10-Q 1 usph-10q_20140331.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM             TO            

COMMISSION FILE NUMBER 1-11151

 

U.S. PHYSICAL THERAPY, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

NEVADA

 

76-0364866

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

 

(I.R.S. EMPLOYER

IDENTIFICATION NO.)

 

 

1300 WEST SAM HOUSTON PARKWAY SOUTH,

SUITE 300, HOUSTON, TEXAS

 

77042

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes     ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes     ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of May 9, 2014, the number of shares outstanding (issued less treasury stock) of the registrant’s common stock, par value $.01 per share, was: 12,212,649.

 

 

 

 

 

 


 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements.

3

 

 

 

Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

3

 

 

 

Consolidated Statements of Net Income for the three months ended March 31, 2014 and 2013

4

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

5

 

 

 

Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2014

6

 

 

 

Notes to Consolidated Financial Statements

7

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

 

 

Quantitative and Qualitative Disclosure About Market Risk

23

Item 4.

 

 

Controls and Procedures

24

 

PART II—OTHER INFORMATION

 

Item 6.

 

 

Exhibits

25

 

 

 

Signatures

26

 

 

 

Certifications

 

 

 

 

2


 

ITEM 1. FINANCIAL STATEMENTS.

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

 

March 31,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,761

 

 

$

12,898

 

Patient accounts receivable, less allowance for doubtful accounts of $1,583 and $1,430, respectively

 

32,755

 

 

 

30,820

 

Accounts receivable - other, less allowance for doubtful accounts of $198 and $198, respectively

 

1,698

 

 

 

1,844

 

Other current assets

 

3,040

 

 

 

4,098

 

Total current assets

 

54,254

 

 

 

49,660

 

Fixed assets:

 

 

 

 

 

 

 

Furniture and equipment

 

39,472

 

 

 

38,965

 

Leasehold improvements

 

21,701

 

 

 

21,891

 

 

 

61,173

 

 

 

60,856

 

Less accumulated depreciation and amortization

 

46,543

 

 

 

45,896

 

 

 

14,630

 

 

 

14,960

 

Goodwill

 

142,517

 

 

 

143,955

 

Other intangible assets, net

 

15,916

 

 

 

14,479

 

Other assets

 

1,317

 

 

 

1,081

 

 

$

228,634

 

 

$

224,135

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable - trade

$

1,423

 

 

$

1,722

 

Accrued expenses

 

17,147

 

 

 

20,625

 

Current portion of notes payable

 

775

 

 

 

825

 

Total current liabilities

 

19,345

 

 

 

23,172

 

Notes payable

 

450

 

 

 

650

 

Revolving line of credit

 

45,500

 

 

 

40,000

 

Deferred rent

 

1,022

 

 

 

996

 

Other long-term liabilities

 

5,031

 

 

 

4,196

 

Total liabilities

 

71,348

 

 

 

69,014

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable non-controlling interests

 

2,967

 

 

 

4,104

 

Shareholders' equity:

 

 

 

 

 

 

 

U. S. Physical Therapy, Inc. shareholders' equity:

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 500,000 shares authorized, no shares issued and outstanding

 

 

 

 

 

Common stock, $.01 par value, 20,000,000 shares authorized, 14,413,102 and 14,315,882 shares

   issued, respectively

 

144

 

 

 

143

 

Additional paid-in capital

 

40,435

 

 

 

40,569

 

Retained earnings

 

121,970

 

 

 

119,206

 

Treasury stock at cost, 2,214,737 shares

 

(31,628

)

 

 

(31,628

)

Total U. S. Physical Therapy, Inc. shareholders' equity

 

130,921

 

 

 

128,290

 

Non-controlling interests

 

23,398

 

 

 

22,727

 

Total equity

 

154,319

 

 

 

151,017

 

 

$

228,634

 

 

$

224,135

 

See notes to consolidated financial statements.

 

 

 

3


 

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2014

 

 

2013

 

Net patient revenues

$

68,397

 

 

$

61,432

 

Other revenues

 

1,370

 

 

 

1,324

 

Net revenues

 

69,767

 

 

 

62,756

 

Clinic operating costs:

 

 

 

 

 

 

 

Salaries and related costs

 

37,942

 

 

 

34,059

 

Rent, clinic supplies, contract labor and other

 

14,216

 

 

 

12,734

 

Provision for doubtful accounts

 

950

 

 

 

1,097

 

Closure costs

 

13

 

 

 

18

 

Total clinic operating costs

 

53,121

 

 

 

47,908

 

Gross margin

 

16,646

 

 

 

14,848

 

Corporate office costs

 

