC LLCTXFLAbility Health Services and Rehabilitation,L.P.Ability RehabilitationLPTXFLAchieve Management GP, LLC LLCTX Achieve Physical Therapy and Performance,Limited Partnership LPTX Action Therapy Centers, Limited PartnershipAction Physical Therapy HoustonHand Therapy PT ProfessionalsLPTX Adams County Physical Therapy, LimitedPartnership LPTXPAAdvance Rehabilitation & Consulting,Limited Partnership LPTXAL, FL & GAAdvance Rehabilitation Management GP, LLC LLCTXFLAgape Physical Therapy & SportsRehabilitation, Limited Partnership LPTXMDAgape Physical Therapy Management GP,LLC LLCTX Agility Spine & Sports PT Management GPLLC LLCTX Agility Spine & Sports Physical Therapy andRehabilitation, Limited Partnership LPTXAZAnkeny Physical & Sports Therapy, LimitedPartnership LPTXIAARC Iowa PT Plus, LLC LLCTXIAARC Physical Therapy Plus, LimitedPartnership LPTXKS, IA, MOARC PT Management GP, LLC LLCTXMOARCH Physical Therapy and SportsMedicine, Limited Partnership LPTXMIArrow Physical Therapy, Limited PartnershipBroken Arrow Physical TherapyLPTXOKArrowhead Physical Therapy, LimitedPartnershipElite Sports Medicine & PhysicalTherapyLPTXMSAshland Physical Therapy, LimitedPartnership LPTXORAudubon Physical Therapy, LimitedPartnership LPTXLABarren Ridge Physical Therapy, LimitedPartnership LPTXVABayside Management GP, LLC LLCTX Bayside Physical Therapy & SportsRehabilitation, Limited Partnership LPTXMDBeaufort Physical Therapy, LimitedPartnership LPTXNCBosque River Physical Therapy andRehabilitation, Limited Partnership LPTX NameDBAEntityTypeState ofFormationForeignQualificationBow Physical Therapy & Spine Center,Limited Partnership LPTXNHBrazos Valley Physical Therapy, LimitedPartnership LPTX Brick Hand & Rehabilitative Services, LimitedPartnership LPTXNJBriotix Health, Limited PartnershipInSite HealthLPDEAZ, CA, CO, CT, FL,GA, HI, IL, IA, IN, KS,KY, MA, MD, MI,MN, MO, MT, NV, NJ,NY, NC, OH, OK, OR,PA, SC, TX, UT, VA,WA, WIBriotix Management GP, LLC LLCTXFL, MA, OH, UTCape Cod Hand Therapy, Limited PartnershipCape Cod Hand & Upper ExtremityTherapyLPTXMACarolina Physical Therapy and SportsMedicine, Limited Partnership LPTXSCCarolina PT Management GP, LLC LLCTX Center for Physical Rehabilitation andTherapy, Limited Partnership LPDEMICleveland Physical Therapy, Ltd. LPTX Comprehensive Hand & Physical Therapy,Limited Partnership LPTXFLCoppell Spine & Sports Rehab, LimitedPartnershipNorth Davis/Keller PhysicalTherapy Physical Therapy ofColleyville Physical Therapy ofNorth Texas Physical Therapy ofCorinth Trinity Sports & PhysicalTherapy Physical Therapy ofFlower Mound Southlake PhysicalTherapy Physical Therapy ofTrophy Club Heritage TracePhysical Therapy TherapyPartners of Frisco/Little ElmTherapy Partners of North TexasLPTX CPR Management GP, LLC LLCTX Crawford Physical Therapy, LimitedPartnershipFull Potential Physical TherapyLPTXVACross Creek Physical Therapy, LimitedPartnership LPTXMSCrossroads Physical Therapy, LimitedPartnershipGreen Oaks Physical Therapy -Fort Worth Green Oaks PhysicalTherapyLPTX Crossroads Rehabilitation, LimitedPartnershipCrossroads Physical TherapyLPTXMINameDBAEntityTypeState ofFormationForeignQualificationCustom Physical Therapy, Limited Partnership LPTXNVCutting Edge Physical Therapy, LimitedPartnership LPTXINDearborn Physical Therapy, Ltd.Advanced Physical TherapyLPTXMIDecatur Hand and Physical TherapySpecialists, Limited Partnership LPTXGADekalb Comprehensive Physical Therapy,Limited Partnership LPTXGADenali Physical Therapy, Limited Partnership