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 March 31, 2017 .
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 April 27, 2017 , 50,702,971 shares of the registrant’s common stock were outstanding.
 
 
 
 
 



THE ENSIGN GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2017
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 31.1
 
 Exhibit 31.2
 
 Exhibit 32.1
 
 Exhibit 32.2
 
 Exhibit 101




PART I.

Item 1.         Financial Statements

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

 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,507

 
$
57,706

Accounts receivable—less allowance for doubtful accounts of $40,422 and $39,791 at March 31, 2017 and December 31, 2016, respectively
242,863

 
244,433

Investments—current
9,829

 
11,550

Prepaid income taxes
50

 
302

Prepaid expenses and other current assets
21,374

 
19,871

Total current assets
305,623

 
333,862

Property and equipment, net
490,582

 
484,498

Insurance subsidiary deposits and investments
25,176

 
23,634

Escrow deposits
2,394

 
1,582

Deferred tax asset
23,013

 
23,073

Restricted and other assets
13,241

 
12,614

Intangible assets, net
34,524

 
35,076

Goodwill
68,926

 
67,100

Other indefinite-lived intangibles
20,990

 
19,586

Total assets
$
984,469

 
$
1,001,025

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,828

 
$
38,991

Accrued charge related to class action lawsuit (Note 18)
11,000

 

Accrued wages and related liabilities
75,276

 
84,686

Accrued self-insurance liabilities—current
20,461

 
21,359

Other accrued liabilities
61,154

 
58,763

Current maturities of long-term debt
8,155

 
8,129

Total current liabilities
209,874

 
211,928

Long-term debt—less current maturities
258,478

 
275,486

Accrued self-insurance liabilities—less current portion
46,827

 
43,992

Deferred rent and other long-term liabilities
10,980

 
9,124

Total liabilities
526,159

 
540,530

 
 
 
 
Commitments and contingencies (Notes 15, 17 and 18)

 

Equity:
 
 
 
Ensign Group, Inc. stockholders' equity:
 
 
 
Common stock; $0.001 par value; 75,000 shares authorized; 52,952 and 50,657 shares issued and outstanding at March 31, 2017, respectively, and 52,787 and 50,838 shares issued and outstanding at December 31, 2016, respectively (Note 3)
53

 
52

Additional paid-in capital (Note 3)
255,302

 
252,493

Retained earnings
235,689

 
235,021

Common stock in treasury, at cost, 1,863 and 1,520 shares at March 31, 2017 and December 31, 2016, respectively (Note 3)
(37,185
)
 
(31,117
)
Total Ensign Group, Inc. stockholders' equity
453,859

 
456,449

Non-controlling interest
4,451

 
4,046

Total equity
458,310

 
460,495

Total liabilities and equity
$
984,469

 
$
1,001,025

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 March 31,
 
2017

2016
 
 
Revenue
$
441,739

 
$
383,234

Expense:
 
 
 
Cost of services
355,486

 
306,308

Charge related to class action lawsuit (Note 18)
11,000

 

Losses related to operational closures (Note 7 and 17)
4,017

 
7,935

Rent—cost of services (Note 17)
31,900

 
26,991

General and administrative expense
21,270

 
17,387

Depreciation and amortization
10,514

 
8,298

Total expenses
434,187

 
366,919

Income from operations
7,552

 
16,315

Other income (expense):
 
 
 
Interest expense
(3,445
)
 
(1,370
)
Interest income
290

 
234

Other expense, net
(3,155
)
 
(1,136
)
Income before provision for income taxes
4,397

 
15,179

Provision for income taxes
1,441

 
5,889

Net income
2,956

 
9,290

Less: net income attributable to noncontrolling interests
116


118

Net income attributable to The Ensign Group, Inc.
$
2,840

 
$
9,172

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

Basic
$
0.06

 
$
0.18

Diluted
$
0.05

 
$
0.18

Weighted average common shares outstanding:
 
 
 
Basic
50,767

 
50,679

Diluted
52,633

 
52,334

 
 
 
 
Dividends per share
$
0.0425

 
$
0.0400

See accompanying notes to condensed consolidated financial statements.

2


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
2,956

 
$
9,290

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,514

 
8,298

Amortization of deferred financing fees
254

 
154

Long-lived asset impairment
111

 
137

Write-off of deferred financing fees

 
197

Deferred income taxes
61

 
21

Provision for doubtful accounts
7,350

 
5,765

Share-based compensation
2,224

 
1,885

Excess tax benefit from share-based compensation (Note 2)

 
(685
)
Change in operating assets and liabilities
 
 
 
Accounts receivable
(6,900
)
 
(13,910
)
Prepaid income taxes
252

 
4,887

Prepaid expenses and other assets
(2,790
)
 
(615
)
Insurance subsidiary deposits and investments
179

 
1,759

Charge related to class action lawsuit (Note 18)
11,000

 

Losses related to operational closures (Note 17)
3,906

 
7,798

Accounts payable
(4,044
)
 
(1,491
)
Accrued wages and related liabilities
(9,410
)
 
(11,323
)
Income taxes payable
1,175

 
13

Other accrued liabilities
938

 
(1,473
)
Accrued self-insurance liabilities
1,568

 
1,906

Deferred rent liability
242

 
82

Net cash provided by operating activities
19,586

 
12,695

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(11,997
)
 