7,132

 

 

 

6,413

 

Operating income from continuing operations

 

9,514

 

 

 

8,435

 

Interest and other income, net

 

1

 

 

 

2

 

Interest expense

 

(253

)

 

 

(135

)

Income before taxes from continuing operations

 

9,262

 

 

 

8,302

 

Provision for income taxes

 

2,939

 

 

 

2,493

 

Net income from continuing operations including non-controlling interests

 

6,323

 

 

 

5,809

 

Discontinued operations, net of tax

 

-

 

 

 

(200

)

Net income including non-controlling interests

 

6,323

 

 

 

5,609

 

Less: net income attributable to non-controlling interests

 

(2,095

)

 

 

(1,888

)

Net income attributable to common shareholders

$

4,228

 

 

$

3,721

 

Diluted earnings per share attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

0.35

 

 

$

0.32

 

Basic earnings per share attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

0.35

 

 

$

0.32

 

From discontinued operations

 

-

 

 

 

(0.01

)

 

$

0.35

 

 

$

0.31

 

Revaluation of redeemable non-controlling interests, net of tax (Note 4)

 

(0.08

)

 

 

-

 

 

$

0.27

 

 

$

0.31

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

0.35

 

 

$

0.32

 

From discontinued operations

 

-

 

 

 

(0.01

)

 

$

0.35

 

 

$

0.31

 

Revaluation of redeemable non-controlling interests, net of tax (Note 4)

 

(0.08

)

 

 

-

 

 

$

0.27

 

 

$

0.31

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

 

Basic

 

12,129

 

 

 

11,955

 

Diluted

 

12,144

 

 

 

11,979

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

0.12

 

 

$

0.10

 

Earnings attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

4,228

 

 

$

3,851

 

From discontinued operations

 

-

 

 

 

(130

)

 

 

$

4,228

 

 

$

3,721

 

See notes to consolidated financial statements.

 

4


 

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(unaudited)

 

Three Months Ended March 31,

 

 

2014

 

 

2013

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income including non-controlling interests

$

6,323

 

 

$

5,609

 

Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

1,387

 

 

 

1,352

 

Provision for doubtful accounts

 

950

 

 

 

1,089

 

Equity-based awards compensation expense

 

735

 

 

 

639

 

Loss on sale of business and sale or abandonment of assets, net

 

19

 

 

 

14

 

Excess tax benefit from exercise of stock options

 

(126

)

 

 

-

 

Deferred income tax

 

1,580

 

 

 

(219

)

Other

 

-

 

 

 

33

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Increase in patient accounts receivable

 

(3,002

)

 

 

(3,429

)

Decrease in accounts receivable - other

 

146

 

 

 

74

 

Decrease in other assets

 

735

 

 

 

2,095

 

Decrease in accounts payable and accrued expenses

 

(5,241

)

 

 

(2,460

)

Increase in other liabilities

 

184

 

 

 

56

 

Net cash provided by operating activities

 

3,690

 

 

 

4,853

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchase of fixed assets

 

(849

)

 

 

(1,270

)

Purchase of businesses, net of cash acquired

 

(125

)

 

 

(4,215

)

Acquisitions of non-controlling interests

 

(2,833

)

 

 

(956

)

Proceeds on sale of business and fixed assets, net

 

16

 

 

 

14

 

Net cash used in investing activities

 

(3,791

)

 

 

(6,427

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Distributions to non-controlling interests

 

(1,413

)

 

 

(1,594

)

Cash dividends to shareholders

 

-

 

 

 

(1,207

)

Proceeds from revolving line of credit

 

29,000

 

 

 

30,600

 

Payments on revolving line of credit

 

(23,500

)

 

 

(27,600

)

Payment of notes payable

 

(250

)

 

 

(50

)

Excess tax benefit from stock options exercised

 

126

 

 

 

33

 

Other

 

1

 

 

 

5

 

Net cash used in financing activities

 

3,964

 

 

 

187

 

Net increase in cash

 

3,863

 

 

 

(1,387

)

Cash - beginning of period

 

12,898

 

 

 

11,671

 

Cash - end of period

$

16,761

 

 

$

10,284

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

$

242

 

 

$

177

 

Interest

$

345

 

 

$

119

 

Non-cash investing and financing transactions during the period:

 

 

 

 

 

 

 

Purchase of business - seller financing portion

$

-

 

 

$

400

 

Revaluation of redeemable non-controlling interests

$

1,639

 

 

$

-

 

See notes to consolidated financial statements.