LPTXAKDHT Hand Therapy, Limited PartnershipArizona Desert Hand TherapyServices Desert Hand andPhysical TherapyLPTXAZDHT Management GP, LLC LLCTXAZDynamic Hand Therapy & Rehabilitation,Limited Partnership LPTXILEastgate Physical Therapy, LimitedPartnershipSummit Physical TherapyLPTXOHEdge Physical Therapy, Limited PartnershipRiver’s Edge Physical TherapyLPTXMTEnid Therapy Center, Limited PartnershipEnid Physical TherapyLPTXOKEverett Management, LLC LLCWA Evergreen Physical Therapy, LimitedPartnership LPTXMIExcel Physical Therapy, Limited Partnership LPTXAKExcel PT Texas GP, LLC LLCTX Fit2WRK, Inc. CorpTX Five Rivers Therapy Services, LimitedPartnershipPeak Physical TherapyLPTXARFlannery Physical Therapy, LimitedPartnershipPhysical Therapy PlusLPTXNJForest City Physical Therapy, LimitedPartnership LPTXILFredericksburg Physical Therapy, LimitedPartnership LPTX Frisco Physical Therapy, Limited Partnership LPTX Gahanna Physical Therapy, LimitedPartnershipCornerstone Physical TherapyLPTXOHGC Oklahoma GP, LLC LLCTX Genesee Valley Physical Therapy, LimitedPartnership LPTXMIGreen Country Physical Therapy, LimitedPartnership LPTXOKGreen Oaks Physical Therapy, LimitedPartnership LPTX Hamilton Physical Therapy Services, LP LPTXNJNameDBAEntityTypeState ofFormationForeignQualificationHands-On Sports Medicine, LimitedPartnershipMetro Spine and SportsRehabilitationLPTXILHarbor Physical Therapy, Limited Partnership LPTXMDHeritage Physical Therapy, LimitedPartnership LPTXCAHH Rehab Associates, Inc.Genesee Valley Physical TherapyTheramax Physical TherapyCorpMIDEHigh Performance Physical Therapy, LLCAtlanta Falcons Physical TherapyCentersLLCTXGAHigh Plains Physical Therapy, LimitedPartnership LPTXWYHighlands Physical Therapy & SportsMedicine, Limited Partnership LPTXNJHoeppner Physical Therapy, LimitedPartnership LPTXVTHPTS Management GP, LLC LLCTXNJIH GP, LLC LLCTX Indy ProCare Physical Therapy, LimitedPartnership LPTXINInSite Health Limited Partnership LPDE Integrated Management GP, LLC LLCTXWAIntegrated Rehab Group, Limited Partnership LPTXWAIntermountain Physical Therapy, LimitedPartnership LPTXIDJackson Clinics PT Management GP, LLC LLCTX Jackson Clinics, Limited Partnership LPTXVAJoan Ostermeier Physical Therapy, LimitedPartnershipSport & Spine Clinic of WittenbergLPTXWIJulie Emond Physical Therapy, LimitedPartnershipMaple Valley Physical TherapyLPTXVTKelly Lynch Physical Therapy, LimitedPartnershipSport & Spine Clinic of WatertownLPTXWIKennebec Physical Therapy, LLC LLCTXMEKingwood Physical Therapy, Ltd.Spring-Klein Physical TherapyWest Woodlands PhysicalTherapy Lake Conroe SportsMedicine and RehabilitationLPTX Lake Houston Physical Therapy, LimitedPartnershipNorthern Oaks Orthopedic &Sports PTLPTX Leader Physical Therapy, Limited PartnershipMemphis Physical TherapyLPTXTNLife Fitness Physical Therapy, LLCIn Balance Physical TherapyHerbst Physical TherapyLLCMDPALife Strides Physical Therapy andRehabilitation, Limited Partnership LPTXSCLiveWell Physical Therapy, LimitedPartnership LPTX NameDBAEntityTypeState ofFormationForeignQualificationMadison Physical Therapy, LimitedPartnership LPTXNJMadison Spine, Limited Partnership LPTXNJMax Motion Physical Therapy, LimitedPartnership LPTXAZMerrill Physical Therapy, Limited Partnership LPTXWIMishock Physical Therapy, LimitedPartnershipXcelerate Physical TherapyLPTXPAMishock PT Management GP, LLC LLCTX Mission Rehabilitation and Sports Medicine,Limited Partnership LPTX Mobile Spine and Rehabilitation, LimitedPartnership LPTXALMomentum