U S PHYSICAL THERAPY INC /NV 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of U.S. Physical Therapy, Incl and its subsidiaries (herein referred to as “we”, “us”, “our” or the “Company”) should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” and “Forward-Looking Statements” sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on February 28, 2023. EXECUTIVE SUMMARY We operate our business through our reportable segments which include the (1) physical therapy operations segment and (2) the industrial injury prevention services (“IIP”) segment. Our physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the IIP segment include onsite injury prevention and rehabilitation, performance optimization, post-offer employment testing, functional evaluations and ergonomic assessments. The majority 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. These services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers (“ATCs”). During the last three years, we completed the following acquisitions of clinic practices and IIP businesses detailed below: % Interest Number of Acquisition Date Acquired Clinics October 2023 Acquisition October 31, 2023 ** * September 2023 Acquisition 1 September 29, 2023 70% 4 September 2023 Acquisition 2 September 29, 2023 70% 1 July 2023 Acquisition July 31, 2023 70% 7 May 2023 Acquisition May 31, 2023 45% 4 February 2023 Acquisition February 28, 2023 80% 1 November 2022 Acquisition November 30, 2022 80% 13 October 2022 Acquisition October 31, 2022 60% 14 September 2022 Acquisition September 30, 2022 80% 2 August 2022 Acquisition August 31, 2022 70% 6 March 2022 Acquisition March 31, 2022 70% 6 December 2021 Acquisition December 31, 2021 75% 3 November 2021 Acquisition November 30, 2021 70% * September 2021 Acquisition September 30, 2021 100% * June 2021 Acquisition June 30, 2021 65% 8 March 2021 Acquisition March 31, 2021 70% 6 * IIP business ** On October 31, 2023, we concurrently acquired 100% of an IIP business and a 55% equity interest in an ergonomics software business (“October 2023 Acquisition”). 30 Table of Contents The following table provides a roll forward of our clinic count for the periods presented. For the Year Ended December 31, 2023 December 31, 2022 December 31, 2021 Number of clinics, beginning of period 640 591 554 Additions 46 65 42 Closed or sold (15 ) (16 ) (5 ) Number of clinics, end of period 671 640 591 Our strategy is to continue acquiring outpatient physical therapy practices, develop outpatient physical therapy clinics as satellites in existing partnerships, and continue acquiring companies that provide or serve our IIP sector. In May 2023, we completed a secondary offering of 1,916,667 shares of its common stock at an offering price of $90.00 per share. Upon completion of the offering, we received net proceeds of approximately $163.6 million, after deducting an underwriting discount of $8.6 million and recognizing related fees and expenses of $0.2 million. A portion of the net proceeds was used to repay the $35.0 million then outstanding under our credit agreement while the remainder is expected to be used primarily for additional acquisitions. Our Board of Directors raised our quarterly dividend to $0.44 per share, on February 27, 2024, and declared a quarterly dividend for the first quarter of 2024 at the higher rate. Medicare Reimbursement The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). Outpatient rehabilitation providers may enroll in Medicare as institutional outpatient rehabilitation facilities (i.e., rehab agencies) or individual physical or occupational therapists in private practice. The majority of our clinicians are enrolled as individual physical or occupational therapists in private practice while the remaining balance of providers are reimbursed through enrolled rehab agencies. The following is a summary of significant regulatory changes which have affected our results of operations as well as the policies and payment rates that may affect our future results of operations. For calendar years 2021 and 2022, CMS’s expected decreases in Medicare reimbursement were mostly offset by one-time increases in payments as a result of other legislation passed by Congress. Payments under the 2023 MPFS physician fee schedule decreased by 2%, and for calendar year 2024, CMS’s final policies for 2024 will result in an approximately 3.5% decrease in Medicare payments for the therapy specialty. In the final 2020 MPFS rule, CMS clarified that when the physical therapist is involved for the entire duration of the service and the physical therapist assistant (“PTA”) provides skilled therapy alongside the physical therapist, the CQ modifier is not required. Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS applies the de minimis standard to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service. For dates of service on and after January 1, 2022, CMS pays for physical therapy and occupational therapy services provided by PTAs and occupational therapist assistants (“OTAs”) at 85% of the otherwise applicable Part B payment amount. CMS allows a timed service to be billed without the CQ or CO modifier when a PTA or OTA participates in providing care, but the physical therapist or occupational therapist meets the Medicare billing requirements without including the PTA’s or OTA’s minutes. This occurs when the physical therapist or occupational therapist provides more minutes than the 15-minute midpoint. The calendar year 2024 MPFS final rule did not contain any policy changes concerning the modifiers for services provided by physical therapy and occupational therapy assistants. RESULTS OF OPERATIONS The defined terms with their respective description used in the following discussion are listed below: Mature Clinics are clinics opened or acquired prior to January 1, 2022, and are still operating as of December 31, 2023. Net rate per patient visit is net patient revenue related to our physical therapy operations divided by total number of patient visits (defined below) during the periods presented. Patient visits is the number of unique patient visits during the periods presented. Average daily visits per clinic is patient visits divided by the number of days in which normal business operations were conducted during the periods presented and further divided by the average number clinics in operation during the periods presented. Full Year 2023 refers to the year ended December 31, 2023. Full Year 2022 refers to the year ended December 31, 2022. 