Annual report pursuant to Section 13 and 15(d)

Acquisitions And Disposals

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Acquisitions And Disposals
12 Months Ended
Dec. 31, 2011
Acquisitions And Disposals [Abstract]  
Acquisitions And Disposals

3. Acquisitions and Disposals

2011 Acquisitions

Pursuant to its strategy for becoming the leading provider of post-acute health care services in the United States, the Company acquired five home health entities and eight hospices during the twelve months ended December 31, 2011, and maintains an ownership interest in the entities set forth below.

 

Acquired Entity

   Ownership
Percentage
    State of Operations      Acquisition
Date
 

LHCG XX III, LLC (d/b/a Marshall County Hospital Home Health)

     75     Kentucky         01/01/2011   

LHCG XXII, LLC (d/b/a Hospice Complete)

     100     Alabama         01/01/2011   

Vital Hospice, Inc. (d/b/a Vital Hospice)

     100     Louisiana         01/01/2011   

LHCG XIX, LLC (Baptist Home Health Care)

     75     Florida         02/01/2011   

Texas Health Care Group of Texarkana, LLC (d/b/a Texarkana HomeCare and Christus HomeCare)

     73.68     Texas         03/01/2011   

LHCG XXV, LLC (d/b/a Community Loving Care Hospice,LLC)

     100     Missouri         04/01/2011   

LHCG XXIX, LLC (d/b/a Keller HomeCare & Keller Hospice)

     67     Alabama         04/05/2011   

Each of the acquisitions was accounted for under the acquisition method of accounting, and accordingly, the accompanying consolidated financial statements include the results of operations of each acquired entity from the date of acquisition.

The total purchase price for the Company's acquisitions was $12.3 million, which was paid primarily in cash. Purchase prices are determined based on an analysis of comparable acquisitions and the target market's potential future cash flows. Consideration for one of the acquisitions was a transfer of a 26.32% ownership interest in one of the Company's wholly owned home health agencies. The transfer of the noncontrolling interest in the Company's existing home health agency was accounted for as an equity transaction, resulting in the Company recognizing additional paid in capital of $206,000.

The Company's home-based segment recognized goodwill of $7.4 million, including $658,000 of noncontrolling goodwill. 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 following table summarizes the consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as the fair value at the acquisition dates of the noncontrolling interest acquired (all amounts are in thousands).

 

Consideration

  

Cash

   $ 11,745   

Equity instruments (the Company exchanged a noncontrolling interest in one of its entities)

     369   

Working capital

     143   
  

 

 

 

Fair value of total consideration transferred

   $ 12,257   
  

 

 

 

Acquisition-related costs (included in general and administrative expenses)

   $ 420   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

  

Trade name

   $ 4,471   

Certificates of need/license

     1,354   

Other identifiable intangible assets

     398   

Other assets

     13   
  

 

 

 

Total identifiable assets

   $ 6,236   
  

 

 

 

Noncontrolling interest

   $ 1,372   

Goodwill, including noncontrolling interest of $658,000

   $ 7,393   

Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. The other identifiable assets include non-compete agreements that are amortized over the life of the agreements, ranging from two to five years. Noncontrolling interest is valued at fair value by applying a discount to the value of the acquired entity for lack of control. The fair value of the acquired intangible assets is preliminary pending the final valuations of those assets.

During the twelve months ended December 31, 2011, the Company purchased additional ownership interests in three of its joint ventures. The total purchase price for the additional ownership was $891,000 and was accounted for as an equity transaction, resulting in the Company reducing additional paid in capital by $641,000.

During the twelve months ended December 31, 2011, the Company sold membership interests in three of its wholly owned subsidiaries. The total sales price was $308,000 for the sale of 26% membership interests and was accounted for as equity transactions, resulting in the Company increasing additional paid in capital by $212,000.

During the twelve months ended December 31, 2011, the Company settled the working capital amounts acquired on a 2011 acquisition paying $155,000 in cash related to the settlements.

 

The following table contains unaudited pro forma consolidated income statement information assuming the 2011 acquisitions closed January 1, 2010 (amount in thousands):

 

     2011     2010  

Net service revenue

   $ 635,628      $ 651,632   

Operating income (loss)

     (6,228     95,349   

Net income (loss)

     (13,311     46,778   

Basic earnings per share

     (0.73     2.58   

Diluted earnings per share

     (0.73     2.57   

The pro forma disclosure in the table above includes adjustments for depreciation expense, amortization of intangible assets, income tax expense and an estimate of additional costs to provide administrative services for these locations as if the acquisition had occurred on January 1, 2010. 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.

2010 Acquisitions

Home-Based

The total purchase price of home-based acquisitions was $18.4 million, which was paid primarily in cash. The purchase prices were determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.

The Company recognized goodwill of $11.2 million, including $663,000 of goodwill attributable to noncontrolling interests, related to acquisitions made in 2010. The Company expects its portion of goodwill to be fully tax deductible.

During 2010, the Company purchased certain noncontrolling interest holders' assigned interests in one of the Company's joint ventures, resulting in cash payments of $1.9 million and a decrease in additional paid in capital of $1.9 million.

