Note 4 - Acquisition of Caris HealthCare, L.P.

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Business Combination Disclosure [Text Block]

Note 4 – Acquisition of Caris HealthCare, L.P.

On June 11, 2021, the Company acquired the remaining 24.9% equity interest in Caris HealthCare, L.P. (“Caris”) for a purchase price of approximately $28,713,000, net of cash acquired. Caris specializes in providing hospice and palliative care to over 1,250 patients per day in 28 locations in Georgia, Missouri, South Carolina, Tennessee, and Virginia. As a leading senior care provider, this acquisition is a strategic advancement of our growth that will provide a continuum of post-acute health care to seniors in our operational footprint.

Prior to the June 11, 2021 acquisition date, the Company held a 75.1% non-controlling equity interest in Caris, which was accounted for as an equity method investment. The Company accounted for the acquisition of the remaining 24.9% equity interest of Caris as a step acquisition, which required remeasurement of the Company’s previous 75.1% ownership interest to fair value. Using acquisition accounting, the Company increased the value of its previously held equity method investment to its fair value of approximately $133.1 million, which resulted in a gain of $95.2 million. This gain is recorded in the interim condensed consolidated statements of operations under the line item “gains on acquisitions of equity method investments”.

The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation and determine the fair value of the previously held equity method investment.

The Company has performed a preliminary valuation analysis of the fair market value of Caris’ assets acquired and liabilities assumed. The final valuation of the assets acquired, and liabilities assumed was not complete as of September 30, 2021, but will be finalized within the allowable measurement period. The following table summarizes the allocation of the preliminary purchase price as of the transaction’s closing date (in thousands):

	Amount
Cash and cash equivalents	$	15,515
Restricted cash and cash equivalents		58
Accounts receivable		10,544
Prepaid expenses and other assets		1,006
Property and equipment		3,608
Operating lease – right-of-use assets		2,122
Intangible assets		7,038
Total assets acquired		39,891
Trade accounts payable		3,459
Accrued payroll		3,223
Other current liabilities		587
Operating lease liabilities		2,122
Other noncurrent liabilities		58
Total liabilities assumed		9,449
Net identifiable assets acquired		30,442
Goodwill		146,954
Total estimated fair value of the acquisition	$	177,396

The indefinite-lived intangible assets acquired include the trade name of Caris and the certificates of need and licenses. The goodwill is recorded in the homecare and hospice segment and is attributed to the workforce acquired and reputation of the business as part of the transaction. We expect approximately 30%-40% of the goodwill to be deductible for income tax purposes.

For the three months ended September 30, 2021, Caris contributed net patient revenues of $17,547,000 and income before income taxes of $4,660,000 that are included in the Company's interim condensed consolidated statements of operations.  For the nine months ended September 30, 2021, Caris contributed net patient revenues of $21,259,000 and income before income taxes of $5,643,000 that are included in the Company’s interim condensed consolidated statements of operations.

The following table contains unaudited pro forma interim condensed consolidated statements of operations information for the three months and nine months ended September 30, 2021 and 2020, assuming that the Caris acquisition closed on January 1, 2020. The pro forma financial information includes various assumptions, including those related to the preliminary purchase price allocation of assets acquired and liabilities assumed. The pro forma financial information may vary in future quarters based on the final valuations and analysis of the fair value of the assets acquired and liabilities assumed (in thousands).

	Three Months Ended September 30					Nine Months Ended September 30
	2021			2020		2021		2020
Net patient revenues	$	254,817		$	243,357	$	736,619	$	744,762
Total costs and expenses		263,975			256,385		770,295		770,338
Income from operations		12,762			10,215		48,544		45,667
Non-operating income		3,399			3,500		10,374		10,670
Income (loss) before income taxes		(7,636	)		14,406		35,691		17,465
Net income (loss) attributable to NHC	$	(3,348	)	$	13,698	$	29,002	$	15,589