Business Combinations

6 Months Ended

Jun. 30, 2021

Business Combination and Asset Acquisition [Abstract]

Inpatient Rehabilitation

During the six months ended June 30, 2021, 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 April 2021, we acquired 51% of the operations of a 14-bed inpatient rehabilitation unit in San Angelo, Texas when Shannon Medical contributed those operations to our existing joint venture entity.

•In June 2021, we acquired 75% of the operations of a 16-bed inpatient rehabilitation unit in McKees Rocks, Pennsylvania through our existing joint venture with Heritage Valley Health System, Inc. The acquisition was funded using cash on hand. The cash payment of $1.1 million shown in the table below occurred in July 2021.

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):









Identifiable intangible assets:
Noncompete agreement (useful life of 3 years)	$	0.4
Trade name (useful life of 20 years)	0.3


Goodwill	3.5
Other long-term assets	0.1
Total assets acquired	$	4.3

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Fair value of assets acquired	$	0.8	$	1.4	$	0.8	$	1.7
Goodwill	3.5		6.6		3.5		9.2

Fair value of noncontrolling interest owned by joint venture partner	(3.2)		(8.0)		(3.2)		(10.9)

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

Home Health and Hospice

On June 1, 2021, we completed the acquisition of the home health and hospice assets of Frontier Home Health and Hospice (“Frontier”) in Alaska, Colorado, Montana, Washington, and Wyoming. The Frontier acquisition included the purchase of a 50% equity interest in the Heart of the Rockies Home Health joint venture and a 90% equity interest in the Hospice of Southwest Montana joint venture (inclusive of an additional 40% equity interest purchased for approximately $4 million). On the acquisition date, nine home health and eleven hospice locations became part of our national network of home health and hospice locations. This acquisition was made to expand our existing presence in Colorado and Wyoming and extend our services to Alaska, Montana and Washington. We funded this transaction using cash on hand and borrowings under our revolving credit facility.

We accounted for this transaction under the acquisition method of accounting and reported the results of operations of Frontier from its date of acquisition. Assets acquired, liabilities assumed, and noncontrolling interests were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on various valuation methodologies including: replacement cost and continued use methods for property and equipment; an income approach using primarily discounted cash flow techniques for the noncompete and license intangible assets; an income approach utilizing the relief-from-royalty method for the trade name intangible asset; an income approach utilizing the excess earnings method for the certificates of need; and present value of remaining lease payments for leases. 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. For all other assets and liabilities, the fair value was assumed to represent carrying value due to their short maturities. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. All goodwill recorded reflects our expectations of favorable growth opportunities in the home health and hospice markets based on positive demographic trends. All of the goodwill recorded as a result of this transaction is deductible for federal income tax purposes.

The fair values recorded were based upon a preliminary valuation. Estimates and assumptions used in

such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). We expect to continue to obtain information to assist us in determining the fair value of the net assets acquired at the acquisition date during the measurement period.

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


Cash and cash equivalents	$	0.8
Accounts receivable, net	0.9
Prepaid expenses and other current assets	0.2
Property and equipment	0.1
Operating lease right-of-use-assets	0.9
Identifiable intangible assets:
Noncompete agreement (useful life of 5 years)	1.7
Trade name (useful life of 3 months)	0.2
Certificates of need (useful lives of 10 years)	3.1
Licenses (useful lives of 10 years)	4.8
Goodwill	90.1

Total assets acquired	102.8
Liabilities assumed:
Current operating lease liabilities	0.3
Accounts payable	0.2
Accrued payroll	0.8
Other current liabilities	0.7
Long-term operating lease liabilities	0.7

Total liabilities assumed	2.7
Noncontrolling interests	1.6
Net assets acquired	$	98.5

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Fair value of assets acquired, net of $0.8 million of cash acquired	$	11.9	$	—	$	11.9	$	0.1
Goodwill	90.1		—		90.1		1.0
Fair value of liabilities assumed	(2.7)		—		(2.7)		—
Fair value of noncontrolling interest owned by joint venture partner	(1.6)		—		(1.6)		—

Net cash paid for acquisitions	$	97.7	$	—	$	97.7	$	1.1

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, 2020 (in millions):


	Net Operating Revenues		Net (Loss) Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to June 30, 2021
Inpatient Rehabilitation	$	—	$	—

Home Health and Hospice	3.2		(0.3)
Combined entity: Supplemental pro forma from 04/01/2021-06/30/2021	1,295.0		113.8
Combined entity: Supplemental pro forma from 04/01/2020-06/30/2020	1,085.2		34.1
Combined entity: Supplemental pro forma from 01/01/2021-06/30/2021	2,537.2		221.9
Combined entity: Supplemental pro forma from 01/01/2020-06/30/2020	2,278.2		121.7

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 2020 reporting period. See Note 2, Business Combinations, to the consolidated financial statements accompanying the 2020 Form 10‑K for information regarding acquisitions completed in 2020.