(18,231
)
Cash payment for business acquisitions
(8,693
)
 
(490
)
Cash payment for asset acquisitions
(310
)
 

Escrow deposits
(2,394
)
 
(1,646
)
Escrow deposits used to fund business acquisitions
1,582

 
400

Cash proceeds from the sale of property and equipment and insurance proceeds
608

 
197

Restricted and other assets
(193
)
 
(334
)
Net cash used in investing activities
(21,397
)
 
(20,104
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility (Note 15)
345,000

 
156,750

Payments on revolving credit facility and other debt (Note 15)
(362,015
)
 
(110,152
)
Issuance of common stock upon exercise of options
957

 
3,377

Repurchase of shares of common stock (Note 3)
(6,068
)
 
(30,000
)
Dividends paid
(2,179
)
 
(2,072
)
Excess tax benefit from share-based compensation (Note 2)

 
692

Purchase of non-controlling interest
(83
)
 

Payments of deferred financing costs

 
(1,385
)
Net cash (used in) provided by financing activities
(24,388
)
 
17,210

Net (decrease) increase in cash and cash equivalents
(26,199
)
 
9,801

Cash and cash equivalents beginning of period
57,706

 
41,569

Cash and cash equivalents end of period
$
31,507

 
$
51,370

See accompanying notes to condensed consolidated financial statements.

3


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



 
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
4,076

 
$
1,149

Income taxes
$
8

 
$
275

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
5,708

 
$
5,329


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 other ancillary businesses. As of March 31, 2017 , the Company operated 212 facilities, 40 home health, hospice and home care agencies 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 17,900 operational skilled nursing beds and 4,500 assisted living and independent living units. As of March 31, 2017 , the Company owned 51 of its 212 affiliated facilities and leased an additional 161 facilities through long-term lease arrangements and had options to purchase 10 of those 161 facilities. As of December 31, 2016 , the Company owned 50 of its 210 affiliated facilities and leased an additional 160 facilities through long-term lease arrangements, and had options to purchase nine of those 160 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 March 31, 2017 and for the three months ended March 31, 2017 and 2016 (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, 2016 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 (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 condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of condensed consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its condensed consolidated statements of income.
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

5

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


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 basis.
Revenue from the Medicare and Medicaid programs accounted for 68.2% , and 66.8% of the Company's revenue for the three months ended March 31, 2017 and 2016 , 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 months ended March 31, 2017 and 2016 .
The Company’s service specific revenue recognition policies are as follows:
Skilled Nursing Revenue
The Company’s revenue is derived primarily from providing long-term healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients. For patients 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.
Assisted and Independent Living Revenue
The Company's revenue is recorded when services are rendered on the date services are provided at amounts billable to individual residents and consists of fees for basic housing and assisted living care. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. For patients under reimbursement arrangements with Medicaid, revenue is recorded based on contractually agreed-upon amounts or rate on a per resident, daily basis or as services. Revenue for certain ancillary charges is recognized as services are provided, and such fees are billed monthly in arrears.
Home Health Revenue
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

6

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


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.
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 recorded an impairment charge of $111 and $137 related to the closure of facilities during the three months ended March 31, 2017 and 2016, respectively.
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.

7

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


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 below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. See further discussion at Note 11, 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, 2017, the combined self-insured retention was $500 per claim, subject to an additional one-time deductible of $750 for California affiliated facilities and a separate, one-time, deductible of $1,000 for non-California facilities. For all affiliated facilities, 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 limit 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 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 $36,646 and $34,735 as of March 31, 2017 and December 31, 2016 , 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 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 $21,743 and $20,873 as of March 31, 2017 and December 31, 2016 , respectively.
In addition, the Company has recorded an asset and equal liability of $4,473 and $4,104 at March 31, 2017 and December 31, 2016 , 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 12, 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 $4,426 and $5,639 as of March 31, 2017 and December 31, 2016 , 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

8

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


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 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.
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 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 March 2016, the FASB issued a new standard to simplify several aspects of 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. The new standard was effective for the Company in the first quarter of fiscal year 2017. Under the previous guidance, excess tax benefits and deficiencies from share-based compensation arrangements were recorded in equity when the awards vested or were settled. The new guidance requires prospective recognition of excess tax benefits and deficiencies in the income statement, resulting in the recognition of excess tax benefits in income tax expense, rather than in paid-in-capital, for the three months ended March 31, 2017 .

In addition, under the new guidance, excess income tax benefits from share-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. The Company has elected to apply the cash flow

9

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


classification guidance prospectively, resulting in an increase to operating cash flow for the three months ended March 31, 2017 , and the prior year period has not been adjusted.

The Company has also elected to continue to estimate the expected forfeitures rather than electing to account for forfeitures as they occur. Finally, the adoption of the guidance requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding.

Accounting Standards Recently Issued But Not Yet Adopted by the Company

In January 2017, the FASB issued amended authoritative guidance to clarify the definition of a business and reduce diversity in practice related to the evaluation of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new provisions provide the requirements needed for an integrated set of assets and activities (the set) to be a business and also establish a practical way to determine when a set is not a business. The more robust framework helps entities to narrow the definition of outputs created by the set and align it with how outputs are described in the new revenue standard. This guidance is effective for annual and interim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted in certain cases. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test. The new provisions eliminate step 2 from the goodwill impairment test and the shifts the concept of impairment from a measure of loss when comparing the implied fair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test. This guidance is effective for annual periods beginning after December 15, 2019, which will be the Company's fiscal year 2020, 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 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 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's evaluation of the adoption method and impact to the consolidated financial statements is ongoing and being performed concurrently with the new revenue standard.

