Quarterly Report


Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2016 .
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                      to                      .
Commission file number: 001-33757
__________________________
THE ENSIGN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware
33-0861263
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)

27101 Puerta Real, Suite 450
Mission Viejo, CA 92691
(Address of Principal Executive Offices and Zip Code)

(949) 487-9500
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
_____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of November 1, 2016 , 50,682,997 shares of the registrant’s common stock were outstanding.
 
 
 
 
 



THE ENSIGN GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 31.1
 
 Exhibit 31.2
 
 Exhibit 32.1
 
 Exhibit 32.2
 
 Exhibit 101




Part I. Financial Information

Item 1.         Financial Statements
THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)

 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,414

 
$
41,569

Accounts receivable—less allowance for doubtful accounts of $36,960 and $30,308 at September 30, 2016 and December 31, 2015, respectively
232,465

 
209,026

Investments—current
7,511

 
2,004

Prepaid income taxes
1,325

 
8,141

Prepaid expenses and other current assets
18,569

 
18,827

Assets held for sale—current (Note 19)
8,466

 

Total current assets
308,750

 
279,567

Property and equipment, net
350,255

 
299,633

Insurance subsidiary deposits and investments
27,655

 
32,713

Escrow deposits
1,298

 
400

Deferred tax asset
21,427

 
20,852

Restricted and other assets
14,869

 
9,631

Intangible assets, net
42,975

 
45,431

Goodwill
67,100

 
40,886

Other indefinite-lived intangibles
19,086

 
18,646

Total assets
$
853,415

 
$
747,759

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,005

 
$
36,029

Accrued wages and related liabilities
71,597

 
78,890

Accrued self-insurance liabilities—current
22,076

 
18,122

Liabilities held for sale—current (Note 19)
1,709

 

Other accrued liabilities
57,531

 
46,205

Current maturities of long-term debt
8,141

 
620

Total current liabilities
199,059

 
179,866

Long-term debt—less current maturities
162,474

 
99,051

Accrued self-insurance liabilities—less current portion
45,717

 
37,881

Deferred rent and other long-term liabilities
8,545

 
3,976

Total liabilities
415,795

 
320,774

 
 
 
 
Commitments and contingencies (Notes 16, 18 and 20)

 

Equity:
 
 
 
Ensign Group, Inc. stockholders' equity:
 
 
 
Common stock; $0.001 par value; 75,000 shares authorized; 52,587 and 50,642 shares issued and outstanding at September 30, 2016, respectively, and 51,918 and 51,370 shares issued and outstanding at December 31, 2015, respectively (Note 3)
52

 
51

Additional paid-in capital (Note 3)
248,785

 
235,076

Retained earnings
218,887

 
193,420

Common stock in treasury, at cost, 1,520 and 123 shares at September 30, 2016 and December 31, 2015, respectively (Note 3)
(31,117
)
 
(1,223
)
Total Ensign Group, Inc. stockholders' equity
436,607

 
427,324

Non-controlling interest
1,013

 
(339
)
Total equity
437,620

 
426,985

Total liabilities and equity
$
853,415

 
$
747,759

See accompanying notes to condensed consolidated financial statements.

1


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016

2015
 
2016
 
2015
 
 
 
 
Revenue
$
428,065

 
$
351,086

 
$
1,221,816

 
$
968,671

Expense:
 
 
 
 
 
 
 
Cost of services
348,971

 
280,545

 
985,817

 
770,293

(Gain)/loss related to divestitures (Note 18 and 19)
(2,505
)
 

 
5,430

 

Rent—cost of services (Note 18)
33,342

 
24,500

 
91,074

 
62,531

General and administrative expense
17,306

 
17,165

 
54,351

 
46,917

Depreciation and amortization
10,911

 
7,288

 
28,981

 
20,185

Total expenses
408,025

 
329,498

 
1,165,653

 
899,926

Income from operations
20,040

 
21,588

 
56,163

 
68,745

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(2,135
)
 
(802
)
 
(4,951
)
 
(2,035
)
Interest income
236

 
242

 
749

 
603

Other expense, net
(1,899
)
 
(560
)
 
(4,202
)
 
(1,432
)
Income before provision for income taxes
18,141

 
21,028

 
51,961

 
67,313

Provision for income taxes
6,957

 
7,869

 
20,124

 
25,833

Net income
11,184

 
13,159

 
31,837

 
41,480

Less: net income (loss) attributable to noncontrolling interests
29


(313
)
 
184

 
(351
)
Net income attributable to The Ensign Group, Inc.
$
11,155

 
$
13,472

 
$
31,653

 
$
41,831

Net income per share attributable to The Ensign Group, Inc.:

 
 

 
 
 
 
Basic
$
0.22

 
$
0.26

 
$
0.63

 
$
0.84

Diluted
$
0.21

 
$
0.25

 
$
0.61

 
$
0.81

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
50,541

 
51,144

 
50,498

 
49,981

Diluted
52,045

 
53,070

 
52,102

 
51,880

 
 
 
 
 
 
 
 
Dividends per share
$
0.0400

 
$
0.0375

 
$
0.1200

 
$
0.1125


See accompanying notes to condensed consolidated financial statements.