 

 

 

5


 

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN THOUSANDS)

(unaudited)

 

 

U. S. Physical Therapy, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Non-

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Treasury Stock

 

 

Shareholders'

 

 

controlling

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Equity

 

 

Interests

 

 

Total

 

Balance December 31, 2013

 

14,316

 

 

$

143

 

 

$

40,569

 

 

$

119,206

 

 

 

(2,215

)

 

$

(31,628

)

 

$

128,290

 

 

$

22,727

 

 

$

151,017

 

Issuance of restricted stock, net of cancellations

 

97

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

Compensation expense - restricted stock

 

-

 

 

 

-

 

 

 

735

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

735

 

 

 

-

 

 

 

735

 

Excess tax benefit of equity grants

 

-

 

 

 

-

 

 

 

126

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

126

 

 

 

-

 

 

 

126

 

Revaluation of redeemable non-controlling interests, net of tax

 

-

 

 

 

-

 

 

 

(967

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(967

)

 

 

-

 

 

 

(967

)

Acquisition of non-controlling interests

 

-

 

 

 

-

 

 

 

(28

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(28

)

 

 

(11

)

 

 

(39

)

Dividends payable to shareholders

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,464

)

 

 

-

 

 

 

-

 

 

 

(1,464

)

 

 

-

 

 

 

(1,464

)

Distributions to non-controlling interest partners

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,413

)

 

 

(1,413

)

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

4,228

 

 

 

-

 

 

 

-

 

 

 

4,228

 

 

 

2,095

 

 

 

6,323

 

Balance March 31, 2014

 

14,413

 

 

$

144

 

 

$

40,435

 

 

$

121,970

 

 

 

(2,215

)

 

$

(31,628

)

 

$

130,921

 

 

$

23,398

 

 

$

154,319

 

See notes to consolidated financial statements.

 

 

 

6


 

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(unaudited)

 

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accounts of U.S. Physical Therapy, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. The Company primarily operates through subsidiary clinic partnerships, in which the Company generally owns a 1% general partnership interest and a 64% limited partnership interest. The managing therapist of each clinic owns, directly or indirectly, the remaining limited partnership interest in the majority of the clinics (hereinafter referred to as “Clinic Partnership”). To a lesser extent, the Company operates some clinics, through wholly-owned subsidiaries, under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”).

The Company continues to seek to attract physical and occupational therapists who have established relationships with patients and physicians by offering therapists a competitive salary and a share of the profits of the clinic operated by that therapist. The Company has developed satellite clinic facilities of existing clinics, with the result that many Clinic Partnerships and Wholly-Owned Facilities operate more than one clinic location. In addition, the Company has acquired a controlling interest in a number of clinics through acquisitions.

During 2013, the Company acquired the following clinic groups:

 

 

 

 

 

% Interest

 

 

Number of

Acquisition

 

Date

 

Acquired

 

 

Clinics

 

 

 

 

 

 

 

 

 

February 2013 Acquisition

 

February 28

 

 

72%

 

 

9

April 2013 Acquisition

 

April 30

 

 

50%

 

 

5

May 2013 Acquisition

 

May 24

 

 

80%

 

 

5

December 9, 2013 Acquisition

 

December 9

 

 

60%

 

 

12

December 13, 2013 Acquisition

 

December 13

 

 

90%

 

 

11

 

In addition to the above clinic group acquisitions, in 2013, the Company, through three of its subsidiaries, acquired three physical therapy clinic practices in separate transactions.

 

During the three months ended March 31, 2014, the Company has not acquired any clinic groups, however, the Company did acquire two clinic practices in separate transactions.  One of the acquired clinics will operate as a satellite of one of the Company’s partnerships and the other will be consolidated into an existing clinic.

As of March 31, 2014, the Company operated 472 clinics in 43 states.

The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition.

The Company intends to continue to focus on developing new clinics, on opening satellite clinics where deemed appropriate and pursuing additional acquisition opportunities.

The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q. However, the statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes this report contains all necessary adjustments (consisting only of normal recurring adjustments) to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. For further information regarding the Company’s accounting policies, please read the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Company believes, and the Chief Executive Officer, Chief Financial Officer and Corporate Controller have certified, that the financial statements included in this report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented.

7


 

Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results the Company expects for the entire year. Please also review the Risk Factors section included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Clinic Partnerships

For Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly or indirectly, are recorded within the balance sheets and income statements as non-controlling interests.

Wholly-Owned Facilities

For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the profit sharing therapists. The amount is expensed as compensation and included in clinic operating costs – salaries and related costs. The respective liability is included in current liabilities – accrued expenses on the balance sheet.

