Acquisitions and Disposals

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Acquisitions and Disposals

3. Acquisitions and Disposals

2016 Acquisitions

The total aggregate purchase price for the acquired 23 locations that occurred in 2016 was $24.1 million, of which $23.1 million was paid in cash. These providers conduct home health operations in Alabama, Arizona, Arkansas, Florida, Louisiana, and Oklahoma; hospice operations in Alabama, Arizona, Arkansas, Georgia, and Missouri; and physical therapy clinics in Arkansas.

The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition that occurred during the fourth quarter of 2016 have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the final appraisals. The Company expects to finalize its analysis during 2017.

Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting, and, accordingly, the accompanying financial information includes the results of operations of the acquired entities from the dates of acquisition.

The following table summarizes the aggregate consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired (amounts in thousands):

Consideration
Cash	$	23,082
Fair value of total consideration transferred	23,082
Recognized amounts of identifiable assets acquired and liabilities assumed
Trade name	4,113
Certificates of needs/licenses	3,520
Other identifiable intangible assets	262
Other assets and (liabilities), net	(865		)
Total identifiable assets	7,030
Noncontrolling interest	1,784
Goodwill, including noncontrolling interest of $1,275	$	17,836

Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certificates of needs are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using the multi period excess earnings method. The other identifiable assets include non-compete agreements that are amortized over the life of the agreements, ranging from one to three years. Noncontrolling interest is valued at fair value by applying a discount to the value of the acquired entity for lack of control.

The Company has conducted an assessment of deferred income tax accounting and the calculation of the final net working capital adjustment and has recognized provision amounts in it is accounting for the acquisition of Halcyon for all identified liabilities in accordance with the requirements of ASC Topic 805. During the twelve months ended December 31, 2016, a decrease to net working capital adjustment of $2.0 million and an increase to deferred tax liabilities of $0.8 million were recorded in goodwill.

The following table contains unaudited pro forma consolidated income statement information assuming the 2016 acquisitions closed January 1, 2015 (amount in thousands, except earnings per share):

	2016		2015
Net service revenue	$	936,621	$	907,941
Operating income	71,977		64,547
Net income	37,521		31,217
Basic earnings per share	2.14		1.79
Diluted earnings per share	2.12		1.78

The pro forma information presented above includes adjustments for (i) depreciation expense, (ii) amortization of identifiable intangible

assets, (iii) income tax provision using the Company’s effective tax rate and (iv) estimate of additional costs to provide administrative costs for these locations. This pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred. In addition, future results may vary significantly from the results reflected in the pro forma information.

2015 Acquisitions

The total aggregate purchase price for the Company’s acquisitions, which closed in the twelve months ended December 31, 2015, was $71.4 million, of which $70.1 million was paid in cash. The purchase prices are determined based on an analysis of comparable acquisitions and the target market’s potential future cash flows. The Company expects its portion of goodwill to be fully tax deductible. The company paid $0.4 million in acquisition-related costs, which was recorded in general and administrative expenses.