2


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
31,837

 
$
41,480

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
28,981

 
20,185

Amortization of deferred financing fees
571

 
443

Fixed assets impairment
137

 

Write-off of deferred financing fees
321

 

Deferred income taxes
(657
)
 
778

Provision for doubtful accounts
20,070

 
13,770

Share-based compensation
6,907

 
4,948

Excess tax benefit from share-based compensation
(2,250
)
 
(2,791
)
(Gain)/loss on disposition of property and equipment
(21
)
 
22

Gain on sale of urgent care centers
(2,505
)
 

Change in operating assets and liabilities
 
 
 
Accounts receivable
(43,207
)
 
(75,689
)
Prepaid income taxes
6,817

 
(3,801
)
Prepaid expenses and other assets
47

 
(6,932
)
Insurance subsidiary deposits and investments
(448
)
 
(10,617
)
Losses related to operational closure (Note 18)
7,381

 

Accounts payable
2,155

 
538

Accrued wages and related liabilities
(6,849
)
 
8,763

Income taxes payable
51

 

Other accrued liabilities
11,734

 
17,937

Accrued self-insurance liabilities
9,907

 
3,689

Deferred rent liability
205

 
577

Net cash provided by operating activities
71,184

 
13,300

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(52,273
)
 
(42,300
)
Cash payment for business acquisitions
(63,810
)
 
(79,874
)
Cash payment for asset acquisitions
(777
)
 
(15,851
)
Escrow deposits
(1,298
)
 
(2,310
)
Escrow deposits used to fund business acquisitions
400

 
16,153

Use of restricted cash

 
5,082

Cash received from sale of urgent care centers, net of note receivable
5,952

 

Cash proceeds from the sale of property and equipment and insurance proceeds
391

 

Restricted and other assets
(1,009
)
 
(1,476
)
Net cash used in investing activities
(112,424
)
 
(120,576
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility (Note 16)
519,000

 
224,000

Payments on revolving credit facility and other debt (Note 16 and Note 3)
(447,481
)
 
(234,267
)
Proceeds from common stock offering (Note 3)

 
112,078

Issuance costs in connection with common stock offering (Note 3)

 
(5,961
)
Issuance of treasury stock upon exercise of options
106

 
16

Issuance of common stock upon exercise of options
5,537

 
3,828

Repurchase of shares of common stock (Note 3)
(30,000
)
 

Dividends paid
(6,131
)
 
(5,559
)
Excess tax benefit from share-based compensation
2,332

 
2,802

Payments of deferred financing costs
(3,278
)
 

Net cash provided by financing activities
40,085

 
96,937

Net decrease in cash and cash equivalents
(1,155
)
 
(10,339
)
Cash and cash equivalents beginning of period
41,569

 
50,408

Cash and cash equivalents end of period
$
40,414

 
$
40,069

See accompanying notes to condensed consolidated financial statements.

3


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)



 
Nine Months Ended
September 30,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
5,054

 
$
1,967

Income taxes
$
11,552

 
$
26,002

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
4,168

 
$
4,084

Note receivable from sale of urgent care centers
$
700

 
$

Refundable deposits assumed as part of business acquisition
$

 
$
3,488

Debt assumed as part of asset acquisition
$

 
$
11,699


See accompanying notes to condensed consolidated financial statements.


4


THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands, except per share data)
(Unaudited)

1. DESCRIPTION OF BUSINESS

The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum as well as, urgent care centers and other ancillary businesses. As of September 30, 2016 , the Company operated 209 facilities, 38 home health, hospice and home care agencies, 14 urgent care centers and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oregon, South Carolina, Texas, Utah, Washington and Wisconsin. The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted living, home health, home care, hospice, urgent care and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 22,400 operational skilled nursing, assisted living and independent living beds. As of September 30, 2016 , the Company owned 35 of its 209 affiliated facilities and leased an additional 174 facilities through long-term lease arrangements, and had options to purchase 24 of those 174 facilities. As of December 31, 2015 , the Company owned 32 of its 186 affiliated facilities and leased an additional 154 facilities through long-term lease arrangements, and had options to purchase 20 of those 154 facilities.
Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide certain accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.
Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this quarterly report is not meant to imply, nor should it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc.
Other Information — The accompanying condensed consolidated financial statements as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 (collectively, the Interim Financial Statements) are unaudited. Certain information and note disclosures normally included in annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations. Readers of the Interim Financial Statements should refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2015 which are included in the Company’s annual report on Form 10-K, File No. 001-33757 (the Annual Report) filed with the Securities and Exchange Commission (SEC). Management believes that the Interim Financial Statements reflect all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position and results of operations in all material respects. The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or shareholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing and assisted living operations, home health, hospice and home care operations, urgent care centers and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its consolidated statements of income.
The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's relationship with variable interest entities was not material at September 30, 2016 .

5

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



In July 2016, the Company completed the sale of its three urgent care centers in Colorado for $7,392 . On September 27, 2016, the Company agreed to terms to sell its remaining fourteen urgent care centers in Washington. The sale of the Washington clinics is expected to close in December 2016. Certain asset and liabilities included in the sale of the urgent care centers in Washington have been presented as held for sale in the accompanying condensed consolidated balance sheets as of September 30, 2016 . The sale transactions do not meet the criteria of discontinued operations as they do not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
On December 9, 2015, the Company announced a two-for-one stock split of its outstanding shares of common stock. The stock split was effected in the form of a stock dividend, paid on December 23, 2015 to shareholders of record at the close of business on December 17, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All applicable share numbers and per share amounts presented in the notes to condensed consolidated financial statements and the condensed consolidated statements of income have been retroactively adjusted to reflect the stock split. The par value of the Company's common stock remained unchanged at $0.001 per share.