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 Company is currently evaluating the impact this guidance will

10

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


have on its consolidated financial statements but expects this adoption will result in a significant increase in the assets and liabilities on its consolidated balance sheet.

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, and may be applied retrospectively to each period presented (full retrospective method) or retrospectively with the cumulative effect recognized in beginning retained earnings as of the date of adoption (modified retrospective method). 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. In December 2016, the FASB made certain technical corrections to further clarify the core revenue recognition principles, primarily in response to feedback from several sources, including the FASB/IASB Transition Resource Group. The guidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The Company initiated an adoption plan in fiscal year 2015, beginning with preliminary evaluation of the standard, and will continue by performing additional analysis of revenue streams and transactions for which the accounting may change under the new standard. The adoption plan, which also includes evaluation of the adoption method and the impact to the consolidated financial statements, is ongoing and will be completed by the end of fiscal year 2017. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations and significant judgments in measurement and recognition. The FASB has issued and may issue in the future, interpretive guidance, which may impact its evaluation, however the Company currently anticipates adopting the standard as of January 1, 2018, using the modified retrospective method.

3. COMMON STOCK
On February 8, 2017, the Company announced that its Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $30,000 of its common stock under the program for a period of 12 months . Under this program, 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. The stock repurchase program is scheduled to expire on February 8, 2018 . During the first quarter of 2017, the Company repurchased 343 shares of its common stock for a total of $6,068 .

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 . 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.

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.

The adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting: Topic 718 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding. A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:

11

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


 
Three Months Ended March 31,
 
2017

2016
Numerator:
 
 
 
Net income
$
2,956

 
$
9,290

Less: net income attributable to noncontrolling interests
116

 
118

Net income attributable to The Ensign Group, Inc.
$
2,840

 
$
9,172

 
 
 
 
Denominator:

 
 
Weighted average shares outstanding for basic net income per share
50,767

 
50,679

Basic net income per common share attributable to The Ensign Group, Inc.
$
0.06

 
$
0.18

         
A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows:
 
Three Months Ended March 31,
 
2017

2016
Numerator:
 
 
 
Net income
$
2,956

 
$
9,290

Less: net income attributable to noncontrolling interests
116

 
118

Net income attributable to The Ensign Group, Inc.
$
2,840

 
$
9,172

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding
50,767

 
50,679

Plus: incremental shares from assumed conversion  (1)
1,866

 
1,655

Adjusted weighted average common shares outstanding
52,633

 
52,334

Diluted net income per common share attributable to The Ensign Group, Inc.
$
0.05

 
$
0.18

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,272 and 725 for the three months ended March 31, 2017 and 2016 , 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 March 31, 2017 and December 31, 2016 :
 
 
March 31, 2017
 
December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
 
$
31,507

 
$

 
$

 
$
57,706

 
$

 
$


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


12

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


At March 31, 2017 and December 31, 2016 , the Company had approximately $35,005 and $35,184 , 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 March 31, 2017 , the debt security investments were held in AA, A and BBB+ rated debt securities.

6. REVENUE AND ACCOUNTS RECEIVABLE

Revenue for the three months ended March 31, 2017 and 2016 is summarized in the following tables:
 
Three Months Ended March 31,
 
2017
 
2016
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
148,271

 
33.6
%
 
$
123,641

 
32.3
%
Medicare
129,920

 
29.4

 
110,278

 
28.8

Medicaid — skilled
23,017

 
5.2

 
21,665

 
5.7

Total Medicaid and Medicare
301,208

 
68.2

 
255,584

 
66.8

Managed care
75,562

 
17.1

 
64,543

 
16.8

Private and other payors (1)
64,969

 
14.7

 
63,107

 
16.4

Revenue
$
441,739

 
100.0
%
 
$
383,234

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in other services segment and ancillary services for both the three months ended March 31, 2017 and 2016 and urgent care centers for the three months ended March 31, 2016 .


Accounts receivable as of March 31, 2017 and December 31, 2016 is summarized in the following table:
 
March 31, 2017
 
December 31, 2016
Medicaid
$
108,468

 
$
111,031

Managed care
67,690

 
66,346

Medicare
53,547

 
55,500

Private and other payors
53,580

 
51,347

 
283,285

 
284,224

Less: allowance for doubtful accounts
(40,422
)
 
(39,791
)
Accounts receivable, net
$
242,863

 
$
244,433


7. BUSINESS SEGMENTS

The Company has three reportable operating segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities; (2) assisted and independent living services, which includes the operation of assisted and independent living facilities; and (3) 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 our chief operating decision maker, or CODM, reviews financial information at the operating segment level.