31 Table of Contents Full Year 2023 versus Full Year 2022 Total net revenue for the Full Year 2023 increased $51.7 million, or 9.3%, to $604.8 million from $553.1 million for the Full Year 2022 while operating costs increased $42.2 million, or 9.6%, to $483.3 million from $441.1 million over the same periods, respectively. Total operating cost was $483.3 million for the 2023 Year, or 79.9% of total revenue, as compared to $441.1million or 79.7% of total revenue for the 2022 Year. Gross profit for the Full Year 2023 was $121.5 million, or 20.1% of net revenue, compared to $112.0 million for the Full Year 2022, or 20.3% of net revenue. Net income attributable to our shareholders (“USPH net income”) was $28.2 million for Full Year 2023 compared to $32.2 million for Full Year 2022. USPH net income included a non-cash impairment charge, prior to allocation to non-controlling interest and income taxes, of $17.5 million in the year ended December 31, 2023 ($9.1 million net of $5.2 million allocated to non-controlling interest and $3.1 million income tax) and $9.1 million in the year ended December 31, 2022 ($4.7 million net of $2.7 million allocated to non-controlling interest and $1.6 million income tax). In accordance with Generally Accepted Accounting Principles (“GAAP”), the revaluation of non-controlling interest, net of taxes, is not included in net income but is charged directly to retained earnings; however, this change is included in the computation of earnings per share. Earnings per share for Full Year 2023 were $1.28 compared to $2.25 for Full Year 2022. For the Year Ended December 31, 2023 December 31, 2022 (In thousands, except per share data) Earnings per share Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 28,239 $ 32,158 Charges to retained earnings: Revaluation of redeemable non-controlling interest (13,565 ) (3,890 ) Tax effect at statutory rate (federal and state) 3,466 994 $ 18,140 $ 29,262 Earnings per share (basic and diluted) $ 1.28 $ 2.25 Shares used in computation - basic and diluted 14,188 12,985 Non-GAAP Measures We use Adjusted EBITDA and Operating Results, non-GAAP measures, which eliminate certain items described below that can be subject to volatility and unusual costs, as the principal measures to evaluate and monitor financial performance period over period. We believe that Adjusted EBITDA and Operating Results are useful measures for investors to use in comparing the Company's period-to-period results as well as for comparing with other similar businesses since most do not have redeemable instruments and therefore have different equity structures. Adjusted EBITDA is defined as net income attributable to our shareholders before interest income, interest expense, taxes, depreciation, amortization, non-cash asset impairment charge, change in fair value of contingent earn-out consideration, Relief Funds, changes in revaluation of put-right liability, equity-based awards compensation expense, and related portions for non-controlling interests. 32 Table of Contents Operating Results equals net income attributable to our shareholders less non-cash asset impairment charge, changes in revaluation of put-right liability, Relief Funds, changes in fair value of contingent earn-out consideration, and any allocations to non-controlling interests, all net of taxes. Operating Results per share also exclude the impact of the revaluation of redeemable non-controlling interest and the associated tax impact. The tables below reconcile net income attributable to our shareholders calculated in accordance with GAAP to Operating Results and Adjusted EBITDA. 33 Table of Contents ADJUSTED EBITDA AND OPERATING RESULTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) For the Year Ended December 31, 2023 December 31, 2022 (In thousands, except per share data) Adjusted EBITDA (a non-GAAP measure) Net income attributable to USPH shareholders $ 28,239 $ 32,158 Adjustments: Provision for income taxes 12,156 12,164 Depreciation and amortization 15,695 14,743 Interest expense, debt and other, net 9,303 5,779 Interest income from investments (3,774 ) - Impairment of goodwill and other intangible assets 17,495 9,112 Equity-based awards compensation expense 7,236 7,264 Change in revaluation of put-right liability (2,582 ) 5 Change in fair value of contingent earn-out consideration 1,550 (2,520 ) Relief Funds* (467 ) - Other income (390 ) (859 ) Allocation to non-controlling interests (6,744 ) (4,185 ) 77,717 73,661 Operating Results (a non-GAAP measure) Net income attributable to USPH shareholders $ 28,239 $ 32,158 Adjustments: Impairment of goodwill and other intangible assets 17,495 9,112 Change in fair value of contingent earn-out consideration 1,550 (2,520 ) Change in revaluation of put-right liability (2,582 ) 5 Relief Funds* (467 ) - Allocation to non-controlling interest (5,215 ) (2,734 ) Tax effect at statutory rate (federal and state) (2,755 ) (987 ) $ 36,265 $ 35,034 Operating Results per share (a non-GAAP measure) $ 2.56 $ 2.70 *In March 2020 in response to the COVID-19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provided waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19. The Company recorded income under the CARES Act ("Relief Funds"). Adjusted EBITDA increased $4.1 million to $77.7 million for Full Year 2023 from $73.7 million in Full Year 2022 while Operating Results increased $1.2 million to $36.3 million, or $2.56 per share, in Full Year 2023 from $35.0 million, or $2.70 per share, in the Full Year 2022. The increase in both Adjusted EBITDA and Operating Results was primarily associated with clinic additions since the comparable prior year period and increased volume at mature clinics. 