Significant Accounting Policies

Long-Lived Assets

Fixed assets are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives for furniture and equipment range from three to eight years and for software purchased from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets, which is generally three to five years.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence of certain events or circumstances which indicate that the amounts may be impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Goodwill

Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of the acquired business assets, which include certain intangible assets. Historically, goodwill has been derived from acquisitions 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 at the time of purchase, any excess or shortfall, as applicable, is recognized as an adjustment to additional paid-in capital.

The fair value of goodwill and other intangible assets with indefinite lives are tested for impairment annually and upon the occurrence of certain events, and are written down to fair value if considered impaired. The Company evaluates goodwill for impairment on at least an annual basis (in its third quarter) by comparing the fair value of its reporting units to the carrying value of each reporting unit including related goodwill. The Company operates a one segment business which is made up of various clinics within partnerships. The partnerships are components of regions and are aggregated to the operating segment level for the purpose of determining our reporting units when performing our annual goodwill impairment test.

An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other intangible assets, exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using two methods: (i) earnings prior to taxes, depreciation and amortization for the reporting unit multiplied by a putprice/earnings ratio used in the industry and (ii) a discounted cash flow analysis. A weight is assigned to each factor and the sum of each weight times the factor is considered the estimated fair value. For 2013, the factors (i.e., price/earnings ratio, discount rate and residual capitalization rate) were updated to reflect current market conditions. The evaluations in the third quarter of 2013 and 2012 did not yield any impairment charge. During the three months ended March 31, 2014, the Company has not identified any triggering events occurring after the testing date that would impact the impairment testing results obtained.

Non-controlling interests

The Company recognizes non-controlling interests as equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the income statement. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income

8


 

when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling interest on the deconsolidation date.

When the purchase price of a non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall, as applicable, 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.  

The non-controlling interests that are reflected as redeemable non-controlling interests in the consolidated financial statements consist of those owners who have certain redemption rights that are currently exercisable, and that, if exercised, require that the Company purchase the non-controlling interest of the particular limited partner.  The redeemable non-controlling interests are adjusted to the fair value in the reporting period in which the Company deems it probable that the limited partner will assert the redemption rights and will be adjusted each reporting period thereafter.  The adjustments are charged to additional paid-in capital and are not reflected in the statement of net income.  Although the adjustments are not reflected in the statement of net income, current accounting rules require that the Company reflect the charge in its earnings per share calculation.  

Typically, for acquisitions, the Company agrees to purchase the individual’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.

Revenue Recognition

Revenues are recognized in the period in which services are rendered. Net patient revenues (patient revenues less estimated contractual adjustments) are reported at the estimated net realizable amounts from third-party payors, patients and others for services rendered. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience.

The Company determines allowances for doubtful accounts based on the specific agings and payor classifications at each clinic. The provision for doubtful accounts is included in clinic operating costs in the statement of net income. Net 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 the Company estimates to be collectible.

Medicare Reimbursement

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). The MPFS rates are automatically updated annually based on a formula, called the sustainable growth rate (“SGR”) formula. The use of the SGR formula would have resulted in calculated automatic reductions in rates in every year since 2002; however, for each year through March 31, 2014, Centers for Medicare & Medicaid Services (“CMS”) or Congress has taken action to prevent the implementation of SGR formula reductions. The Bipartisan Budget Act of 2013 froze the Medicare physician fee schedule rates at 2013 levels through March 31, 2014, averting a scheduled 20.1% cut in the MPFS as a result of the SGR formula that would have taken effect on January 1, 2014. The Protecting Access to Medicare Act of 2014 temporarily blocks this reduction through March 31, 2015 and replaces it with a 0.5% payment increase for services provided through December 31, 2014 and a 0% payment update from January 1, 2015 through March 31, 2015. Automatic reductions in the Medicare physician fee schedule payment rates will commence on April 1, 2015, unless Congress again takes legislative action to prevent the SGR formula reductions from going into effect.

The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years, and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap.  On April 1, 2013, a 2% reduction to Medicare payments was implemented.

As a result of the Balanced Budget Act of 1997, the formula for determining the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/or speech-language pathology services provided to any Medicare beneficiary (i.e., the “Therapy Cap” or “Limit”) was established. Based on the statutory definitions which constrained how the Therapy Cap would be applied, there is one Limit for Physical Therapy and Speech Language Pathology Services combined, and one Limit for Occupational Therapy. During 2013, the annual Limit on outpatient therapy services was $1,900 for Physical Therapy and Speech Language Pathology Services combined and $1,900 for Occupational Therapy Services. Effective January 1, 2014, the annual Limit on outpatient therapy services is $1,920 for Physical and Speech Language Pathology Services combined and $1,920 for Occupational Therapy Services.  Historically, these Therapy Caps applied to outpatient therapy services provided in all settings, except for services provided in departments of hospitals. However, the Protecting Access to Medicare Act of 2014, and prior legislation, extended the annual limits on therapy expenses and the manual medical review thresholds to services furnished in hospital outpatient department settings through March 31, 2015. The application of annual limits will no longer apply to hospital outpatient department settings commencing as of March 31, 2015 unless Congress extends it.