The Company also reports an “all other” category that includes revenue from its mobile diagnostics and other ancillary operations for both the three months ended March 31, 2017 and 2016 and urgent care centers for the three months ended March 31, 2016 . The Company completed the sale of its urgent care centers in 2016. These 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 expansion of the Company's assisted and independent living services led it to separate the assisted and independent living services into a distinct reportable segment in the fourth quarter of 2016. Previously, the Company had two reportable segments: (1) transitional, skilled and assisted living services (TSA services), which includes the operation of skilled nursing facilities and assisted living facilities; and (2) home health and hospice services. The Company has presented the financial information for the three months ended March 31, 2016 on a comparative basis to conform with the current year segment presentation. Certain revenues by payor source were reclassified

13

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


between Medicaid and "Private and other" to conform with the current year segment presentation. See also Note 11, Goodwill and Other Indefinite-Lived Intangible Assets for comparative information on changes in the carrying amount of goodwill by segment.

As of March 31, 2017 , transitional and skilled services included 150 wholly-owned affiliated skilled nursing facilities and 21 campuses that provide skilled nursing and rehabilitative care services. The Company provided room and board and social services through 41 wholly-owned affiliated assisted and independent living facilities and 21 campuses. Home health, home care and hospice services were provided to patients through 40 affiliated agencies. As of March 31, 2017 , 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 March 31, 2017
 
 
 
Transitional and Skilled Services (2)
 
Assisted and Independent Living Services (2)
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
138,825

 
$
7,036

 
$
2,410

 
$

 
$
148,271

 
33.6
%
 
Medicare
 
107,928

 

 
21,992

 

 
129,920

 
29.4

 
Medicaid-skilled
 
23,017

 

 

 

 
23,017

 
5.2

 
Subtotal
 
269,770

 
7,036

 
24,402

 

 
301,208

 
68.2
%
 
Managed care
 
70,357

 

 
5,205

 

 
75,562

 
17.1

 
Private and other
 
32,212

 
25,310

 
2,526

 
4,921

(1)
64,969

 
14.7

 
Total revenue
 
$
372,339

 
$
32,346

 
$
32,133

 
$
4,921

 
$
441,739

 
100.0
%
 
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for both the three months ended March 31, 2017 and 2016 and urgent care centers for the three months ended March 31, 2016.
(2) Certain revenues by payor source were reclassified between Medicaid and "Private and other" to conform with the current year segment presentation.
 
 
Three Months Ended March 31, 2016
 
 
 
Transitional and Skilled Services (2)
 
Assisted and Independent Living Services (2)
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
114,822

 
$
6,245

 
$
2,574

 
$

 
$
123,641

 
32.3
%
 
Medicare
 
91,644

 

 
18,634

 

 
110,278

 
28.8

 
Medicaid-skilled
 
21,665

 

 

 

 
21,665

 
5.7

 
Subtotal
 
228,131

 
6,245

 
21,208

 

 
255,584

 
66.8

 
Managed care
 
60,538

 

 
4,005

 

 
64,543

 
16.8

 
Private and other
 
26,543

 
23,926

 
1,453

 
11,185

(1)
63,107

 
16.4

 
Total revenue
 
$
315,212

 
$
30,171

 
$
26,666

 
$
11,185

 
$
383,234

 
100.0
%
 
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for both the three months ended March 31, 2017 and 2016 and urgent care centers for the three months ended March 31, 2016.
(2) Certain revenues by payor source were reclassified between Medicaid and "Private and other" to conform with the current year segment presentation.
     
The following table sets forth selected financial data consolidated by business segment:

14

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


 
 
Three Months Ended March 31, 2017
 
 
Transitional and Skilled Services (3)
 
Assisted and Independent Living Services (3)
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Revenue from external customers
 
$
372,339

 
$
32,346

 
$
32,133

 
$
4,921

 
 
 
$
441,739

Intersegment revenue (1)
 
744

 

 

 
884

 
(1,628
)
 

Total revenue
 
$
373,083

 
$
32,346

 
$
32,133

 
$
5,805

 
$
(1,628
)
 
$
441,739

Segment income (loss) (2)
 
$
31,790

 
$
4,439

 
$
4,294

 
$
(32,971
)
 
$

 
$
7,552

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
 
(3,155
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
 
$
4,397

Depreciation and amortization
 
$
6,953

 
$
1,623

 
$
235

 
$
1,703

 
$

 
$
10,514

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities and other ancillary operations to the Company's other operating subsidiaries.
(2) Segment income includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, assisted and independent living services and home health and hospice businesses. General and administrative expense is included in "All Other" category.
(3) The Company's campuses, which represent facilities that offer both skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independent living services have been allocated and recorded in the respective reportable segment.
 
 
Three Months Ended March 31, 2016
 
 
Transitional and Skilled Services (3)
 
Assisted and Independent Living Services (3)
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Revenue from external customers
 
$
315,212

 
$
30,171

 
$
26,666

 
$
11,185

 
 
 
$
383,234

Intersegment revenue (1)
 
710

 

 

 
271

 
(981
)
 

Total revenue
 
$
315,922

 
$
30,171

 
$
26,666

 
$
11,456

 
$
(981
)
 
$
383,234

Segment income (loss) (2)
 
$
27,596

 
$
3,260

 
$
3,176

 
$
(17,717
)
 
$

 
$
16,315

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
 
$
(1,136
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
 
$
15,179

Depreciation and amortization
 
$
5,239

 
$
1,063

 
$
268

 
$
1,728

 
$

 
$
8,298

 
 
 
 
 
 
 
 
 
 
 
 
 
(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 includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, assisted and independent living services and home health and hospice businesses. General and administrative expense is included in "All Other" category.
(3) The Company's campuses, which represent facilities that offer both skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independent living services have been allocated and recorded in the respective reportable segment.