Reclassifications - Prior period results reflect reclassifications, for comparative purposes, related to the early adoption of authoritative guidance for the presentation of deferred taxes. Deferred tax assets have been presented on the balance sheets as a non-current asset for all periods presented. Historically, these assets were classified as either current or non-current assets, as applicable.
Estimates and Assumptions — The preparation of Interim Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Interim Financial Statements relate to revenue, allowance for doubtful accounts, intangible assets and goodwill, impairment of long-lived assets, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments — The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations.
Revenue Recognition — The Company recognizes revenue when the following four conditions have been met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured. The Company's revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to the individual. For reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.
Revenue from the Medicare and Medicaid programs accounted for 66.6% and 66.1% of the Company's revenue for the three and nine months ended September 30, 2016 , respectively, and 66.7% and 68.0% for the three and nine months ended September 30, 2015 , respectively. The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the three and nine months ended September 30, 2016 and 2015 .
The Company’s service specific revenue recognition policies are as follows:
Skilled Nursing, Assisted and Independent Living Revenue
The Company’s revenue is derived primarily from providing long-term healthcare services to residents and is recognized on the date services are provided at amounts billable to individual residents. For residents under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rate on a per patient, daily basis or as services are performed.
Home Health Revenue

6

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Medicare Revenue
Net service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.
The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.
In addition to revenue recognized on completed episodes, the Company also recognizes a portion of revenue associated with episodes in progress. Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per episode and its estimate of the average percentage complete based on visits performed.
Non-Medicare Revenue
Episodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.
Non-episodic Based Revenue - Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimated per-visit rates, as applicable.
Hospice Revenue
Revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment rates are daily rates for each of the levels of care the Company delivers. The Company makes adjustments to revenue for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall payment cap, the Company monitors its provider numbers and estimates amounts due back to Medicare if a cap has been exceeded. The Company records these adjustments as a reduction to revenue and increases other accrued liabilities.
Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.
In evaluating the collectability of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type and the status of ongoing disputes with third-party payors. On an annual basis, the historical collection percentages are reviewed by payor and by state and are updated to reflect the recent collection experience of the Company. In order to determine the appropriate reserve rate percentages which ultimately establish the allowance, the Company analyzes historical cash collection patterns by payor and by state. The percentages applied to the aged receivable balances are based on the Company’s historical experience and time limits, if any, for managed care, Medicare, Medicaid and other payors. The Company periodically refines its estimates of the allowance for doubtful accounts based on experience with the estimation process and changes in circumstances.
Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

7

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. Management has evaluated its long-lived assets and did not record impairment charges during the three months ended September 30, 2016 or the three and nine months ended September 30, 2015 . We recorded an impairment charge of $137 related to the closure of one facility during the first quarter of 2016.
Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of favorable leases, lease acquisition costs, patient base, facility trade names and customer relationships. Favorable leases and lease acquisition costs are amortized over the life of the lease of the facility. Patient base is amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.
The Company's indefinite-lived intangible assets consist of trade names and Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit (operating segment) below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. See further discussion at Note 12, Goodwill and Other Indefinite-Lived Intangible Assets .
Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. For claims made after January 1, 2013, the combined self-insured retention was $500 per claim, subject to an additional one-time deductible of $1,000 for California affiliated facilities and a separate, one-time, deductible of $750 for non-California facilities. For all California affiliated facilities, the third-party coverage above these limits was $1,000 per claim, $3,000 per facility, with a $5,000 blanket aggregate limit. For all facilities outside of California, except those located in Colorado, the third-party coverage above these limits was $1,000 per claim, $3,000 per facility, with a $5,000 blanket aggregate and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits was $1,000 per claim and $3,000 per facility for skilled nursing facilities, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.
The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas and Washington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider. These requirements include, but are not limited to, maintaining statutory capital. The Company’s policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis. Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $36,396 and $29,772 as of September 30, 2016 and December 31, 2015 , respectively.
  The Company’s operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $500 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and, effective February 1, 2011, the Company has purchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. As of July 1, 2014, the Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $350 per occurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and pay benefits are managed through a state insurance pool. Outside of California, Texas and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $350 per accident. In all states except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost

8

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $20,328 and $18,276 as of September 30, 2016 and December 31, 2015 , respectively.
In addition, the Company has recorded an asset and equal liability of $4,764 and $2,881 at September 30, 2016 and December 31, 2015 , respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis. See Note 13, Restricted and Other Assets.
The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $300 for each covered person with an additional one-time aggregate individual stop loss deductible of $75 . Beginning 2016, the Company's policy does not include the additional one-time aggregate individual stop loss deductible of $75 . The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $6,305 and $5,074 as of September 30, 2016 and December 31, 2015 , respectively.
The Company believes that adequate provision has been made in the Interim Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows and financial condition would be adversely affected.

Income Taxes — Deferred tax assets have been presented on the balance sheet as a non-current asset for all periods presented related to the early adoption of authoritative guidance for the presentation of deferred taxes. Historically, these assets were classified as either current or non-current assets, as applicable. There is no effect on the condensed consolidated statements of income or condensed consolidated statements of cash flow.

Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.

For interim reporting purposes, the provision for income taxes is determined based on the estimated annual effective income tax rate applied to pre-tax income, adjusted for certain discrete items occurring during the period. In determining the effective income tax rate for interim financial statements, the Company must consider expected annual income, permanent differences between financial reporting and tax recognition of income or expense and other factors. When the Company takes uncertain income tax positions that do not meet the recognition criteria, it records a liability for underpayment of income taxes and related interest and penalties, if any. In considering the need for and magnitude of a liability for such positions, the Company considers the potential outcomes from a review of the positions by the taxing authorities.
In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ.

Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented within total equity in the Company's consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its consolidated

9

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

Stock-Based Compensation — The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables.

Leases and Leasehold Improvements - At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating or capital lease. The Company records rent expense for operating leases that contain scheduled rent increases on a straight-line basis over the term of the lease. The lease term used for straight-line rent expense is calculated from the date the Company is given control of the leased premises through the end of the lease term. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements, as well as the period over which the Company records straight-line rent expense.

Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company's financial management and certain standards are under consideration.

Recent Accounting Standards Adopted by the Company:

In November 2015, the FASB issued updated guidance requiring all deferred tax assets and liabilities be presented as non-current. The Company early adopted this guidance in the first quarter of fiscal year 2016, retrospectively. The Company has classified deferred tax amounts as non-current assets in the condensed consolidated balance sheet for all periods presented. There was no effect on the condensed consolidated statements of income or statement of cash flows. See the Condensed Consolidated Balance Sheets.

In April 2015, the FASB issued updated guidance requiring debt issuance costs related to a recognized debt liability to be presented in the consolidated balance sheet as a direct reduction from the carrying amount of the debt liability. The new standard was effective for the Company in the first quarter of fiscal year 2016. The Company adopted this amendment during the first quarter of 2016. See Note 16, Debt to the Condensed Consolidated Financial Statements.

In August 2014, the FASB issued authoritative guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances. The new standard was effective for the Company in the first quarter of fiscal year 2016. The adoption of this standard did not have a material effect on the Company's financial statements.

Accounting Standards Recently Issued But Not Yet Adopted by the Company:

In August 2016, the FASB issued amended authoritative guidance to reduce the diversity in practice related to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The new provisions target cash flow issues related to (i) debt prepayment or debt extinguishment costs, (ii) settlement of debt instruments with coupon rates that are insignificant relative to effective interest rates, (iii) contingent consideration payments made after a business combination, (iv) proceeds from settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance and bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. This guidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2016, the FASB issued its standard to simplify several aspects the accounting for employee share-based payment transactions, which includes the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance will be effective for annual periods beginning after December 15,

10

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2016, which will be the Company's fiscal year 2017, with early adoption permitted. The Company is evaluating the impact of the standard, but believes the final result will be a decrease in income tax expense and an increase in diluted share counts and net cash provided by operating activities.

In March 2016, the FASB issued authoritative guidance that eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Under the new guidance, the equity method of accounting should be applied prospectively from the date significant influence is obtained. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued authoritative guidance clarifying that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. Under the new guidance, an entity will still need to evaluate whether it is possible that the counterparty will perform under the contract as part of the assessment for hedge accounting. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued its standard to amend the principal-versus-agent implementation guidance and illustrations in the Board’s new revenue standard, which includes accounting implication related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. The guidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The guidance has the same effective date as the new revenue standard and the Company is required to adopt the guidance by using the same transition method it would use to adopt the new revenue standard. The Company is currently assessing whether the adoption of the guidance will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. This guidance applies to all entities and is effective for annual periods beginning after December 15, 2018, which will be the Company's fiscal year 2019, with early adoption permitted. The adoption of this standard is expected to have a material impact on the Company's financial position. The Company is currently assessing the material impact of adopting the guidance on our consolidated financial statements.

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018. Early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new standard supersedes most current revenue recognition guidance, including industry-specific guidance. In July 2015, the FASB formally deferred for one year the effective date of the new revenue standard and decided to permit entities to early adopt the standard. The guidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The Company is currently assessing whether the adoption of the guidance will have a material impact on the Company's consolidated financial statements.

3. COMMON STOCK

11

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Common Stock Repurchase Program

On November 4, 2015 and February 9, 2016, the Company announced that its Board of Directors authorized two stock repurchase programs, under which the Company may repurchase up to $15,000 of its common stock under each program for a period of 12 months. Under these programs, the Company is authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws. During the first quarter of 2016, the Company repurchased 1,452 shares of its common stock for a total of $30,000 and the repurchase programs expired upon the repurchase of the full authorized amount under the plans. The Company did not have stock repurchase programs in place during the three months ended September 30, 2016 or during the three and nine months ended September 30, 2015 .

Common Stock Offering

In February 2015, the Company completed a common stock offering, issuing 5,467 shares at approximately $20.50 per share. After deducting underwriting discounts and commissions of $5,604 , excluding other issuance costs of $357 , the Company received net proceeds of $106,474 . The Company then used $94,000 of the net proceeds to pay off outstanding amounts under its credit facility.

4. COMPUTATION OF NET INCOME PER COMMON SHARE

Basic net income per share is computed by dividing income from continuing operations attributable to The Ensign Group, Inc. stockholders by the weighted average number of outstanding common shares for the period. The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

As discussed in Note 2, Summary of Significant Accounting Policies , all per share and shares outstanding amounts presented below reflect the two-for-one stock split that was effected in the fourth quarter of 2015.