Physical & Sports Rehabilitation,Limited PartnershipMomentum Physical Therapy &Sports RehabLPTXFL, CO, AZMountain View Physical Therapy, LimitedPartnershipMountain View Physical and HandTherapyLPTXORMSPT Management GP, LLC LLCTXNJNational Rehab Delaware, Inc. CorpDEMONational Rehab GP, Inc. CorpTXFL,MONational Rehab Management GP, Inc. CorpTXILNew Horizons Physical Therapy, LimitedPartnership LPTXINNorman Physical Therapy, LimitedPartnership LPTXOKNorth Jersey Game On Physical Therapy,Limited PartnershipMadison Spine & PhysicalTherapyLPTXNJNorth Lake Physical Therapy and Rehab,Limited Partnership LPTXORNorth Lake PT Management GP, LLC LLCTX Northern Lights Physical Therapy, LimitedPartnership LPTXNDNorthwest PT Management GP, LLC LLCTX Northwoods Physical Therapy, LimitedPartnership LPTXMIOPR Management Services, Inc. Inc.TXAK, AL, AZ, CO, CT,DE, FL, GA, IA, ID,IL, IN, KS, LA, MA,MD, ME, MI, MN,MO, MS, MT, NC,ND, NE, NH, NJ, NM,NV, OH, OK, OR, PA,SC, SD, TN, VA, VT,WI, WYOSR Physical Therapy, Limited Partnership LPTXMNNameDBAEntityTypeState ofFormationForeignQualificationOSR Physical Therapy Management GP LLC LLCTX Old Towne Physical Therapy, LimitedPartnership LPTXDEOregon Spine & Physical Therapy, LimitedPartnershipPeak State Physical TherapyLPTXORPelican State Physical Therapy, LimitedPartnershipAudubon Physical TherapyLPTXLAPenns Wood Physical Therapy, LimitedPartnership LPTXPAPerformancePro Sports Medicine andRehabilitation, Limited Partnership LPTX Phoenix Physical Therapy, LimitedPartnership LPTXOHPhysical Restoration and Sports Medicine,Limited Partnership LPTXVAPhysical Therapy Northwest, LimitedPartnership LPTXORPhysical Therapy and Spine Institute, LimitedPartnership LPTXILPhysical Therapy Solutions, LimitedPartnership LPDEVAPinnacle Therapy Services, LLC LLCDEMOPioneer Physical Therapy, Limited Partnership LPTXNEPlymouth Physical Therapy Specialists,Limited Partnership LPTXMIPort City Physical Therapy, LimitedPartnership LPTXMEPrecision Physical Therapy, LimitedPartnership LPTXPAPremier Physical Therapy and SportsPerformance, Limited Partnership LPDE Premier Management GP, LLC LLCDE ProActive Physical Therapy, LimitedPartnership LPTXSDProCare Physical Therapy Management GP,LLC LLCTX ProCare PT, Limited Partnership LPTXPAProgressive Physical Therapy Clinic, Ltd.Progressive Hand and PhysicalTherapyLPTX PTS GP Management, LLC LLCTX Quad City Physical Therapy & Spine, LimitedPartnership LPTXIARACVA GP, LLC LLCTXVAR. Clair Physical Therapy, Limited PartnershipClair Physical TherapyLPTX Radtke Physical Therapy, Limited Partnership LPTXMNReaction Physical Therapy, LLC LLCDEOKRebound Physical Therapy, LimitedPartnership LPTXORNameDBAEntityTypeState ofFormationForeignQualificationRebound PT Management GP, LLC LLCTX Red River Valley Physical Therapy, LimitedPartnership LPTX Redbud Occupational & Physical Therapy,Limited Partnership LPTXOKRedmond Ridge Management, LLC LLCWA Regional Physical Therapy Center, LimitedPartnership LPTX Rehab Partners #1, Inc. CorpTXFL, MA, & WIRehab Partners #2, Inc. CorpTXFLRehab Partners #3, Inc. CorpTXMO, MT, NJ, ND, &SDRehab Partners #4, Inc. CorpTXOH, & UTRehab Partners #5, Inc. CorpTX Rehab Partners #6, Inc. CorpTXORRehab Partners Acquisition #1, Inc. CorpTX Rehabilitation Associates of Central Virginia,Limited PartnershipRehab Associates of CentralVirginia (Campbell County)LPTXVARestore Physical Therapy, Limited Partnership LPTXFLRice Rehabilitation Associates, LimitedPartnership LPTXGARiverview Physical Therapy, LimitedPartnership