The Company's transitional and skilled services segment income for the three months ended March 31, 2017 and 2016 included continued obligations under the lease, lease termination costs and related closing expenses of $4,017 and $7,935 , respectively. These amounts included the value of the present value of future rental payments of approximately $2,715 and $6,512 and long-lived assets impairment of $111 and $137 for the three months ended March 31, 2017 and 2016 , respectively. See Note 17, Leases for further detail.

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

15

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


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 three months ended March 31, 2017 , the Company expanded its operations with the addition of one campus operation, one stand-alone assisted living operation and one hospice agency through a combination of long-term leases and purchases. 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 aggregate purchase price for these acquisitions for the three months ended March 31, 2017 was $8,693 . The addition of these operations added 124 operational skilled nursing beds and 108 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 also opened two newly constructed stand-alone skilled nursing operations under long-term lease agreements, which added 253 operational skilled nursing beds.
The table below presents the allocation of the purchase price for the operations acquired in business combinations during the three months ended March 31, 2017 and 2016 :
 
Three Months Ended March 31,
 
2017
 
2016
Building and improvements
5,290

 

Equipment, furniture, and fixtures
449

 

Assembled occupancy
59

 

Definite-lived intangible assets

 
100

Goodwill
1,826

 
140

Other indefinite-lived intangible assets
1,094

 
250

Other assets acquired, net of liabilities assumed
(25
)
 

    Total acquisitions
$
8,693

 
$
490


In addition to the business combinations above, the Company acquired Medicare and Medicaid licenses for additional hospice and skilled nursing beds to add to existing operations for an aggregate purchase price of $310 .

Subsequent to March 31, 2017 , the Company expanded its operations with the addition of three stand-alone skilled nursing operations through a combination of long-term leases and purchases for an aggregate purchase price of $11,300 . The addition of these operations added 285 operational skilled nursing beds operated by the Company's operating subsidiaries. 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 leases.

16

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


9. PROPERTY AND EQUIPMENT— Net
Property and equipment, net consist of the following:
 
March 31, 2017
 
December 31, 2016
Land
$
47,565

 
$
47,565

Buildings and improvements
309,789

 
304,263

Equipment
161,453

 
153,170

Furniture and fixtures
5,397

 
6,931

Leasehold improvements
83,089

 
80,164

Construction in progress
2,928

 
2,441

 
610,221

 
594,534

Less: accumulated depreciation
(119,639
)
 
(110,036
)
Property and equipment, net
$
490,582

 
$
484,498


See also Note 8, Acquisitions for information on acquisitions during the three months ended March 31, 2017 .

10. INTANGIBLE ASSETS — Net
 
 
Weighted Average Life (Years)
 
March 31, 2017
 
December 31, 2016
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
Intangible Assets
 
 
 
 
Net
 
 
 
Net
Lease acquisition costs
 
24.7
 
$
483

 
$
(83
)
 
$
400

 
$
483

 
$
(78
)
 
$
405

Favorable leases
 
32.3
 
35,116

 
(5,084
)
 
30,032

 
35,116

 
(4,589
)
 
30,527

Assembled occupancy
 
0.3
 
1,956

 
(1,933
)
 
23

 
1,897

 
(1,897
)
 

Facility trade name
 
30.0
 
733

 
(275
)
 
458

 
733

 
(269
)
 
464

Customer relationships
 
18.5
 
4,933

 
(1,322
)
 
3,611

 
4,933

 
(1,253
)
 
3,680

Total
 
 
 
$
43,221

 
$
(8,697
)
 
$
34,524

 
$
43,162

 
$
(8,086
)
 
$
35,076


Amortization expense was $611 and $1,087 for the three months ended March 31, 2017 and 2016 , respectively. Of the $611 in amortization expense incurred during the three months ended March 31, 2017 , approximately $36 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.
Estimated amortization expense for each of the years ending December 31 is as follows:
Year
Amount
2017 (remainder)
$
1,748

2018
2,301

2019
2,301

2020
2,301

2021
2,301

2022
2,296

Thereafter
21,276

 
$
34,524



17

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


11. 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, in accordance with the provisions of Accounting Standards Codification topic 350, Intangibles—Goodwill and Other (ASC 350).  This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, a "Step 0" analysis. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs "Step 1" of the traditional two-step goodwill impairment test 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 three months ended March 31, 2017 :
 
Goodwill
 
Transitional and Skilled Services
 
Assisted and Independent Living Services
 
Home Health and Hospice Services
 
All Other
 
Total
January 1, 2017
$
40,636

 
$
3,538

 
$
17,901

 
$
5,025

 
$
67,100

Additions

 

 
1,826

 

 
1,826

March 31, 2017
$
40,636

 
$
3,538


$
19,727

 
$
5,025

 
$
68,926


The Company anticipates that total goodwill recognized will be fully deductible for tax purposes as of March 31, 2017 . See further discussion of goodwill acquired at Note 8, Acquisitions .
During the three months ended March 31, 2017 , the Company recorded $1,369 in Medicare licenses and $35 in trade name indefinite-lived intangible assets as part of its acquisitions.