9


 

In the Deficit Reduction Act of 2005, Congress implemented an exceptions process to the annual Limit for therapy expenses for therapy services above the annual Limit.  The Bipartisan Budget Act of 2013 extended the exceptions process for outpatient Therapy Caps through March 31, 2014. Therapy services above the annual Limit that are medically necessary satisfy an exception to the annual Limit and such claims are payable by the Medicare program. The Protecting Access to Medicare Act of 2014 extends the exceptions process for outpatient therapy caps through March 31, 2015.   Unless Congress extends the exceptions process, the therapy caps will apply to all outpatient therapy services beginning April 1, 2015, except those services furnished and billed by outpatient hospital departments. For any claim above the annual Limit, the claim must contain a modifier indicating that the services are medically necessary and justified by appropriate documentation in the medical record.

Furthermore, under the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The Bipartisan Budget Relief Act of 2013 extended through March 31, 2014 the requirement that Medicare perform manual medical review of therapy services beyond the $3,700 threshold.  In addition, as of January 1, 2013, CMS implemented a claims based data collection strategy that is designed to assist in reforming the Medicare payment system for outpatient therapy.  Since January 1, 2013, all therapy claims must include additional codes and modifiers providing information about the beneficiary’s functional status at the outset of the therapy episode of care, specified points during treatment, and at the time of discharge.  Effective July 1, 2013, claims submitted without the appropriate codes and modifiers are returned unpaid.

CMS adopted a multiple procedure payment reduction (“MPPR”) for therapy services in the final update to the MPFS for calendar year 2011. During 2011, the MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (“RVU”) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2011 and 2012, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 20% in office and other non-institutional settings and by 25% in institutional settings. The American Taxpayer Relief Act of 2012 increased the payment reduction of the practice expense component to 50%, on subsequent therapy procedures in either setting, effective April 1, 2013. In addition, the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRA”) directed CMS to implement a claims-based data collection program to gather additional data on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practice settings that provide outpatient therapy services are required to include this data on the claim form. Since July 1, 2013, therapists have been required to report new codes and modifiers on the claim form that reflect a patient’s functional limitations and goals at initial evaluation, periodically throughout care, and at discharge. Since July 1, 2013, CMS has rejected claims if the required data is not included in the claim.

The Physician Quality Reporting System, or "PQRS," is a CMS reporting program that uses a combination of incentive payments and payment reductions to promote reporting of quality information by "eligible professionals." Although physical therapists, occupational therapists and qualified speech-language therapists are generally able to participate in the PQRS program, therapy professionals for whose services we bill through our rehab agencies cannot participate because the Medicare claims processing systems currently cannot accommodate institutional providers such as rehab agencies. Eligible professionals, such as those of our therapy professionals for whose services we bill using their individual Medicare provider numbers, who do not satisfactorily report data on quality measures will be subject to a 2% reduction in their Medicare payment in 2016.

Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that it is in compliance in all material respects with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Company’s financial statements as of March 31, 2014. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program.

Management Contract Revenues

Management contract revenues are derived from contractual arrangements whereby the Company 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 when services are performed. Costs, typically salaries for the Company’s employees, are recorded when incurred. Management contract revenues are included in “other revenues” in the accompanying Consolidated Statements of Net Income.

10


 

Contractual Allowances

Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements for such services by both insurance companies and government sponsored healthcare programs. Medicare regulations and the various third party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in Company clinics. The Company estimates contractual allowances based on its interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow it to provide the necessary detail and accuracy with its collectibility estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from the Company’s estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. The Company’s billing systems may not capture the exact change in its contractual allowance reserve estimate from period to period in order to assess the accuracy of its revenues, and hence, its contractual allowance reserves. Management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, the difference between net revenues and corresponding cash collections has historically generally reflected a difference within approximately 1% of net revenues. Additionally, analysis of subsequent period’s contractual write-offs on a payor basis shows a less than 1% difference between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, the Company believes that a change in the contractual allowance reserve estimate would not likely be more than 1% at March 31, 2014.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company recognizes accrued interest expense and penalties associated with unrecognized tax benefits as income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the three months ended March 31, 2014 and 2013.