LPTXMERiverwest Physical Therapy, LimitedPartnership LPTXLARoepke Physical Therapy, Limited PartnershipElite Hand & Upper ExtremityClinicLPTXWIRYKE Management GP, LLC LLCTX Saginaw Valley Sport and Spine, LimitedPartnershipSport & Spine Physical Therapyand Rehab; Evergreen PTLPTXMISaline Physical Therapy of Michigan, Ltd.Physical Therapy in MotionLPTXMISeacoast Physical Therapy, LimitedPartnership LPTXMEShrewsbury Physical Therapy, LimitedPartnership LPTXPASignature Physical Therapy, LimitedPartnership LPTXOKSnohomish Management, LLC LLCWA Sooner Physical Therapy, Limited Partnership LPTXOKSouth Tulsa Physical Therapy, LimitedPartnershipPhysical Therapy of JenksLPTXOKSpectrum Physical Therapy, LimitedPartnershipSouthshore Physical TherapyTXCT Spine & Sport Physical Therapy, LimitedPartnership LPTXGANameDBAEntityTypeState ofFormationForeignQualificationSport & Spine Clinic of Fort Atkinson, LimitedPartnershipSport & Spine Clinic of Sauk CitySport & Spine Clinic of MadisonSport & Spine Clinic of JeffersonSport & Spine EdgertonLPTXWISport & Spine Clinic, L.P.Sport & Spine Sport & SpineClinic of Edgar Sport & SpineMinocqua Sport & Spine - RibMountainLPDEWISpracklen Physical Therapy, LimitedPartnership LPTXNESTAR PT Management GP, LLC LLCTX STAR Physical Therapy, LP LPTXTN, INStar Therapy Centers, Limited PartnershipStar Therapy Services ofCopperfield Star Therapy Servicesof Cy-Fair Star Therapy Servicesof Fulshear Star Therapy Servicesof Katy Star Therapy Services ofMagnolia Star Therapy Services ofSpring Cypress Star TherapyServices of Cinco RanchLPTX Texstar Physical Therapy, Limited Partnership LPTX The Hale Hand Center, Limited Partnership LPTXFLThe U.S. Physical Therapy Foundation NPTXQualified to fund raisein CA, FL, KS, MD,MI, TN, TX, VATherapyworks Physical Therapy, LLCTherapyworksLLCDEINThibodeau Physical Therapy, LimitedPartnership LPTXMIThunder Physical Therapy, LimitedPartnership LPTXWATulsa Hand Therapy, LLCTulsa Hand and Physical TherapyLLCTXOKU.S. Physical Therapy, Inc. CorpNVMIU.S. Physical Therapy, Ltd. LPTXNJ, NCU.S. PT - Delaware, Inc. CorpDEFL, IL, MN, MO NM,U.S. PT - Payroll, Inc. (formerly RehabPartners #7, Inc.) CorpTXNJU.S. PT Alliance Rehabilitation Services, Inc.Alliance Rehabilitation ServicesCorpTXPAU.S. PT Contract Management, Inc. CorpTX U.S. PT Management, Ltd. LPTXWAU.S. PT Michigan #1, Limited PartnershipGenesee Valley Physical TherapyLPTXMIU.S. PT Michigan #2, Limited PartnershipPhysical Therapy SolutionsLPTXMINameDBAEntityTypeState ofFormationForeignQualificationU.S. PT Solutions, Inc.Physical Therapy SolutionsCorpTXVAU.S. PT Texas, Inc.Kinetix Physical TherapyCorpTXMSU.S. PT Therapy Services, Inc. (formerly U.S.Surgical Partners, Inc.)Capstone Physical TherapyCarolina Hand and WellnessCenter Hand Therapy of NorthTexas - Frisco Hand Therapy ofNorth Texas - Coppell InnovativePhysical Therapy Lake City HandTherapy Life Sport PhysicalTherapy Life Sport PhysicalTherapy - Glen Ellyn Metro HandRehabilitation Missouri CityPhysical Therapy Mountain ViewPhysical Therapy of MedfordMountain View Physical Therapyof Talent Northern Illinois TherapyServices Propel Physical TherapyReAction Physical TherapyTherapeutic Concepts Tulsa HandTherapy Waco Sports Medicineand RehabilitationCorpDECA, FL, IA, IL, IN,KS, ME, MS, MO,NC, OH, OK, OR, PA,TX VA, & WIU.S. PT Turnkey Services, Inc. (formerlySurgical Management GP, Inc.The Hand & Orthopedic RehabClinicCorpTXINU.S. Therapy, Inc.First Choice Physical TherapyCorpTXIN The Facilities