Other indefinite-lived intangible assets consists of the following:
 
March 31, 2017

December 31, 2016
Trade name
$
1,181

 
$
1,146

Medicare and Medicaid licenses
19,809

 
18,440

 
$
20,990

 
$
19,586


12. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:
 
March 31, 2017

December 31, 2016
Debt issuance costs, net
$
3,390

 
$
3,611

Long-term insurance losses recoverable asset
4,473

 
4,104

Deposits with landlords
4,652

 
3,526

Capital improvement reserves with landlords and lenders
726

 
673

Note receivable from sale of urgent care centers

 
700

Restricted and other assets
$
13,241

 
$
12,614


18

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


Included in restricted and other assets as of March 31, 2017 are anticipated insurance recoveries related to the Company's workers' compensation, 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. Note receivable from sale of urgent centers was reclassed to current assets from restricted and other assets as the Company is anticipating to receive the receivable within the 12 months period.

13. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:
 
March 31, 2017

December 31, 2016
Quality assurance fee
$
6,953

 
$
4,604

Refunds payable
19,651

 
18,368

Deferred revenue
6,033

 
6,994

Cash held in trust for patients
2,276

 
2,373

Resident deposits
6,237

 
6,099

Dividends payable
2,177

 
2,186

Property taxes
7,822

 
9,130

Income tax payable
2,357

 
1,182

Operational closure liability
2,290

 
1,972

Other
5,358

 
5,855

Other accrued liabilities
$
61,154

 
$
58,763

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. Operational closure liability includes short-term portion of the closing costs that are payable within the next 12 months. The remaining long-term portion is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.

19

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


14. INCOME TAXES
The Company is not currently under examination by any major income tax jurisdiction. During 2017, the statutes of limitations will lapse on the Company's 2013 Federal tax year and certain 2012 and 2013 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 months ended March 31, 2017 or 2016.
For the three months ended March 31, 2017 and 2016 , the Company recorded total pre-tax charges related to lease terminations and closing expenses in connection with the closure of operations of $4,017 and $7,935 , respectively. The Company recorded estimated tax benefits of $ 1,542 and $ 3,065 for the three months ended three months ended March 31, 2017 and 2016 related to the losses. See Note 17, Leases .

15. DEBT
Long-term debt consists of the following:
 
March 31, 2017
 
December 31, 2016
Term loan with SunTrust, interest payable quarterly
$
146,250

 
$
148,125

Credit facility with SunTrust
107,000

 
122,000

Mortgage loans and promissory note, principal and interest payable monthly, interest at fixed rate
13,892

 
14,032

 
267,142

 
284,157

Less: current maturities
(8,155
)
 
(8,129
)
Less: debt issuance costs
(509
)
 
(542
)
 
$
258,478

 
$
275,486


Credit Facility with a Lending Consortium Arranged by SunTrust
The Company maintains a credit facility with a lending consortium arranged by SunTrust (as amended to date, the Credit Facility). On July 19, 2016, the Company entered into the second amendment to the credit facility (Second Amended Credit Facility), which amended the existing credit agreement to increase the aggregate principal amount up to $450,000 . The Second Amended Credit Facility comprised of a $300,000 revolving credit facility and a $150,000 term loan. Borrowings under the term loan portion of the Second Amended Credit Facility mature on February 5, 2021 and amortize in equal quarterly installments, in an aggregate annual amount equal to 5.0% per annum of the original principal amount. The interest rates and commitment fee applicable to the Second Amended Credit Facility are similar to the Amended Credit Facility discussed below. Except as set forth in the Second Amended Credit Facility, all other terms and conditions of the Amended Credit Facility remained in full force and effect as described below.

On February 5, 2016, the Company amended its existing revolving credit facility to increase its aggregate principal amount available to  $250,000  (the Amended Credit Facility). Under the credit facility, the Company may seek to obtain incremental revolving or term loans in an aggregate amount not to exceed  $150,000 . The interest rates applicable to loans under the credit facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.75% to 1.75% per annum or LIBOR plus a margin ranging from 1.75% to 2.75% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, the Company will pay a commitment fee on the unused portion of the commitments under the credit facility that will range from 0.30% to 0.50% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio of the Company and its subsidiaries. The Company is permitted to prepay all or any portion of the loans under the credit facility prior to maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders.

The Credit Facility is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The credit facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. Under the Credit Facility, the Company must comply with financial maintenance covenants to be tested quarterly, consisting of a maximum Consolidated Total Net Debt to consolidated EBITDA ratio (which shall be increased

20

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


to 3.50 : 1.00 for the first fiscal quarter and the immediate following three fiscal quarters), and a minimum interest/rent coverage ratio (which cannot be below 1.50 : 1.00 ). The majority of lenders can require that the Company and its operating subsidiaries mortgage certain of its real property assets to secure the Amended Credit Facility if an event of default occurs, the Consolidated Total Net Debt to consolidated EBITDA ratio is above 2.75 : 1.00 for two consecutive fiscal quarters, or its liquidity is equal or less than 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) for ten consecutive business days, provided that such mortgages will no longer be required if the event of default is cured, the Consolidated Total Net Debt to consolidated EBITDA ratio is below 2.75 : 1.00 for two consecutive fiscal quarters, or its liquidity is above 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) or ninety consecutive days, as applicable. As of March 31, 2017 , the Company's operating subsidiaries had $253,250 outstanding under the Credit Facility. The outstanding balance on the term loan was $146,250 , of which $7,500 is classified as short-term and the remaining $138,750 is classified as long-term. The outstanding balance on the revolving Credit Facility was $107,000 , which is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2017 .