34 Table of Contents Physical Therapy Operations For the Year Ended December 31, Variance 2023 2022 $ % (In thousands, except percentages) Revenue related to: Mature Clinics (1) $ 452,459 $ 421,806 $ 30,653 7.3 % Clinic additions (2) 60,495 39,990 20,505 * (6) Clinics sold or closed (3) 1,602 2,794 (1,192 ) * (6) Net Patient Revenue 514,556 464,590 49,966 10.8 % Other (4) 11,992 11,502 490 4.3 % Total 526,548 476,092 50,456 10.6 % Operating costs (4) 421,484 380,035 41,449 10.9 % Gross profit $ 105,064 $ 96,057 $ 9,007 9.4 % Financial and operating metrics (not in thousands): Net rate per patient visit (1) $ 102.80 $ 103.63 $ (0.83 ) (0.8 )% Patient visits (1) 5,005,426 4,483,282 522,144.0 11.6 % Average daily visits per clinic (1) 30.0 28.7 1.3 4.5 % Gross margin 20.0 % 20.2 % Salaries and related costs per visit, clinics (5) $ 59.19 $ 59.52 $ (0.33 ) (0.6 )% Operating costs per visit, clinics (5) $ 82.79 $ 83.34 $ (0.55 ) (0.7 )% Working days 254 255 (1 ) (0.4 )% Number of clinics at the end of the period 671 640 31 4.8 % (1) See defined terms above for definitions. (2) Clinic additions during the years ended 2023 and 2022. (3) Revenue from closed clinics includes revenues from the 15 and 16 clinics closed during the full year December 31, 2023 and 2022, respectively. (4) Includes revenues and costs from management contracts. (5) Excludes management contract costs. (6) Not meaningful. Revenues Revenues increased $50.5 million, or 10.6%, to $526.5 million in Full Year 2023 compared to $476.1 million in Full Year 2022. This increase was primarily due to a record-high average daily visits per clinic for a full year in the Company’s history of 30.0 visits, and an increase in volume from the 31 net new clinics added since the comparable prior year period, partially offset by a decrease in net rate per patient visit to $102.80 for Full Year 2023 compared to $103.63 for Full Year 2022. Total patient visits were 5,005,426 for the 2023 Year and 4,483,282 for the 2022 Year, an increase of 11.6%, with visits at mature clinics up 3.1%. The decrease in net rate in the Full Year 2023 from the Full Year 2022 was primarily due to the combined Medicare rate reductions in 2022 and 2023. All other payor categories, including commercial and workers’ compensation, increased as compared to the prior year. Other revenue was $12.0 million for the Full Year 2023 Year and $11.5 million for the Full Year 2022, of which management contracts was $8.6 million for the Full Year 2023 as compared to $8.1 million for the Full Year 2022. Operating costs Operating costs increased by $41.4 million or 10.9% to $421.5 million in the Full Year 2023 from $380.0 million in the Full Year 2022. The increase was primarily due to the higher volume from the new clinics added since the comparable year period as well as increased patient visits in Mature Clinics. Operating costs for Mature Clinics increased $10.1 million year over year to $363.2 million for the Full Year 2023 from $353.2 million for the Full Year 2022 due to increased visits in the comparable periods. On a per visit basis (excluding management contracts), operating costs decreased to $82.79 for the Full Year 2023 compared to $83.34 for the Full Year 2022. Salaries and related costs related to clinics increased to $296.3 million in the Full Year 2023 from $266.8 million in the 2022 Year, an increase of $29.5 million, or 11.1%. Salaries and related costs per visit (excluding management contracts), related to clinics decreased to $59.19 for the Full Year 2023 from 59.52 for the Full Year 2022 mostly due to the 31 new clinics added year over year as well as increased visits from Mature Clinics. 35 Table of Contents Rent, supplies, contract labor and other costs related to clinics increased to $97.2 million in the Full Year 2023 from $87.6 million in the 2022 Year, an increase of $9.6 million, or 11.1% mostly due to the 31 new clinics added year over year as well as increased visits from Mature Clinics. Rent, supplies, contract labor and other costs, clinics decreased slightly on a per visit basis to $19.42 per visit for the Full Year 2023 compared to $19.53 for the Full Year 2022. Operating costs related to management contracts increased 10.7% from $6.4 million for the Full Year 2022 to $7.1 million in the Full Year 2023. The provision for credit losses was $6.2 million for the Full Year 2023 and $5.5 million for the Full Year 2022. As a percentage of net revenues, the provision for credit losses were 1.0% for both 2023 and 2022. Our provision for credit losses as a percentage of total patient accounts receivable was 5.0% on December 31, 2023, and 5.2% on December 31, 2022. Gross Profit Gross profit from physical therapy operations increased $9.0 million, or 9.4%, to $105.1 million for Full Year 2023 from $96.1 million for Full Year 2022 while the gross profit margin from physical therapy operations decreased slightly to 20.0% for Full Year 2023 from 20.2% and Full Year 2022. Industrial Injury Prevention Services For the Year Ended December 31, 202 2022 (In thousands, except percentages) Net revene $ 78,254 $ 77,052 Operating costs 61,809 61,085 Gross profit $ 16,445 $ 15,967 Gross margin 21.0 % 20.7 % IIP business revenue increased $1.2 million to $78.3 million for the Full Year 2023 as compared to $77.1 million for the Full Year 2022. Operating costs related to the IIP business increased 1.2% in the Full Year 2023 to $61.8 million from $61.1 million for the Full Year 2022. Gross profit increased $0.5 million, or 3.0%, to $16.4 million for Full Year 2023 from $16.0 million for the Full Year 2022 while gross profit margin percentage from IIP operations increased slightly to 21.0% for Full Year 2023 from 20.7% for the Full Year 2022. Corporate Office Costs Corporate office costs were $52.0 million, or 8.6% of net revenue, for the Full Year 2023 compared to $46.1 million, or 8.3% of net revenue, for the Full Year 2022. The increase in corporate office costs was primarily due to higher salaries and related costs to support the larger number of clinics. Impairment of Goodwill and Other Intangible Assets A non-cash impairment charge of $17.5 million was recognized during the Full Year 2023 related to a reporting unit in our IIP segment. This compares to a $9.1 million non-cash impairment charge to goodwill in the comparable prior year period related to the same reporting unit. Operating Income Operating income was $52.1 million for the Full Year 2023 compared to $56.8 million for the Full Year 2022. Excluding the non-cash impairment charge of $17.5 million in the Full Year 2023 and $9.1 million in the Full Year 2022, operating income was $69.6 million for the twelve months ended 2023 compared to $65.9 million for the twelve months ended 2022. 