On December 30, 2010, the Company paid $6.9 million in cash for three acquisitions with January 1, 2011 acquisition dates. Control was not assumed until January 1, 2011; therefore, the $6.9 million cash payments are recorded as advance payment on acquisitions at December 31, 2010.

One of the Company's 2009 acquisitions provided for up to $2.5 million in contingent consideration to be paid to the seller if certain financial measurements are achieved. The fair value of the contingent consideration recognized on the acquisition date was $1.7 million. The fair value of the contingent consideration was estimated using the income approach based on financial projections of the acquired company. The projected cash flows were discounted using a discount rate of London Interbank Offered Rate plus 100 basis points, which the Company believes is appropriate and is representative of a market participant assumption. During the fourth quarter of 2010, the Company paid $1.7 million to satisfy the contingent consideration obligation.

Facility-Based

The total purchase price of the facility-based acquisitions was $7.2 million, which was paid primarily in cash. The purchase price was determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.

 

The Company recognized goodwill of $6.0 million related to the acquisitions, which is fully tax deductible.

During 2010, certain noncontrolling interest holders redeemed their interest in one of the Company's joint ventures, resulting in a cash payment of approximately $36,000. In connection with the partial redemption, the Company decreased noncontrolling interest redeemable by approximately $41,000 and increased retained earnings by the same amount, representing the fair value at December 31, 2009 of the shares converted during the first quarter of 2010. Simultaneously, the Company recorded goodwill of $36,000, which is not deductible for income tax purposes, to represent the value of the noncontrolling interest redeemed. As of December 31, 2010, all noncontrolling interest associated with this joint venture had been redeemed.

2009 Acquisitions

Home-Based

The total purchase price of home-based acquisitions was $33.2 million, which was paid primarily in cash. The purchase prices were determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows. The purchase price for Southeast Louisiana HomeCare, LLC included a transfer of a 25% noncontrolling interest in three of the Company's wholly owned home health agencies. The transfer of the noncontrolling interest in the Company's existing home health agencies was accounted for as an equity transaction, resulting in the Company recognizing additional paid in capital of $181,000.

The Company recognized goodwill of $22.0 million, including $3.2 million of goodwill attributable to noncontrolling interests, related to acquisitions made in 2009. The Company expects its portion of goodwill to be fully tax deductible.

During 2009, the Company purchased additional ownership interests in five of its joint ventures. The total purchase price for the additional ownership interests was $2.3 million and was accounted for as an equity transaction, resulting in the Company recognizing additional paid in capital of $2.3 million.

In 2008, one of the Company's acquisitions contained contingent consideration to the seller, a portion of which was to be settled in shares of the Company's stock one year after the acquisition date. The number of shares to be issued was contingent upon the acquired company achieving certain financial measurements in the year after the acquisition. During the year end December 31, 2009, the Company recorded $1.9 million of additional purchase price related to the contingent consideration as the acquired company achieved the required financial measurements. Of the contingent consideration, $950,000 was paid in cash during 2009. The remaining $950,000 was recorded as a liability as of December 31, 2009. In the first quarter of 2010, the Company issued 29,988 shares of the Company's common stock, valued at $950,000, as settlement of the remaining contingent consideration.

During 2009, the Company settled the working capital amounts acquired on several 2008 acquisitions. An additional $349,000 was paid in cash in 2009 related to the settlements. An additional $2.7 million was recognized as goodwill and a deferred tax liability related to the finalization of acquisition accounting.

On December 31, 2009, the Company paid $1.2 million in cash for two acquisitions with January 1, 2010 acquisition dates. Control was not assumed until January 1, 2010; therefore, the $1.2 million cash payment is recorded in other assets on the balance sheet as of December 31, 2009.

Facility-Based

The total purchase price of the facility-based acquisitions was $1.2 million, which was paid primarily in cash. The purchase price was determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.

 

The Company recognized goodwill of $86,000, including $22,000 of noncontrolling goodwill, related to the acquisitions. The Company expects its portion of goodwill to be fully tax deductible.

In conjunction with the redemption by certain noncontrolling interest holders of their interest in one of the Company's joint ventures, $15,000 of goodwill, which is not deductible for income tax purposes, was recognized in the facility-based services segment.

2009 Divestitures

In September 2009, the Company sold its outpatient rehabilitation clinic, generating a loss of $22,000 which was part of the Facility-Based services. The results of operations related to the clinic are included in discontinued operations in the Company's condensed consolidated statement of income for the year ended December 31, 2009. There was no operating activity related to the outpatient rehabilitation clinic after it was sold.

The following table provides financial results of discontinued operations for the year ended December 31, 2009 (amounts in thousands):

 

     2009  

Net service revenue

   $ 402   

Costs of services and general and administrative expenses

     (543
  

 

 

 

Income (loss) from discontinued operations before income taxes

     (141

Income tax benefit

     55   

Loss from discontinued operations net of income tax benefit

     (86
  

 

 

 

Less loss from discontinued operations attributable to noncontrolling interest

     —     
  

 

 

 

Income (loss) from discontinued operations attributable to LHC Group Inc.'s common stockholders

   $ (86 )