A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016

2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
11,184

 
$
13,159

 
$
31,837

 
$
41,480

Less: net income (loss) attributable to noncontrolling interests
29

 
(313
)
 
184

 
(351
)
Net income attributable to The Ensign Group, Inc.
$
11,155

 
$
13,472

 
$
31,653

 
$
41,831

 
 
 
 
 
 
 
 
Denominator:

 
 
 
 
 
 
Weighted average shares outstanding for basic net income per share
50,541

 
51,144

 
50,498

 
49,981

Basic net income per common share attributable to The Ensign Group, Inc.
$
0.22

 
$
0.26

 
$
0.63

 
$
0.84

         
A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows:

12

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016

2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
11,184

 
$
13,159

 
$
31,837

 
$
41,480

Less: net income (loss) attributable to noncontrolling interests
29

 
(313
)
 
184

 
(351
)
Net income attributable to The Ensign Group, Inc.
$
11,155

 
$
13,472

 
$
31,653

 
$
41,831

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
50,541

 
51,144

 
50,498

 
49,981

Plus: incremental shares from assumed conversion  (1)
1,504

 
1,926

 
1,604

 
1,899

Adjusted weighted average common shares outstanding
52,045

 
53,070

 
52,102

 
51,880

Diluted net income per common share attributable to The Ensign Group, Inc.
$
0.21

 
$
0.25

 
$
0.61

 
$
0.81

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 944 and 808 for the three and nine months ended September 30, 2016 , respectively, and 439 and 201 for the three and nine months ended September 30, 2015 , respectively.

5. FAIR VALUE MEASUREMENTS
Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 :
 
 
September 30, 2016
 
December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
 
$
40,414

 
$

 
$

 
$
41,569

 
$

 
$


Our non-financial assets, which include long-lived assets, including goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. See Note 2, Summary of Significant Accounting Policies for further discussion of the Company's significant accounting policies.

Debt Security Investments - Held to Maturity

At September 30, 2016 and December 31, 2015 , the Company had approximately $35,166 and $34,717 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value. The Company has the intent and ability to hold these debt securities to maturity. Further, as of September 30, 2016 , the debt security investments were held in AA, A and BBB+ rated debt securities.


13

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6. REVENUE AND ACCOUNTS RECEIVABLE

Revenue for the three and nine months ended September 30, 2016 and 2015 is summarized in the following tables:
 
Three Months Ended September 30,
 
2016
 
2015
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
140,487

 
32.8
%
 
$
114,106

 
32.5
%
Medicare
122,292

 
28.6

 
101,212

 
28.8

Medicaid — skilled
22,172

 
5.2

 
18,924

 
5.4

Total Medicaid and Medicare
284,951

 
66.6

 
234,242

 
66.7

Managed care
67,381

 
15.7

 
54,411

 
15.5

Private and other payors (1)
75,733

 
17.7

 
62,433

 
17.8

Revenue
$
428,065

 
100.0
%
 
$
351,086

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in urgent care centers and other ancillary services.

 
Nine Months Ended September 30,
 
2016
 
2015
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
390,825

 
32.0
%
 
$
316,608

 
32.7
%
Medicare
352,013

 
28.8

 
290,964

 
30.0

Medicaid — skilled
64,499

 
5.3

 
51,206

 
5.3

Total Medicaid and Medicare
807,337

 
66.1

 
658,778

 
68.0

Managed care
197,102

 
16.1

 
148,374

 
15.3

Private and other payors (1)
217,377

 
17.8

 
161,519

 
16.7

Revenue
$
1,221,816

 
100.0
%
 
$
968,671

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in urgent care centers and other ancillary services.

Accounts receivable as of September 30, 2016 and December 31, 2015 is summarized in the following table:
 
September 30, 2016
 
December 31, 2015
Medicaid
$
106,457

 
$
90,677

Managed care
61,901

 
56,411

Medicare
52,562

 
49,970

Private and other payors
48,505

 
42,276

 
269,425

 
239,334

Less: allowance for doubtful accounts
(36,960
)
 
(30,308
)
Accounts receivable, net
$
232,465

 
$
209,026



14

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7. BUSINESS SEGMENTS

The Company has two reportable operating segments: (1) transitional, skilled and assisted living services (TSA services), which includes the operation of skilled nursing facilities and assisted and independent living facilities and is the largest portion of the Company's business, and (2) home health and hospice services, which includes the Company's home health, home care and hospice businesses. The Company's Chief Executive Officer, who is the chief operating decision maker, or CODM, reviews financial information at the operating segment level.

The Company also reports an “all other” category that includes results from its urgent care centers and other ancillary operations. The urgent care centers and other ancillary operations are neither significant individually nor in aggregate and therefore do not constitute a reportable segment. The reporting segments are business units that offer different services and that are managed separately to provide greater visibility into those operations. The "all other" category also includes operating expenses that the Company does not allocate to operating segments as these expenses are not included in the segment operating performance measures evaluated by the CODM. See also Note 12, Goodwill and Other Indefinite-Lived Intangible Assets for comparative information on changes in the carrying amount of goodwill by segment.

As of September 30, 2016 , TSA services included 209 wholly-owned affiliated skilled nursing facilities that provide skilled nursing and rehabilitative care services, as well as wholly-owned affiliated assisted and independent living facilities that provide room and board and social services. Home health, home care and hospice services were provided to patients through the Company's 38 agencies. The Company's urgent care services, which is included in the "all other" category, were provided to patients by the Company's wholly owned urgent care operating subsidiaries. See also Note 19, Divestitures for further information relating to the sale of urgent care centers. As of September 30, 2016 , the Company held majority membership interests in other ancillary operations, which operating results are included in the "all other" category.

The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss, and are included in the "all other" category in the selected segment financial data that follows. The accounting policies of the reporting segments are the same as those described in Note 2 , Summary of Significant Accounting Policies. The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below.