36 Table of Contents Other (Expenses) Income Interest Expense, Debt and Other Interest expense, net of $3.3 million savings from an interest rate swap arrangement discussed below in the “ Liquidity and Capital Resources - Interest Rate Swap” , increased $3.5 million to $9.3 million for the Full Year 2023 compared to $5.8 million in the Full Year 2022 due to increased borrowings. The interest rate on the Company’s term loan, was 4.9% for the Full Year 2023, with an all-in effective interest rate, including all associated costs, of 5.3%. Interest income from investment Interest income from investment amounted to $3.8 million for the Full Year 2023. This interest income is a result of investing excess cash associated with proceeds from our secondary offering completed in May 2023. Change in fair value of contingent earn-out consideration We revalued contingent earn-out consideration related to certain acquisitions resulting in an expense of $1.6 million for the Full Year 2023 compared to a gain of $2.5 million for the Full Year 2022. Change in Revaluation of Put-Right Liability For the Full Year 2023, we recorded a gain of $2.6 million on the valuation of the put-right liability compared to a loss of less than $0.1 million for the Full Year 2022. The put-right relates to the potential future purchase of a company that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. Equity in earnings of unconsolidated affiliate For the Full Year 2023, we recognized income of $1.0 million compared to $1.2 million for the Full Year 2022 from a joint venture which provides physical therapy services for patients at hospitals. Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting. Provision for Income Taxes The provision for income tax was $12.2 million for each of the years ended 2023 and 2022. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 30.1% for 2023 and 27.4% for 2022 as calculated below. The increase in the effective tax rate was primarily due to return-to-provision adjustments mostly related to true up of differences between tax and book basis of certain intangibles. 37 Table of Contents For the Year Ended December 31, 2023 December 31, 2022 (In thousands, except percentages) Income before taxes $ 49,376 $ 55,571 Less: Net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity (4,426 ) (6,902 ) Non-controlling interest - permanent equity (4,555 ) (4,347 ) $ (8,981 ) $ (11,249 ) Income before taxes less net income attributable to non-controlling interest $ 40,395 $ 44,322 Provision for income taxes $ 12,156 $ 12,164 Effective income tax rate 30.1 % 27.4 % Net Income Attributable to Non-controlling Interest Net income attributable to redeemable non-controlling interest (temporary equity) was $4.4 million for the Full Year 2023 and $6.9 million for the Full Year 2022. Net income attributable to non-controlling interest (permanent equity) was $4.6 million for the Full Year 2023 and $4.3 million for the Full Year 2022. Other Comprehensive Income We entered into an interest rate swap agreement in May 2022, which became effective on June 30, 2022. The maturity date of the swap agreement is June 30, 2027. It has a $150 million notional value adjusted concurrently with scheduled principal payments made on the term loan. Beginning in July 2022, we pay a fixed one-month Secured Overnight Financing Rate (“SOFR”) of interest of 2.815%. The total interest rate in any period also includes an applicable margin based on the Company’s consolidated leverage ratio. In the Full Year 2023, our interest rate including the applicable margin was 4.9%. Unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. The fair value of the interest rate swap at December 31, 2023, was $3.7 million, and $5.4 million at December 31, 2022, which has been included within Other assets (current and long term) in the accompanying Consolidated Balance Sheet. The impact of the interest rate swap on the accompanying Consolidated Statements of Comprehensive Income was an unrealized loss of $1.2 million, net of tax, for the 2023 Year. LIQUIDITY AND CAPITAL RESOURCES We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. Total cash and cash equivalents were $152.8 million as of December 31, 2023, compared to $31.6 million as of December 31, 2022. Additionally, we had $144.4 million of outstanding borrowings and $175.0 million in available credit under our credit facilities as of December 31, 2023, compared to $179.1 million of outstanding borrowings and $145.9 million in available credit under our credit facilities as of December 31, 2022. On May 30, 2023, we completed a secondary offering of our common stock resulting in net proceeds of $163.6 million after deducting fees associated with the transaction. A portion of the net proceeds was used to repay the $35.0 million then outstanding under our Credit Agreement while the remainder is expected to be used primarily for acquisitions. Our cash is currently invested in a high-yield savings account which generated interest income of approximately $2.1 million in 2023. We believe that our cash and cash equivalents and availability under our Credit Facilities are sufficient to fund the working capital needs of our operating subsidiaries through at least February 29, 2025. 