On September 13, 2013, the U.S. Treasury Department and the I.R.S. issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the “Tangible Property Regulations”).  The Tangible Property Regulations are generally effective for tax years beginning on or after January 1, 2014, and may be adopted in earlier years.  The Company adopted the tax treatment of expenditures to improve tangible property and the capitalization of inherently facilitative costs to acquire tangible property as of January 1, 2014.  Historically, the Company has treated the expenditures to improve tangible property and the capitalization of inherently facilitative costs to acquire tangible property similar for tax and book.  Management does not anticipate the impact of these changes to be material to the Company’s consolidated financial statements.

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair values due to the short-term maturity of these financial instruments. The carrying amount of the Company’s revolving line of credit approximates its fair value. The interest rate on the revolving line of credit, which is tied to the Eurodollar Rate, is set at various short-term intervals as detailed in the Credit Agreement (as defined in Note 9).

Segment Reporting

Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company identifies

11


 

operating segments based on management responsibility and believes it meets the criteria for aggregating its operating segments into a single reporting segment.

Use of Estimates

In preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to, purchase accounting, goodwill impairment, allowance for receivables, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates.

Self-Insurance Program

The Company utilizes a self-insurance plan for its employee group health insurance coverage administered by a third party. Predetermined loss limits have been arranged with the insurance company to minimize the Company’s maximum liability and cash outlay. Accrued expenses include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims. Management believes that the current accrued amounts are sufficient to pay claims arising from self-insurance claims incurred through March 31, 2014.

Restricted Stock

Restricted stock issued to employees and directors is subject to certain conditions, including continued employment or continued service on our Board of Directors (the “Board”), respectively. The transfer restrictions for shares granted to directors lapse in four equal quarterly installments and those to employees lapse in equal installments on the following four or five annual anniversaries of the date of grant. Compensation expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the service period. The restricted stock issued is included in basic and diluted shares for the earnings per share computation.

Reclassifications

Prior period amounts have been reclassified to conform to current period presentation due to discontinued operations recognized in 2013.

 

2. EARNINGS PER SHARE

The computations of basic and diluted earnings per share for the Company are as follows (in thousands, except per share data):

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

 

2013

 

Earnings attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

4,228

 

 

$

3,851

 

From discontinued operations

 

-

 

 

 

(130

)

 

 

4,228

 

 

 

3,721

 

Revaluation of redeemable non-controlling interests, net of tax

 

(967

)

 

 

-

 

 

$

3,261

 

 

$

3,721

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

0.35

 

 

$

0.32

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

0.35

 

 

$

0.32

 

From discontinued operations

 

-

 

 

 

(0.01

)

 

$

0.35

 

 

$

0.31

 

Charges to additional-paid-in-capital  - revaluation of redeemable non-controlling interests, net of tax

 

(0.08

)

 

 

-

 

 

$

0.27

 

 

$

0.31

 

 

 

 

 

 

 

 

 

12


 

Diluted earnings per share attributable to common shareholders:

 

 

 

 

 

 

 

From continuing operations

$

0.35

 

 

$

0.32

 

From discontinued operations

 

-

 

 

 

(0.01

)

 

$

0.35

 

 

$

0.31

 

Charges to additional-paid-in-capital - revaluation of redeemable non-controlling interests, net of tax

 

(0.08

)

 

 

-

 

 

$

0.27

 

 

$

0.31

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

 

Basic earnings per share - weighted-average shares

 

12,129

 

 

 

11,955

 

Effect of dilutive securities - stock options

 

15

 

 

 

24

 

Denominator for diluted earnings per share - adjusted weighted-average

   shares

 

12,144

 

 

 

11,979

 

All options to purchase shares were included in the diluted earnings per share calculation for the three months ended March 31, 2014 and 2013 as the average market prices of the common stock was above the exercise prices. The Company’s restricted stock issued is included in basic and diluted shares for the earnings per share computation from the date of grant.

 

The charges to additional paid-in capital – revaluation of redeemable non-controlling interests, net of tax represent the increase in the fair value of the redeemable non-controlling interest that were deemed probable that the owners would assert the redemption rights. See Note 1 – Basis of Presentation and Significant Accounting Policies – Non-controlling Interests.

 

3. ACQUISITIONS OF BUSINESSES

 

During the three months ended March 31, 2014, the Company acquired two individual clinic practices for an aggregate of $125,000 in cash.  On March 31, 2014, the aggregate purchase price is included in Goodwill on the Consolidated Balance Sheet.  Allocation of the purchase prices will be completed during 2014.

