ACQUISITIONS

6 Months Ended

Jun. 30, 2022

We complete acquisitions from time to time in order to pursue our strategy of increasing our market presence by expanding our service base and enhancing our position in certain geographic areas as a leading provider of home health, hospice, personal care and high acuity care services. The purchase price paid for acquisitions is negotiated through arm’s length transactions, with consideration based on our analysis of, among other things, comparable acquisitions and expected cash flows. Acquisitions are accounted for as purchases and are included in our condensed consolidated financial statements from their respective acquisition dates. Goodwill generated from acquisitions is recognized for the excess of the purchase price over tangible and identifiable intangible assets because of the expected contributions of the acquisitions to our overall corporate strategy. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets for significant acquisitions. The preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.

2022 Acquisitions

On March 23, 2022, we entered into a transaction with one of our high acuity care health system partners in which we contributed cash and our health system partner contributed its home health operations to one of our existing high acuity care joint ventures. As a result of this transaction, we recorded goodwill of $8.5 million, other intangibles of $0.4 million (certificate of need and licenses) and noncontrolling interest of $8.9 million within our condensed consolidated balance sheet. The fair value of noncontrolling interest was determined using an income approach and a market approach.

On April 1, 2022, we acquired 15 home health care centers from Evolution Health, LLC, a division of Envision Healthcare, doing business as Guardian Healthcare, Gem City, and Care Connection of Cincinnati ("Evolution"), for an estimated purchase price of $67.8 million. A portion of the purchase price ($51.1 million) was paid to the seller with cash on hand and proceeds from borrowings under our Revolving Credit Facility. The remainder ($16.7 million) was placed into an escrow account in accordance with the closing payment, indemnity and other provisions within the purchase agreement and is reflected in restricted cash within our condensed consolidated balance sheet. Corresponding liabilities were also recorded to accrued expenses and other long-term obligations within our condensed consolidated balance sheet related to these contingent consideration arrangements.

Of the total $16.7 million placed into escrow, $1.0 million has been set aside for any potential closing payment adjustment. The closing payment calculated on the acquisition date included estimates for cash, working capital and various other items. Under the purchase agreement, the purchase price is subject to an adjustment for any differences between estimated amounts included in the closing payment and actual amounts at close. We expect to finalize any changes to the purchase price resulting from the closing payment adjustment during the three-month period ending September 30, 2022. The remaining $15.7 million placed into escrow relates to certain outstanding matters existing as of the acquisition date as well as potential losses the Company may incur for which the seller has an obligation to indemnify the Company. This amount will either be paid to third parties as outstanding matters are resolved or to the seller at certain intervals in the future.

We expect $15 million of goodwill recorded for this acquisition to be deductible for income tax purposes over approximately 15 years.

Evolution contributed $11.3 million in net service revenue and an operating loss of $1.8 million during the three and six-month periods ended June 30, 2022.

The Company is in the process of reviewing the fair value of the assets acquired and liabilities assumed. Based on the Company's preliminary valuation, the total estimated consideration of $67.8 million has been allocated to assets acquired and liabilities assumed as of the acquisition date as follows (amounts in millions):


	Amount
ASSETS
Patient accounts receivable	$	9.1
Prepaid expenses	0.2
Other current assets	0.1
Property and equipment	2.5
Operating lease right of use assets	3.2
Intangible assets (licenses)	1.3
Other assets	0.1
Total assets acquired	$	16.5
LIABILITIES AND EQUITY
Accounts payable	$	(0.7)
Payroll and employee benefits	(2.7)
Accrued expenses	(2.4)
Operating lease liabilities	(2.8)
Deferred income tax liability	(0.5)
Current portion of long-term obligations	(0.6)
Total liabilities assumed	(9.7)
Net identifiable assets acquired	$	6.8
Goodwill	61.0
Total consideration	$	67.8