Segment revenues by major payor source were as follows:

 
 
Three Months Ended September 30, 2016
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
Medicaid
 
$
137,929

 
$
2,558

 
$

 
$
140,487

 
32.8
%
Medicare
 
101,655

 
20,637

 

 
122,292

 
28.6

Medicaid-skilled
 
22,172

 

 

 
22,172

 
5.2

Subtotal
 
261,756

 
23,195

 

 
284,951

 
66.6

Managed care
 
62,806

 
4,575

 

 
67,381

 
15.7

Private and other
 
64,001

 
1,750

 
9,982

 
75,733

 
17.7

Total revenue
 
$
388,563

 
$
29,520

 
$
9,982

 
$
428,065

 
100.0
%

15

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
 
Three Months Ended September 30, 2015
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
Medicaid
 
$
111,613

 
$
2,493

 
$

 
$
114,106

 
32.5
%
Medicare
 
83,410

 
17,802

 

 
101,212

 
28.8

Medicaid-skilled
 
18,924

 

 

 
18,924

 
5.4

Subtotal
 
213,947

 
20,295

 

 
234,242

 
66.7

Managed care
 
51,099

 
3,312

 

 
54,411

 
15.5

Private and other
 
52,115

 
1,643

 
8,675

 
62,433

 
17.8

Total revenue
 
$
317,161

 
$
25,250

 
$
8,675

 
$
351,086

 
100.0
%
 
 
Nine Months Ended September 30, 2016
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
Medicaid
 
$
382,981

 
$
7,844

 
$

 
$
390,825

 
32.0
%
Medicare
 
292,483

 
59,530

 

 
352,013

 
28.8

Medicaid-skilled
 
64,499

 

 

 
64,499

 
5.3

Subtotal
 
739,963

 
67,374

 

 
807,337

 
66.1

Managed care
 
184,466

 
12,636

 

 
197,102

 
16.1

Private and other
 
180,641

 
4,669

 
32,067

 
217,377

 
17.8

Total revenue
 
$
1,105,070

 
$
84,679

 
$
32,067

 
$
1,221,816

 
100.0
%
 
 
Nine Months Ended September 30, 2015
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
Medicaid
 
$
309,781

 
$
6,827

 
$

 
$
316,608

 
32.7
%
Medicare
 
246,931

 
44,033

 

 
290,964

 
30.0

Medicaid-skilled
 
51,206

 

 

 
51,206

 
5.3

Subtotal
 
607,918

 
50,860

 

 
658,778

 
68.0

Managed care
 
140,447

 
7,927

 

 
148,374

 
15.3

Private and other
 
129,206

 
4,722

 
27,591

 
161,519

 
16.7

Total revenue
 
$
877,571

 
$
63,509

 
$
27,591

 
$
968,671

 
100.0
%


       

16

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table sets forth selected financial data consolidated by business segment:
 
 
Three Months Ended September 30, 2016
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Revenue from external customers
 
$
388,563

 
$
29,520

 
$
9,982

 

 
$
428,065

Intersegment revenue (1)
 
694

 

 
574

 
(1,268
)
 

Total revenue
 
$
389,257

 
$
29,520

 
$
10,556

 
$
(1,268
)
 
$
428,065

Segment income (loss) (2)
 
$
31,807

 
$
4,499

 
$
(16,266
)
 
$

 
$
20,040

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
(1,899
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
18,141

Depreciation and amortization
 
$
8,680

 
$
215

 
$
2,016

 
$

 
$
10,911

 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.
(2) Segment income excludes general and administrative expense for TSA services and home health and hospice businesses. General and administrative expense is included in "All Other" category.
 
 
Three Months Ended September 30, 2015
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Revenue from external customers
 
$
317,161

 
$
25,250

 
$
8,675

 

 
$
351,086

Intersegment revenue (1)
 
694

 

 
246

 
(940
)
 

Total revenue
 
$
317,855

 
$
25,250

 
$
8,921

 
$
(940
)
 
$
351,086

Segment income (loss) (2)
 
$
36,226

 
$
4,067

 
$
(18,705
)
 
$

 
$
21,588

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
(560
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
21,028

Depreciation and amortization
 
$
5,542

 
$
258

 
$
1,488

 
$

 
$
7,288

 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.
(2) Segment income excludes general and administrative expense for TSA services and home health and hospice businesses. General and administrative expense is included in "All Other" category.
 
 
Nine Months Ended September 30, 2016
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Revenue from external customers
 
$
1,105,070

 
$
84,679

 
$
32,067

 
 
 
$
1,221,816

Intersegment revenue (1)
 
2,185

 

 
1,539

 
(3,724
)
 

Total revenue
 
$
1,107,255

 
$
84,679

 
$
33,606

 
$
(3,724
)
 
$
1,221,816

Segment income (loss) (2)
 
$
98,761

 
$
12,024

 
$
(54,622
)
 
$

 
$
56,163

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
(4,202
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
51,961

Depreciation and amortization
 
$
22,757

 
$
711

 
$
5,513

 
$

 
$
28,981

 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.
(2) Segment income excludes general and administrative expense for TSA services and home health and hospice businesses. General and administrative expense is included in "All Other" category.

17

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
 
Nine Months Ended September 30, 2015
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Revenue from external customers
 
$
877,571

 
$
63,509

 
$
27,591

 
 
 
$
968,671

Intersegment revenue (1)
 
1,741

 

 
637

 
(2,378
)
 

Total revenue
 
$
879,312

 
$
63,509

 
$
28,228

 
$
(2,378
)
 
$
968,671

Segment income (loss) (2)
 
$
108,592

 
$
9,738

 
$
(49,585
)
 
$

 
$
68,745

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
(1,432
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
67,313

Depreciation and amortization
 
$
15,368

 
$
703

 
$
4,114

 
$

 
$
20,185

 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.
(2) Segment income excludes general and administrative expense for TSA services and home health and hospice businesses. General and administrative expense is included in "All Other" category.