During 2013, the Company completed the following multi-clinic acquisitions of physical therapy practices:

 

 

 

 

% Interest

 

 

Number of

Acquisition

 

Date

 

Acquired

 

 

Clinics

 

 

 

 

 

 

 

 

 

February 2013 Acquisition

 

February 28

 

 

72%

 

 

9

April 2013 Acquisition

 

April 30

 

 

50%

 

 

5

May 2013 Acquisition

 

May 24

 

 

80%

 

 

5

December 9, 2013 Acquisition

 

December 9

 

 

60%

 

 

12

December 13, 2013 Acquisition

 

December 13

 

 

90%

 

 

11

 

In addition to the five multi-clinic acquisitions detailed above, in 2013, the Company acquired three individual clinics in separate transactions.

The purchase price for the 72% interest in the February 2013 Acquisition was $4.3 million in cash and $400,000 in a seller note, that is payable in two principal installments totaling $200,000 each, plus accrued interest, in February 2014 and 2015. The purchase price for the 50% interest in the April 2013 Acquisition was $2.4 million in cash and $200,000 in a seller note, that is payable in two principal installments totaling $100,000 each, plus accrued interest, in April of 2014 and 2015. The purchase price for the 80% interest in the May 2013 Acquisition was $3.6 million in cash and $200,000 in a seller note, that is payable in two principal installments totaling $100,000 each, plus accrued interest, in May of 2014 and 2015. The purchase price for the 60% interest in the December 9, 2013 Acquisition was $1.7 million in cash. The purchase price for the 90% interest in the December 13, 2013 Acquisition was $35.5 million in cash and $500,000 in a seller note, that is payable in two principal installments totaling $250,000 each, plus accrued interest, in December 2014 and 2015.

On February 1, 2013, through a subsidiary, the Company acquired a 100% interest in a clinic for $5,000. On June 1, 2013, the Company acquired a 100% interest in a clinic for $95,000. On September 16, 2013, the Company acquired a 100% interest in a clinic for $130,000.

The purchase prices for the 2013 acquisitions have been preliminarily allocated as follows (in thousands):

 

 

 

 

 

13


 

Cash paid, net of cash acquired

$

46,628

 

Seller notes

 

1,300

 

Total consideration

$

47,928

 

Estimated fair value of net tangible assets acquired:

 

 

 

Total current assets

$

3,756

 

Total non-current assets

 

2,283

 

Total liabilities

 

(1,082

)

Net tangible assets acquired

 

4,957

 

Referral relationships

 

940

 

Non-competition agreements

 

400

 

Tradename

 

1,500

 

Goodwill

 

50,672

 

Fair value of non-controlling interest

 

(10,541

)

 

$

47,928

 

 

The consideration for each transaction was agreed upon through arm’s length negotiations. Funding for the cash portion of the purchase price for the 2013 acquisitions was derived from proceeds under the Credit Agreement.

The results of operations of these acquisitions have been included in the Company’s consolidated financial statements since acquired.

For the two acquisitions which occurred in December, 2013, the purchase price plus the fair value of the non-controlling interest for those two acquisitions was allocated to the fair value of the assets acquired and liabilities assumed based on the preliminary estimates of the fair values at the acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis 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 based on additional information obtained. Changes in the estimated valuation of the tangible and intangible assets acquired and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to goodwill.

 

Except for the December 13, 2013 Acquisition, unaudited proforma consolidated financial information for acquisitions occurring in 2013 have not been included as the results were not material to current operations.

Unaudited proforma net revenue and net income from continuing operations for the Company as if the December 13, 2013 Acquisition occurred as of January 1, 2012 is as follows (in thousands, except per share data):

 

 

 

Three Months

 

 

 

Ended

 

 

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

65,461

 

 

 

Net income attributable to common shareholders from continuing operations

 

$

4,033

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic - net income attributable to common shareholders from continuing operations

 

$

0.33

 

 

 

Diluted - net income attributable to common shareholders from continuing operations

 

$

0.33

 

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

Basic - net income attributable to common shareholders from continuing operations

 

 

12,129

 

 

 

Diluted - net income attributable to common shareholders from continuing operations

 

 

12,144

 

 

 

 

 

 

 

 

 

14


 

 

 

 

4. ACQUISITIONS AND REVALUATIONS OF NON-CONTROLLING INTERESTS

In three separate transactions during the three months ended March 31, 2014, the Company purchased interests in two partnerships. The interests in the partnerships purchased ranged from 20.5% to 35.0%. The aggregate of the purchase prices paid was $2.8 million, which included $1.7 million of net book value. The remaining purchase price of $1.1 million, less future tax benefits of $0.4 million, was recognized as an adjustment to additional paid-in capital.