38 Table of Contents Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have, from time to time, purchased the non-controlling interests of limited partners in our existing partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using our cash, financing, or a combination of the two. We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMS approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the balance has been outstanding for 120 days or longer. As of December 31, 2023, we have accrued $8.8 million related to credit balances (included in accrued expenses), a portion of which is due to patients and payors. The credit balances are expected to be resolved or paid in the next twelve months. The average accounts receivable days outstanding was 29 days on December 31, 2023, and 31 days on December 31, 2022. Net patient receivables in the amounts of $6.3 million and $5.5 million were written-off in 2023 and 2022, respectively. Cash Flow A summary of our operating, investing, and financing activities is discussed below. Year Ended December 31, 2023 December 31, 2022 December 31, 2021 Net cash provided by operating activities $ 81,978 $ 58,537 $ 76,406 Net cash used in investing activities 45,015 81,269 124,136 Net cash provided by financing activities 84,268 25,759 43,379 Operating Activities Cash provided by operating activities increased $23.4 million to $82.0 million for the year ended December 31, 2023 as compared to $58.5 million for the year ended December 31, 2022. This increase was mostly due to higher Adjusted EBITDA as well as increased collections from patient receivables. Investing Activities Cash used in investing activities during the year ended December 31, 2023 totaled $45.0 million and consisted of $9.3 million of fixed assets purchases and $37.8 million used in the purchase of majority interests in businesses and non-controlling interest, temporary and permanent equity. These were partially offset by $1.0 million proceeds from sale of non-controlling interest, temporary and permanent and $0.8 million distribution from an unconsolidated affiliate. Financing Activities Cash provided by financing activities during the year ended December 31, 2023, totaled $84.3 million and consisted of $163.6 million proceeds from a secondary offering completed in May 2023, partially offset by $31.0 million of net payments under our revolving credit facility, $24.1 million of dividends paid to our shareholders, $16.1 million distribution to non-controlling interest and payments of $8.2 million on our debt. 39 Table of Contents Senior Credit Facilities On December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility. This agreement was amended and/or restated in August 2015, January 2016, March 2017, November 2017, and January 2021.On June 17, 2022, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and the lenders from time-to-time party thereto. The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans will be available through the following facilities (collectively, the “Senior Credit Facilities”): 1) Revolving Facility: $175 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $12 million sublimit for the issuance of standby letters of credit and a $15 million sublimit for swingline loans (each, a “Swingline Loan”). 2) Term Facility: $150 million term loan facility (the “Term Facility”). The Term Facility amortizes in quarterly installments of: (a) 0.625% in each of the first two years, (b) 1.250% in the third and fourth year, and (c) 1.875% in the fifth year of the Credit Agreement. The remaining outstanding principal balance of all term loans is due on the maturity date. The proceeds of the Revolving Facility have been and shall continue to be used by us for working capital and other general corporate purposes of our Company and its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by us to refinance the indebtedness outstanding under the Second Amended and Restated Credit Agreement, to pay fees and expenses incurred in connection with the loan facilities transactions, for working capital and other general corporate purposes. We are permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $100 million plus (ii) an unlimited additional amount, provided that (in the case of clause (ii)), after giving effect to such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0:1.0, and the aggregate amount of all incremental increases under the Revolving Facility does not exceed $50,000,000. The interest rates per annum applicable to the Senior Credit Facilities (other than in respect of Swingline Loans) will be Term SOFR as defined in the agreement plus an applicable margin or, at our option, an alternate base rate plus an applicable margin. The interest rate for the 2023 Year on our Senior Credit Facilities, net of savings from the interest rate swap described below, was 5.1%, with an all-interest rate, including all associated costs, of 5.7%. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity. We will also pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). We may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions. The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends, and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement includes certain financial covenants which include the Consolidated Fixed Charge Coverage Ratio and the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary events of default. Our obligations under the Credit Agreement are guaranteed by our wholly owned material domestic subsidiaries (each, a “Guarantor”), and our obligations and any Guarantors are secured by a perfected first priority security interest in substantially all of our existing and future personal property and each Guarantor, subject to certain exceptions. As of December 31, 2023, $144.4 million was outstanding on the Term Facility while none was outstanding under the Revolving Facility, resulting in $175.0 million of credit availability. As of December 31, 2023, we were in compliance with all of the covenants contained in the Credit Agreement. The average effective interest rate, net of the savings from interest rate swap discussed below, for borrowings under the Senior Credit Facility, inclusive of all associated costs, was 5.3% for the Full Year 2023. 