8. ACQUISITIONS
The Company’s acquisition focus is to purchase or lease operating subsidiaries that are complementary to the Company’s current affiliated operations, accretive to the Company's business or otherwise advance the Company's strategy. The results of all the Company’s operating subsidiaries are included in the accompanying Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company also enters into long-term leases that may include options to purchase the affiliated facilities. As a result, from time to time, the Company will acquire affiliated facilities that the Company has been operating under third-party leases.
During the nine months ended September 30, 2016 , the Company expanded its operations with the addition of two home health agencies and four hospice agencies. In addition, the Company acquired nineteen stand-alone skilled nursing operations through purchases, a long-term master lease agreement and a sub-lease agreement. As part of this acquisition, the Company acquired the real estate at three of the skilled nursing operations and entered into long term leases for sixteen skilled nursing operations. The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company has also invested in new ancillary services that are complementary to its existing TSA services and home health and hospice businesses. The aggregate purchase price for these acquisitions for the nine months ended September 30, 2016 was $64,021 . The expansion of skilled nursing operations added 2,336 operational skilled nursing beds and thirteen operational assisted living units operated by the Company's operating subsidiaries. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.
The Company's operating subsidiaries opened five newly constructed post-acute care campuses under long-term lease agreements, which added 386 operational skilled nursing beds and 160 operational assisted living units, operated by the Company's operating subsidiaries.
The table below presents the allocation of the purchase price for the operations acquired in business combinations during the nine months ended September 30, 2016 and 2015 :

18

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
Nine Months Ended September 30,
 
2016
 
2015
Land
$
1,054

 
$
10,879

Building and improvements
21,063

 
48,822

Equipment, furniture, and fixtures
8,265

 
3,032

Assembled occupancy
1,299

 
697

Definite-lived intangible assets
363

 
360

Goodwill
30,343

 
9,467

Favorable leases
393

 
10,201

Other indefinite-lived intangible assets
1,241

 
5,355

    Total acquisitions
$
64,021

 
$
88,813


9. ACQUISITIONS - PRO FORMA FINANCIAL INFORMATION

The Company has established an acquisition strategy that is focused on identifying acquisitions within its target markets that offer the greatest opportunity for investment return at attractive prices. The facilities acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming facilities, is often inadequate, inaccurate or unavailable. As a result, the Company has developed an acquisition assessment program that is based on existing and potential resident mix, the local available market, referral sources and operating expectations based on the Company's experience with its existing facilities. Following an acquisition, the Company implements a well-developed integration program to provide a plan for transition and generation of profits from facilities that have a history of significant operating losses. Consequently, the Company believes that prior operating results are not meaningful as the information is not generally representative of the Company's current operating results or indicative of the integration potential of its newly acquired facilities.

The following table represents pro forma results of consolidated operations as if the acquisitions acquired from January 1, 2016 through the issuance date of the financial statements had occurred at the beginning of 2015, after giving effect to certain adjustments.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016

2015
 
2016
 
2015
Revenue
$
429,305

 
$
394,281

 
$
1,283,095

 
$
1,098,578

Net income attributable to The Ensign Group, Inc.
11,171

 
13,502

 
32,036

 
42,150

Diluted net income per common share
$
0.21

 
$
0.25

 
$
0.61

 
$
0.81

Our pro forma assumptions are as follows:

Revenues and operating costs were based on actual results from the prior operator or from regulatory filings where available. If actual results were not available, revenues and operating costs were estimated based on available partial operating results of the prior operator of the facility, or if no information was available, estimates were derived from the Company’s post-acquisition operating results for that particular facility. Prior year results for the 2016 acquisitions were obtained from available financial information provided by prior operators or available cost reports filed by the prior operators.
 
Interest expense is based upon the purchase price and average cost of debt borrowed during each respective year when applicable, and depreciation is calculated using the purchase price allocated to the related assets through acquisition accounting.

The foregoing unaudited pro forma information is not indicative of what the results of operations would have been if the acquisitions had actually occurred at the beginning of the periods presented, and is not intended as a projection of future results or trends. Included in the table above are pro forma revenue generated during the three and nine months ended September 30, 2016 , by individually immaterial business acquisitions completed through the issuance date of the Interim Financial Statements

19

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


of $ 1,240 and $61,279 , respectively, and $43,195 and $129,907 for the three and nine months ended September 30, 2015 , respectively. Included in the table above are pro forma income generated during the three and nine months ended September 30, 2016 , by individually immaterial business acquisitions completed through the issuance date of the financial statements of $16 and $383 , respectively, and $30 and $319 , for the three and nine months ended September 30, 2015 , respectively.

10. PROPERTY AND EQUIPMENT— Net
Property and equipment, net consist of the following:
 
September 30, 2016
 
December 31, 2015
Land
$
43,075

 
$
41,451

Buildings and improvements
178,542

 
151,434

Equipment
149,872

 
114,752

Furniture and fixtures
5,692

 
5,504

Leasehold improvements
75,328

 
68,405

Construction in progress
2,262

 
781

 
454,771

 
382,327

Less: accumulated depreciation
(104,516
)
 
(82,694
)
Property and equipment, net
$
350,255

 
$
299,633


See Note 8, Acquisitions for information on acquisitions during the nine months ended September 30, 2016 .