On April 1, 2022, we acquired two home health locations from AssistedCare Home Health, Inc. and RH Homecare Services, LLC, doing business as AssistedCare Home Health and AssistedCare of the Carolinas ("AssistedCare"), respectively, for a purchase price of $24.7 million. A portion of the purchase price ($22.2 million) was paid to the seller with cash on hand and proceeds from borrowings under our Revolving Credit Facility. The remainder ($2.5 million) was placed into an escrow account in accordance with the indemnity provisions within the purchase agreement and is reflected in restricted cash within our condensed consolidated balance sheet. A corresponding liability was also recorded to other long-term obligations within our condensed consolidated balance sheet related to this contingent consideration arrangement. The $2.5 million will either be paid to third parties or to the seller at certain intervals in the future.

Based on the Company's preliminary valuation, we recorded goodwill of $24.0 million and other intangibles of $0.7 million in connection with the acquisition. Intangible assets acquired include licenses ($0.5 million), certificates of need ($0.2 million) and acquired names ($0.1 million). The acquired names will be amortized over a weighted average period of one year.

We expect the entire amount of goodwill recorded for this acquisition to be deductible for income tax purposes over approximately 15 years.

AssistedCare contributed $2.6 million in net service revenue and operating income of $0.7 million during the three and six-month periods ended June 30, 2022.

2021 Acquisitions

On August 1, 2021, we acquired Contessa, a leader in hospital-at-home and skilled nursing facility at-home services for an estimated purchase price of $240.7 million, net of cash acquired. The Contessa purchase price included estimates for cash, working capital and other items. Under the purchase agreement, the purchase price was subject to a closing payment adjustment for any differences between estimated amounts included in the closing payment and actual amounts at close. The closing payment adjustment, which was finalized during the three-month period ended December 31, 2021, increased the purchase price by $0.6 million from $240.7 million to $241.3 million.

The Company is in the process of reviewing the fair value of the assets acquired, liabilities assumed and noncontrolling interests. Based on the Company's preliminary valuation, which may be revised as additional information becomes available during the measurement period, the total estimated consideration of $241.3 million has been allocated to assets acquired, liabilities assumed and noncontrolling interests as of the acquisition date as follows (amounts in millions):


	Amount
ASSETS
Patient accounts receivable	$	1.5
Prepaid expenses	0.3
Other current assets	0.1
Property and equipment	0.3
Operating lease right of use assets	0.8
Intangible assets	54.3
Other assets	3.1
Total assets acquired	$	60.4
LIABILITIES AND EQUITY
Accounts payable	$	(0.1)
Payroll and employee benefits	(0.6)
Accrued expenses	(3.4)
Operating lease liabilities	(0.8)
Deferred income tax liability	(3.1)
Current portion of long-term obligations	(0.9)
Other long-term obligations	(0.2)
Total liabilities assumed	(9.1)
Noncontrolling interests	(43.9)
Total equity assumed	(43.9)
Total liabilities and equity assumed	$	(53.0)
Net identifiable assets acquired	$	7.4
Goodwill	233.9
Total consideration	$	241.3

Intangible assets acquired include acquired names ($28.3 million), technology ($19.8 million) and non-compete agreements ($6.2 million). The non-compete agreements will be amortized over a weighted-average period of 2.0 years, and the technology will be amortized over a weighted-average period of 7.0 years. The fair value of noncontrolling interest ($43.9 million) was determined using an income approach.

We do not expect any of the goodwill recorded for this acquisition to be deductible for income tax purposes.

Contessa contributed $4.4 million in net service revenue and an operating loss of $9.7 million (inclusive of technology intangibles amortization totaling $0.7 million) during the three-month period ended June 30, 2022 and $7.2 million in net service revenue and an operating loss of $17.3 million (inclusive of technology intangibles amortization totaling $1.5 million) during the six-month period ended June 30, 2022.

For details regarding the Company's 2021 acquisitions, see Note 4 to the audited consolidated financial statements in our 2021 Annual Report on Form 10-K.