40 Table of Contents Interest Rate Swap In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which became effective on June 30, 2022. It has a $150 million notional value adjusted concurrently with scheduled principal payments made on the term loan and has a maturity date of June 30, 2027. Beginning in July 2022, we receive 1-month SOFR, and pay a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period also includes an applicable margin based on our consolidated leverage ratio. In connection with the swap, no cash was exchanged between us and the counterparty. We designated our interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulate other comprehensive income (loss), net of tax. As of December 31, 2023, the fair value of the interest rate swap was $3.7 million, a decrease of $1.2 million, net of a $0.4 million, income tax effect, as compared to December 31, 2022. The fair value of the interest rate swap is included in other assets (current and long term) in our consolidated balance sheet while the increase in fair value is presented as unrealized loss in our unaudited consolidated statements of comprehensive income. The interest rate swap arrangement generated $3.3 million in interest savings for the Full Year 2023. The average interest rate for the term facility, net of the savings from the swap in the Full Year 2023 was 4.9%. Notes Payable and Deferred Payments Related to Acquisitions We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payable primarily relate to the acquisitions of a business or acquisitions of majority interests in such businesses. At December 31, 2023, our remaining outstanding balance on these notes aggregated $5.3 million. $1.6 million of the outstanding notes payable are payable in 2023, $2.4 million is payable in 2024, and $1.3 million is payable in 2025. Notes are generally payable in equal annual installments of principal over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 8.0% per annum. On September 29, 2023, we acquired a 70% equity interest in a four-clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $6.0 million, of which $5.4 million was paid in cash, and $0.6 million was in the form of a note payable. The note accrues interest at 5.0% per annum and the principal and interest are payable in two installments. The first payment of principal and interest of $0.3 million was paid January 2024, and the second installment of $0.3 million is due on September 30, 2025. In a separate transaction, on September 29, 2023, we acquired a 70% equity interest in a single clinic physical therapy practice. The owner of the practice retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $7.8 million, of which $7.4 million was paid in cash and $0.4 million is a deferred payment due on June 30, 2025. On July 31, 2023, we acquired a 70% equity interest in a five-clinic practice. The practice’s owners retained a 30% equity interest. The purchase price for the 70% equity interest was approximately $2.1 million, of which $1.8 million was paid in cash and $0.3 million is a deferred payment due on June 30, 2025. On May 31, 2023, we and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, our ownership interest is 45%, our local partner’s ownership interest is 30%, and the practice’s pre-acquisition owners have a 25% ownership interest. The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by us, $1.1 million was paid in cash by the local partner, and $0.3 million was in the form of a note payable (of which $0.2 million will be paid by us and $0.1 million will be paid by the local partner). The note will be paid on July 1, 2024. We guaranteed the full payment of $0.3 million on its due date. 41 Table of Contents On February 28, 2023, we acquired an 80% interest in a one-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable. The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025. On November 30, 2022, we acquired an 80% interest in a thirteen-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $25.0 million, of which $24.2 million was paid in cash and $0.8 million in the form of a note payable. The note accrues interest at 7.0% per annum and the principal and interest are payable on November 30, 2024. On October 31, 2022, we acquired a 60% interest in a fourteen-clinic physical therapy practice. The practice’s owners retained 40% of the equity interests. The purchase price for the 60% equity interest was approximately $19.5 million, with a potential additional amount to be paid at a later date based on the performance of the business. This contingent consideration had a fair value of $9.8 million on December 31, 2023. The fair value of this contingent consideration will be adjusted quarterly based on certain criteria and market inputs. There is no maximum payout for this contingency. On September 30, 2022, we acquired an 80% interest in a two-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $4.2 million, of which $3.9 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on September 30, 2024. On August 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $3.5 million, of which $3.3 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on August 31, 2024. On March 31, 2022, we acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $11.5 million, of which $11.2 million was paid in cash and $0.3 million is in the form of a note payable. The note accrues interest at 3.5% per annum and the principal and interest are payable on March 31, 2024. Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We currently have $152.8 million of cash on hand, a significant portion of which is available for deployment into development and other growth initiatives. We plan to continue developing new clinics and making additional acquisitions. We have from time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and financing. A large acquisition may require financing. We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMS approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the account receivable has been outstanding for 120 days or longer. Redeemable Non-Controlling Interest Certain of our limited partnership agreements, as amended, provide that, upon the triggering events, we have a call right and the selling entity or individual has a put right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the put right and the call right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon the exercise of either the put right or the call right is calculated per the terms of the respective agreements and classified as redeemable non-controlling interest (temporary equity) in our consolidated balance sheets. The fair value of the redeemable non-controlling interest at December 31, 2023 was $174.8 million. 