11. INTANGIBLE ASSETS — Net
 
 
Weighted Average Life (Years)
 
September 30, 2016
 
December 31, 2015
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
Intangible Assets
 
 
 
 
Net
 
 
 
Net
Lease acquisition costs
 
24.7
 
$
483

 
$
(73
)
 
$
410

 
$
604

 
$
(577
)
 
$
27

Favorable leases
 
28.0
 
43,248

 
(4,923
)
 
38,325

 
43,248

 
(2,923
)
 
40,325

Assembled occupancy
 
0.3
 
1,897

 
(1,877
)
 
20

 
4,779

 
(4,476
)
 
303

Facility trade name
 
30.0
 
733

 
(263
)
 
470

 
733

 
(244
)
 
489

Customer relationships
 
18.4
 
4,933

 
(1,183
)
 
3,750

 
5,300

 
(1,013
)
 
4,287

Total
 
 
 
$
51,294

 
$
(8,319
)
 
$
42,975

 
$
54,664

 
$
(9,233
)
 
$
45,431


Amortization expense was $1,429 and $3,926 for the three and nine months ended September 30, 2016 , respectively, and $987 and $2,805 for the three and nine months ended September 30, 2015 , respectively. Of the $3,926 in amortization expense incurred during the nine months ended September 30, 2016 , approximately $1,583 related to the amortization of patient base intangible assets at recently acquired facilities, which is typically amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. In addition, the Company identified intangible assets that have become fully amortized during the year and removed the fully amortized balances from the gross asset and accumulated amortization amounts.

20

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Estimated amortization expense for each of the years ending December 31 is as follows:
Year
Amount
2016 (remainder)
$
2,261

2017
2,989

2018
2,989

2019
2,667

2020
2,211

2021
2,161

Thereafter
27,697

 
$
42,975


12. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The Company performs its annual goodwill impairment analysis during the fourth quarter of each year for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment. The Company tests for impairment by comparing the net assets of each reporting unit to their respective fair values. The Company determines the estimated fair value of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the difference between the goodwill carrying value and the implied fair value.

The following table represents activity in goodwill by segment as of and for the nine months ended September 30, 2016 :
 
Goodwill
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total
January 1, 2016
$
17,759

 
$
16,102

 
$
7,025

 
$
40,886

Less: Dispositions

 

 
$
(2,512
)
 
$
(2,512
)
Reclass to held for sale

 

 
$
(1,591
)
 
$
(1,591
)
Purchase price adjustment

 

 
(26
)
 
(26
)
 
17,759

 
16,102

 
2,896

 
36,757

Additions
26,415

 
1,799

 
2,129

 
30,343

September 30, 2016
$
44,174

 
$
17,901

 
$
5,025

 
$
67,100


As of September 30, 2016 , the Company anticipates that total goodwill recognized will be fully deductible for tax purposes. See further discussion of goodwill acquired at Note 8, Acquisitions .

Other indefinite-lived intangible assets consists of the following:
 
September 30, 2016
 
December 31, 2015
Trade name
$
1,146

 
$
1,915

Medicare and Medicaid licenses
17,940

 
16,731

 
$
19,086

 
$
18,646



21

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


13. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:
 
September 30, 2016

December 31, 2015
Debt issuance costs, net
$
3,832

 
$
2,021

Long-term insurance losses recoverable asset
4,764

 
2,881

Deposits with landlords
4,617

 
3,969

Capital improvement reserves with landlords and lenders
956

 
760

Note receivable from sale of urgent care centers
700

 

Restricted and other assets
$
14,869

 
$
9,631

Included in restricted and other assets as of September 30, 2016 are anticipated insurance recoveries related to the Company's general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Update issued by the FASB.

14. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:
 
September 30, 2016

December 31, 2015
Quality assurance fee
$
5,917

 
$
6,120

Refunds payable
16,701

 
13,252

Deferred revenue
8,461

 
6,696

Cash held in trust for patients
2,491

 
3,016

Resident deposits
5,843

 
5,884

Dividends payable
2,051

 
2,072

Property taxes
9,267

 
4,230

Charges related to operational closure
1,979

 

Other
4,821

 
4,935

Other accrued liabilities
$
57,531

 
$
46,205

Quality assurance fee represents amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds. Refunds payable includes payables related to overpayments and duplicate payments from various payor sources. Deferred revenue occurs when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to patients. Cash held in trust for patients reflects monies received from, or on behalf of, patients. Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the accompanying condensed consolidated balance sheets.

15. INCOME TAXES
The Company is not currently under examination by any major income tax jurisdiction. During 2016, the statutes of limitations will lapse on the Company's 2012 Federal tax year and certain 2011 and 2012 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three and nine months ended September 30, 2016 or 2015.
The Company recorded total pre-tax losses related to the closure of one facility in the first quarter of 2016 for a total amount of $7,935 . The Company recorded estimated tax benefits of $3,076 for the nine months ended September 30, 2016 related to the losses. Similar charges did not occur during the three months ended September 30, 2016 or the three and nine months ended September 30, 2015 . See Note 18, Leases .

22

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


16. DEBT
Long-term debt consists of the following:
 
September 30, 2016
 
December 31, 2015
Term loan with SunTrust, interest payable quarterly
$
150,000

 
$

Credit facility with SunTrust
7,000

 
85,000

Mortgage loans and promissory note, principal and interest payable monthly, interest at fixed rate
14,190

 
14,671

 
171,190

 
99,671

Less current maturities
(8,141
)
 
(620
)
Less debt issuance costs
(575
)
 

 
$
162,474