As of April 26, 2017 , there was approximately $288,250 outstanding under the Credit Facility.

Mortgage Loans and Promissory Note

The Company had outstanding indebtedness under mortgage loans and a promissory note issued in connection with various acquisitions. The mortgage loans are insured with the U.S. Department of Housing and Urban Development (HUD), which subjects the Company's operating subsidiaries to HUD oversight and periodic inspections. The mortgage loans and note bear fixed interest rates between 2.6% and 5.3% per annum. Amounts borrowed under the mortgage loans may be prepaid starting after the second anniversary of the notes subject to prepayment fees of the principal balance on the date of prepayment. These prepayment fees are reduced by 1.0% per year for years three through eleven of the loan. There is no prepayment penalty after year eleven . The term of the mortgage loans and the note is between 12 and 33 years . The mortgage loans and note are secured by the real property comprising the facilities and the rents, issues and profits thereof, as well as all personal property used in the operation of the facilities. As of March 31, 2017 , the Company's operating subsidiaries had $13,892 outstanding under the mortgage loans and note, of which $655 is classified as short-term and the remaining $13,237 is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2017 .

Based on Level 2, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.

Off-Balance Sheet Arrangements

As of March 31, 2017 , the Company had approximately $2,310 on the credit facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

16. OPTIONS AND AWARDS
Stock-based compensation expense consists of share-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three months ended March 31, 2017 and 2016 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.
Stock Options
The Company has three option plans, the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive Plan (2005 Plan) and the 2007 Omnibus Incentive Plan (2007 Plan), all of which have been approved by the Company's stockholders. The total number of shares available under all of the Company’s stock incentive plans was 3,903 as of March 31, 2017 .

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. The Company granted 156 options and 53 restricted stock awards from the 2007 Plan during the three months ended March 31, 2017 .

21

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



The Company used the following assumptions for stock options granted during the three months ended March 31, 2017 and 2016 :
Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2017
 
156

 
2.00%
 
6.3 years
 
36%
 
0.80%
2016
 
167

 
1.34%
 
6.5 years
 
46%
 
0.77%

For the three months ended March 31, 2017 and 2016 , the following represents the exercise price and fair value displayed at grant date for stock option grants:
Grant Year
 
Granted
 
Weighted Average Exercise Price
 
Weighted Average Fair Value of Options
2017
 
156

 
$
20.28

 
$
7.15

2016
 
167

 
$
19.89

 
$
8.55


The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended March 31, 2017 and 2016 and therefore, the intrinsic value was $0 at date of grant.

The following table represents the employee stock option activity during the three months ended March 31, 2017 :
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise Price
 
Number of
Options Vested
 
Weighted
Average
Exercise Price
of Options
Vested
January 1, 2017
5,176

 
$
11.62

 
2,704

 
$
8.18

Granted
156

 
20.28

 
 
 
 
Forfeited
(65
)
 
13.14

 
 
 
 
Exercised
(117
)
 
6.96

 
 
 
 
March 31, 2017
5,150

 
$
11.97

 
2,815

 
$
8.55


The following summary information reflects stock options outstanding, vested and related details as of March 31, 2017 :
 
 
 
 
 
 
 
 
 
 
 
 
Stock Options Vested
 
 
Stock Options Outstanding
 
 
 
 
 
Number Outstanding
 
Black-Scholes Fair Value
 
Remaining Contractual Life (Years)
 
Vested and Exercisable
Year of Grant
 
Exercise Price
 
 
 
 
2008
 
2.56
-
4.06
 
385

 
$
572

 
1
 
385

2009
 
4.06
-
4.56
 
526

 
1,129

 
2
 
526

2010
 
4.77
-
4.96
 
142

 
345

 
3
 
142

2011
 
5.90
-
7.99
 
165

 
560

 
4
 
165

2012
 
6.56
-
7.96
 
490

 
1,807

 
5
 
377

2013
 
7.98
-
11.49
 
593

 
2,881

 
6
 
379

2014
 
10.55
-
18.94
 
1,630

 
9,234

 
7
 
667

2015
 
21.47
-
25.24
 
586

 
5,329

 
8
 
143

2016
 
18.79
-
19.89
 
477

 
3,332

 
9
 
31

2017
 
20.28
 
156

 
1,111

 
10
 

Total
 
 
 
 
 
5,150

 
$
26,300

 
 

2,815

Restricted Stock Awards

22

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


The Company granted 53 and 161 restricted stock awards during the three months ended March 31, 2017 and 2016 , respectively. All awards were granted at an exercise price of $0 and generally vest over five years . The fair value per share of restricted awards granted during the three months ended March 31, 2017 and 2016 ranged from $18.56 to $20.68 and $19.89 to $21.84 , respectively. The fair value per share includes quarterly stock awards to non-employee directors.
A summary of the status of the Company's non-vested restricted stock awards as of March 31, 2017 and changes during the three months ended March 31, 2017 is presented below:
 
Non-Vested Restricted Awards
 
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2017
429

 
$
20.42

Granted
53

 
20.08

Vested
(46
)
 
18.25

Forfeited
(4
)
 
18.09

Nonvested at March 31, 2017
432

 
$
20.63


During the three months ended March 31, 2017 , the Company granted 8 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors. The fair value per share of these stock awards was $20.68 based on the market price on the grant date.