42 Table of Contents In the event that a limited non-controlling interest partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition date, we have agreed to certain contractual provisions which enable such non-controlling interest partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes. Share Repurchase Program In March 2009, the Board authorized the repurchase of up to 10% of our common stock (“March 2009 Authorization”). Under the March 2009 Authorization, the Company has purchased a total of 859,499 shares. In November 2023, the Board terminated the March 2009 Authorization such that any such repurchase of our common stock would be considered and determined by the Board at the time of repurchase. We did not purchase any shares of our common stock during the year ended December 31, 2023, or December 31, 2022. Contractual Obligations We have future obligations for debt repayments and associated interest payments as well as future minimum rentals under our non-cancellable operating leases. The obligations as of December 31, 2023, are summarized as follows: Total 2024 2025 2026 2027 2028 Thereafter (In thousands) Term facility (1) $ 144,375 5,625 7,500 9,375 $ 121,875 $ - $ - Notes payable (2) 3,775 2,486 1,289 - - - - Interest expense on Term Facility and notes payable (3) 20,958 6,725 6,508 6,210 1,515 - - Operating leases (4) 144,666 46,845 36,447 27,406 18,495 10,025 5,448 $ 313,774 $ 61,681 $ 51,744 $ 42,991 $ 141,885 $ 10,025 $ 5,448 (1) Amounts due under our Term Facility discussed above. (2) Amounts due related to certain acquisitions discussed above. (3) Interest on our Senior Credit Facility was estimated using the average outstanding balance for the respective periods and our effective interest rate on our Term Facility at December 31, 2023, of 4.7%. Interest on our other debt was estimated using the stated rate in the debt agreement. (4) Includes variable non-lease components, including but not limited to common area maintenance. CRITICAL ACCOUNTING POLICIES Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, net sales and expenses, and disclosure of contingent assets and liabilities. Management bases estimates on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following critical accounting policies involve a higher degree of judgment and complexity. See Note 2, Significant Accounting Policies, to our audited consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K for a complete discussion of our significant accounting policies. The following reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. 43 Table of Contents Revenue Recognition Revenues are recognized in the period in which services are rendered. Net patient revenue consists of revenues from physical therapy 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 revenue (patient revenues less estimated contractual adjustments – described below) is recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between us and the patient upon each patient visit. Separate contractual arrangements exist between us and third-party payors (e.g. insurers, managed care programs, government programs, and workers' compensation programs) which establish the amounts the third parties pay on behalf of the patients for covered services rendered. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations for us but indicate reimbursement rates for patients who are covered by those payors when the services are provided. At that time, we are obligated to provide services for the reimbursement rates stipulated in the payor contracts. The execution of the contract alone does not indicate a performance obligation. For self-paying customers, the performance obligation exists when we provide the services at established rates. The difference between our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue—contractual allowance. Management contract revenue, which is included in other revenue in the consolidated statements of net income, is derived from contractual arrangements whereby we manage a clinic owned by a third party. We do 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 the point in time when services are performed. Costs, typically salaries for our employees, are recorded when incurred. Revenues from the IIP business, which are also included in other revenues in the consolidated statements 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 IIP business is recognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to the consideration we expect to receive in exchange for providing injury prevention services to our clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period. Additionally, other revenue includes services we provide on-site at locations such as schools and industrial worksites for physical or occupational therapy services, athletic trainers and gym membership fees. Contract terms and rates are agreed to in advance between us and the third parties. Services are typically performed over the contract period and revenue is recorded at the point of service. If the services are paid in advance, revenue is recorded as a contract liability over the period of the agreement and recognized at the point in time when the services are performed. We determine allowances for credit losses based on the specific agings of receivables and payor classifications at each clinic. The provision for credit losses 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 credit losses, includes only those amounts we estimate to be collectible. Our provision for credit losses was 1.0% of total net revenue for each years ended December 31, 2023, 2022 and 2021, respectively. Management believes that this is reasonable because the majority of our payors consist of highly solvent, highly regulated, commercial insurance companies as well as government programs, including Medicare. Contractual Allowances Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third-party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in our clinics. We estimate contractual allowances based on our interpretation of the applicable regulations, payor contracts and historical calculations. Each month we estimate our contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and apply an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on our historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow us to provide the necessary detail and accuracy with our collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from our estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. Our billing systems may not capture the exact change in our contractual allowance reserve estimate from period to period. Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management regularly compares our cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, the historical difference between net revenues and corresponding cash collections in any given fiscal year has generally reflected a difference within approximately 1.0% to 1.5% of net revenues. Additionally, analysis of subsequent period’s contractual write-offs on a payor basis reflects a difference within approximately 1.0% to 1.5% between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, we believe that a reasonable likely change in the contractual allowance reserve estimate would not be more than 1.0% to 1.5% of gross billings in accounts receivable at December 31, 2023. For purposes of demonstrating the sensitivity of this estimate on our Company’s financial condition, a 1.0% to 1.5% increase or decrease in our aggregate contractual allowance reserve percentage would decrease or increase, respectively, net patient revenue by approximately $1.4 million to $1.5 million for the year ended December 31, 2023. Management believes the changes in the estimate of the contractual allowance reserve for the periods ended December 31, 2023, 2022 and 2021 have not been material to the statement of income. 44 Table of Contents 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 identifiable 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 is recognized as an adjustment to additional paid-in capital. Goodwill and other indefinite-lived intangible assets are not amortized but are instead subject to periodic impairment evaluations. The fair value of goodwill and other identifiable intangible assets with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events or conditions and are written down to fair value if considered impaired. These events or conditions include but are not limited to a significant adverse change in the business environment, regulatory environment, or legal factors; a current period operating, or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge. We evaluate indefinite-lived tradenames in conjunction with our annual goodwill impairment test. We operate our business through two segments consisting of our physical therapy clinics and our IIP business. For purposes of goodwill impairment analysis, each of our segments is further broken down into reporting units. Reporting units within our physical therapy business comprise of regions primarily based on each clinic’s location. In addition to the six regions, in 2023 and 2022, the IIP business consisted of two reporting units. As part of the impairment analysis, we are first required to assess qualitatively if we can conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, we are then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we consider relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. We consider both the income and market approach in determining the fair value of its reporting units when performing a quantitative analysis. An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated fair value of the reporting unit. The evaluation of goodwill in 2021 did not result in any goodwill amounts that were deemed impaired. We recorded a charge for goodwill impairment of $15.8 million and $9.1 million in the years ended December 31, 2023, and December 31, 2022, respectively. We also recorded a charge of $1.7 million for the impairment of a tradename during the year ended December 31, 2023. The charges for impairment related to one reporting unit in the IIP business. The impairments are a result of a change in the reporting unit’s current and projected operating income as well as various market inputs based on current market conditions. During the year ended December 31, 2023, we did not recognize any additional impairment as a result of the Company’s annual assessment of goodwill and tradenames for the other seven reporting units. We also noted no impairment to long-lived assets for all reporting units. We will continue to monitor for any triggering events or other indicators of impairment. 45 Table of Contents No impairment was recognized as part of our annual assessment of goodwill for the other seven reporting units. Redeemable Non-Controlling Interest The non-controlling interests that are reflected as redeemable non-controlling interest in our consolidated financial statements consist of those owners, including us, that have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that we purchase or the owner sell the non-controlling interest 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 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 Put Rights and Call Rights are not automatic (even upon death) and require either the owner or us to exercise our rights when the conditions triggering the Put or Call Rights have been satisfied. The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements. On the date we acquire a controlling interest in a partnership and the limited partnership agreement for such partnerships contains redemption rights not under our control, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption— Redeemable non-controlling interest . Then, in each reporting period thereafter until it is purchased by us, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial value, 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 to retained earnings and not in the consolidated statements of net income. Although the adjustments are not reflected in the consolidated statements of net income, current accounting rules require that we reflect the adjustments, net of tax, in the earnings per share calculation. The amount of net income attributable to redeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statement of income. We believe the redemption value (i.e. the carrying amount) and fair value are the same. Non-Controlling Interest We recognize non-controlling interests, in which we have 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 net income attributable to non-controlling interests is included in consolidated net income on the face of the consolidated statements of net income. Operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner. When we purchase a non-controlling interest and the purchase differs from the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.