Two of the above transactions related to non-controlling interests were classified as redeemable non-controlling interest.  In addition to those two transactions it was deemed probable that two other individuals would assert their redemption rights.  For the three months ended March 31, 2014, the following table details the changes in the carrying amount of redeemable non-controlling interest:

 

 

Three Months

 

 

Ended

 

 

March 31, 2014

 

Beginning balance

$

4,104

 

Increase due to revaluation of redeemable non-controlling interests

 

1,639

 

Purchases of redeemable non-controlling interests

 

(2,776

)

Ending balance

$

2,967

 

 

 

 

 

The non-controlling interests that are reflected as redeemable non-controlling interests in the consolidated financial statements consist of those owners who have certain redemption rights that are currently exercisable, and that, if exercised, require that the Company purchase the non-controlling interest of those owners.  The redeemable non-controlling interests are adjusted to the fair value in the reporting period in which the Company deems it probable that the limited partner will assert the redemption rights and it will be adjusted each reporting period thereafter.  The adjustments are charged to additional paid-in capital and are not reflected in the statement of net income.  Although the adjustments are not reflected in the statement of net income, current accounting rules require that the Company reflect the charge in an earnings per share calculation.

 

 

5. DISCONTINUED OPERATIONS

On September 30, 2013, the Company sold the remainder of its physician services business. Previously, the Company closed its two physician services facilities – one in August 2013 and the other in December 2012. As previously disclosed in the Company’s public filings, the physician services business incurred negative gross margins in 2012 and through the first nine months of 2013. Revenues from physician services were generated by patient visits, franchise arrangements and fees from third parties. The results of operations and the loss on the sale of the physician services business have been reclassified to discontinued operations for all periods presented.

The following table details the losses from discontinued operations reported for the physician services business:

 

 

 

 

 

 

Three Months

 

 

 

Ended

 

 

 

March 31, 2013

 

Net revenues

 

$

341

 

Operating costs

 

 

532

 

Gross margin

 

 

(191

)

Direct general and administrative expenses

 

 

93

 

 

 

 

(284

)

Tax benefit

 

 

84

 

Loss from discontinued operations

 

$

(200

)

 

The cash flow impact of the sale and closures is deemed immaterial for the consolidated statements of cash flows.

 

15


 

6. GOODWILL

The changes in the carrying amount of goodwill consisted of the following (in thousands):

 

 

Three Months

 

 

Ended

 

 

March 31, 2014

 

Beginning balance

$

143,955

 

Goodwill acquired during the period

 

125

 

Goodwill allocated to specific assets for business acquired in first six months of 2013

 

(1,680

)

Goodwill adjustments for purchase price allocation of businesses acquired

 

117

 

Ending balance

$

142,517

 

 

 

7. INTANGIBLE ASSETS, NET

Intangible assets, net as of March 31, 2014 and December 31, 2013 consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2014

 

 

2013

 

Tradenames

$

10,714

 

 

$

9,814

 

Referral relationships, net of accumulated amortization of $1,737 and $1,582, respectively

 

4,343

 

 

 

3,959

 

Non-competition agreements, net of accumulated amortization of $2,037 and $1,950, respectively

 

859

 

 

 

706

 

 

$

15,916

 

 

$

14,479

 

Tradenames, referral relationships and non-competition agreements are related to the businesses acquired. The value assigned to tradenames has an indefinite life and is tested at least annually for impairment in conjunction with the Company’s annual goodwill impairment test. The value assigned to referral relationships is being amortized over their respective estimated useful lives which range from six to 16 years. Non-competition agreements are amortized over the respective term of the agreements which range from five to six years.

The following table details the amount of amortization expense recorded for intangible assets for the three months ended March 31, 2014 and 2013 (in thousands):

 

 

Three Months Ended March 31,

 

 

2014

 

 

2013

 

Referral relationships

$

155

 

 

$

150

 

Non-competition agreements

 

87

 

 

 

106

 

 

$

242

 

 

$

256

 

 

16


 

Based on the balance of referral relationships and non-competition agreements as of March 31, 2014, the expected amount to be amortized in 2014 and thereafter by year is as follows (in thousands):

 

Referral Relationships

 

 

Non Competition Agreements

 

 

 

Annual

 

 

 

 

Annual

 

Years

 

Amount

 

 

Years

 

Amount

 

2014

 

$

535

 

 

2014

 

$

272

 

2015

 

$

486

 

 

2015

 

$

246

 

2016

 

$

486