Group, Inc. University Physical Therapy, LimitedPartnership LPTXVAUSPT Physical Therapy, Limited PartnershipBody Basics Physical TherapyLPTXIAVictory Physical Therapy, Limited Partnership LPTX West Texas Physical Therapy, LimitedPartnership LPTX Wright Physical Therapy, Limited Partnership LPTX Wright PT Management GP, LLC LLCTX Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated March 15, 2019, with respect to the consolidated financial statements, schedule, and internalcontrol over financial reporting included in the Annual Report of U.S. Physical Therapy, Inc. on Form 10-K for the year endedDecember 31, 2018. We consent to the incorporation by reference of said reports in the Registration Statements of U.S. PhysicalTherapy, Inc. on Forms S-8 (File Nos. 333-30071 effective June 26, 1997, 333-64159 effective September 24, 1998, 333-67680 effectiveAugust 16, 2001, 333-67678 effective August 16, 2001, 333-82932 effective February 15, 2002, 333-103057 effective February 10, 2003,333-113592 effective March 15, 2004, 333-116230 effective June 4, 2004, 333-153051 effective August 15, 2008, 333-185381 effectiveDecember 11, 2012 and 333-200832 effective December 10, 2014)./s/ GRANT THORNTON LLPHouston, TXMarch 15, 2019EXHIBIT 31.1CERTIFICATIONI, Christopher J. Reading, certify that:1.I have reviewed this annual report on Form 10-K of U.S. Physical Therapy, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in whichthis report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.Date: March 15, 2019 /s/ Christopher J. Reading Christopher J. Reading President and Chief Executive Officer (Principal Executive Officer)EXHIBIT 31.2CERTIFICATIONI, Lawrance W. McAfee, certify that:1.I have reviewed this annual report on Form 10-K of U.S. Physical Therapy, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in whichthis report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.Date: March 15, 2019 /s/ Lawrance W. McAfee Lawrance W. McAfee Executive Vice President and Chief Financial Officer (Principal Accounting Officer)EXHIBIT 31.3CERTIFICATIONI, Jon C. Bates, certify that:1.I have reviewed this annual report on Form 10-K of U.S. Physical Therapy, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in whichthis report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.Date: March 15, 2019 /s/ Jon C. Bates Jon C. Bates Vice President and Corporate ControllerEXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of U.S. Physical Therapy, Inc. (the “registrant”) on Form 10-K for the year endingDecember 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “report”), we, Christopher J.Reading, Lawrence W. McAfee and Jon C. Bates, Chief Executive Officer, Chief Financial Officer and Controller, respectively, of theregistrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to ourknowledge:(1)The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and(2)The information contained in the report fairly presents, in all material respects, the financial condition and results ofoperations of the registrant.March 15, 2019/s/ Christopher J. Reading Christopher J. Reading Chief Executive Officer /s/ Lawrance W. McAfee Lawrance W. McAfee Chief Financial Officer /s/ Jon C. Bates Jon C. Bates Vice President and Controller A signed original of this written statement required by Section 906 has been provided to U. S. Physical Therapy, Inc. and will beretained by U. S. Physical Therapy, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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