Business Combinations

9 Months Ended

Sep. 30, 2020

Inpatient Rehabilitation

During the nine months ended September 30, 2020, we completed the following inpatient rehabilitation acquisitions, none of which were individually material to our financial position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient rehabilitation services to patients in the applicable geographic areas.

•In January 2020, we acquired 68% of the operations of a 13-bed inpatient rehabilitation unit in Denver, Colorado through a joint venture with Portercare Adventist Health System. The acquisition was funded through a contribution of our existing 40-bed inpatient rehabilitation hospital in Littleton, Colorado and through contributions of funds which were utilized by the consolidated joint venture to build a 20-bed expansion to the Littleton hospital.

•In May 2020, we acquired 51% of the operations of a 45-bed inpatient rehabilitation unit in Dayton, Ohio through a joint venture with Premier Health Partners. The acquisition was funded through contributions of funds which were utilized by the consolidated joint venture to build a 60-bed de novo inpatient rehabilitation hospital.

We accounted for these transactions under the acquisition method of accounting and reported the results of operations of the acquired hospitals from its respective date of acquisition. Assets acquired were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on various valuation methodologies including: an income approach using primarily discounted cash flow techniques for the noncompete intangible assets and an income approach utilizing the relief from royalty method for the trade name intangible asset. The aforementioned income methods utilize management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects our expectations of our ability to gain access to and penetrate the acquired hospital’s historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in this market. None of the goodwill recorded as a result from these transactions is deductible for federal income tax purposes.

The fair value of the assets acquired at the acquisition date were as follows (in millions):






Property and equipment, net	$	0.1
Identifiable intangible assets:
Noncompete agreements (useful lives of 2 to 3 years)	0.7
Trade name (useful life of 20 years)	0.9


Goodwill	9.2

Total assets acquired	$	10.9

Information regarding the net cash paid for the inpatient rehabilitation acquisitions during each period presented is as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Fair value of assets acquired	$	—	$	0.5	$	1.7	$	0.5
Goodwill	—		4.8		9.2		4.8
Fair value of liabilities assumed	—		(0.2)		—		(0.2)
Fair value of noncontrolling interest owned by joint venture partner	—		(5.1)		(10.9)		(5.1)

Net cash paid for acquisitions	$	—	$	—	$	—	$	—

Home Health and Hospice

In March 2020, we acquired the assets of Generation Solutions of Lynchburg, LLC in Lynchburg, Virginia. This acquisition was made to enhance our position and ability to provide post-acute healthcare services to patients in Central Virginia. The acquisition was funded using cash on hand and was immaterial to our financial position, results of operations, and cash flows.

We accounted for this transaction under the acquisition method of accounting and reported the results of operations of the acquired location from the date of acquisition. Assets acquired were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using an income approach. The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. The goodwill reflects our expectations of our ability to utilize the acquired location’s mobile workforce and established relationships within the community and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in this market. All of the goodwill recorded as a result of this transaction is deductible for federal income tax purposes.

The fair value of the assets acquired at the acquisition date were as follows (in millions):




Identifiable intangible assets:



Licenses (useful lives of 10 years)	$	0.1
Goodwill	1.0

Total assets acquired	$	1.1

Information regarding the net cash paid for the home health and hospice acquisitions during each period presented is as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Fair value of assets acquired	$	—	$	68.6	$	0.1	$	71.8
Goodwill	—		163.9		1.0		174.7
Fair value of liabilities assumed	—		(15.0)		—		(15.3)


Net cash paid for acquisitions	$	—	$	217.5	$	1.1	$	231.2

Pro Forma Results of Operations

The following table summarizes the results of operations of the above mentioned acquisitions from their respective dates of acquisition included in our consolidated results of operations and the unaudited pro forma results of operations of the combined entity had the date of the acquisitions been January 1, 2019 (in millions):


	Net Operating Revenues		Net Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to September 30, 2020
Inpatient Rehabilitation	$	—	$	—

Home Health and Hospice	1.1		—
Combined entity: Supplemental pro forma from 07/01/2020-09/30/2020	1,173.9		77.7
Combined entity: Supplemental pro forma from 07/01/2019-09/30/2019	1,166.9		98.1
Combined entity: Supplemental pro forma from 01/01/2020-09/30/2020	3,435.9		198.8
Combined entity: Supplemental pro forma from 01/01/2019-09/30/2019	3,436.3		292.6

The information presented above is for illustrative purposes only and is not necessarily indicative of results that would

have been achieved if the acquisitions had occurred as of the beginning of our 2019 reporting period.

See Note 2, Business Combinations, to the consolidated financial statements accompanying the 2019 Form 10‑K for information regarding acquisitions completed in 2019.