Total share-based compensation expense recognized for the three months ended March 31, 2017 and 2016 was as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Share-based compensation expense related to stock options
$
1,207

 
$
1,184

Share-based compensation expense related to restricted stock awards
552

 
548

Share-based compensation expense related to stock awards to non-employee directors
132

 
153

Total
$
1,891

 
$
1,885


In future periods, the Company expects to recognize approximately $13,008 and $7,751 in share-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2017 . Future share-based compensation expense will be recognized over 3.0 and 3.4 weighted average years for unvested options and restricted stock awards, respectively. There were 2,335 unvested and outstanding options at March 31, 2017 , of which 2,209 are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest at March 31, 2017 was  5.9 years.

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of and for the three months ended March 31, 2017 and as of and for the twelve months ended December 31, 2016 is as follows:
Options
 
March 31, 2017
 
December 31, 2016
Outstanding
 
$
38,372

 
$
55,610

Vested
 
29,494

 
38,101

Expected to vest
 
8,253

 
15,983

Exercisable
 
1,542

 
9,199

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options.
Equity Instrument Denominated in the Shares of a Subsidiary
On May 26, 2016, the Company implemented a management equity plan and granted stock options and restricted stock awards of a subsidiary of the Company to employees and management of that subsidiary (Subsidiary Equity Plan). These awards generally vest over a period of five years or upon the occurrence of certain prescribed events. The value of the stock options and

23

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


restricted stock awards is tied to the value of the common stock of the subsidiary. The awards can be put to the Company at various prescribed dates, which in no event is earlier than six months after vesting of the restricted awards or exercise of the stock options. The Company can also call the awards, generally upon employee termination.
The grant-date fair value of the 2016 awards is $4,623 , which is recognized as compensation expense over the relevant vesting periods, with a corresponding adjustment to noncontrolling interests. The grant value was determined based on an independent valuation of the subsidiary shares. For the three months ended March 31, 2017 , the Company expensed $333 in share-based compensation related to the Subsidiary Equity Plan. There was no expense incurred for the three months ended March 31, 2016 as the plan was implemented in the second quarter of 2016.
The aggregate number of the Company's common shares that would be required to settle these awards at current estimated fair values, including vested and unvested awards, at March 31, 2017 is 251 . There was no comparable amount at March 31, 2016 as the plan was implemented in the second quarter of 2016.

17. LEASES
The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 93 affiliated skilled nursing, assisted living and independent living facilities used in the Company’s operations under eight “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 12 to 19 years. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the then current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases.
The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term and maintenance and repair costs for the leased property.
Commencing the third year, the rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5% . In addition to rent, the Company is required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. Total rent expense under the Master Leases was approximately $14,116 and $14,000 for the three months ended March 31, 2017 and 2016 , respectively.
At the Company's option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. If the Company elects to renew the term of a Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the Master Lease.
Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. The Company is not aware of any defaults as of March 31, 2017 .
In March 2017, the Company voluntarily discontinued operations at one of its skilled nursing facilities after determining that the facility cannot competitively operate in the marketplace without substantial investment renovating the building. After careful consideration, the Company determined that the costs to renovate the facility could outweigh the future returns from the operation. As part of this closure, the Company entered into an agreement with its landlord allowing for the closure of the property, as well as other provisions, to allow its landlord to transfer the property and the licenses free and clear of the applicable master lease. This arrangement does not impact the rent expense to be paid in 2017, or expected to be paid in future periods, and has no material impact on the Company's lease coverage ratios under the Master Leases. The Company recorded a continued obligation liability under the lease and related closing expenses of $2,830 , including the present value of rental payments of approximately $2,715 , which was recognized in the first quarter of 2017. Residents of the affected facility were transferred to local skilled nursing facilities.

24

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


In February 2016, the Company voluntarily discontinued operations at one of its skilled nursing facilities in order to preserve the overall ability to serve the residents in surrounding counties after careful consideration and some clinical survey challenges. As part of this closure, the Company entered into an agreement with its landlord allowing for the closure of the property as well as other provisions to allow its landlord to transfer the property and the licenses free and clear of the applicable master lease. This arrangement does not impact the rental payments and has no material impact on the Company's lease coverage ratios under the Master Leases. The Company recorded a continued obligation liability under the lease and related closing expenses of $7,935 , including the present value of rental payments of approximately $6,512 , which was recognized in the first quarter of 2016. Residents of the affected facility were transferred to local skilled nursing facilities.
The Company also leases certain affiliated operations and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years . The Company has entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts upon completion of construction. The term of each lease is 15 years with two five -year renewal options and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years . Most of these leases contain renewal options, certain of which involve rent increases. Total rent expense, inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $31,992 and $27,135 for the three months ended March 31, 2017 and 2016 , respectively.
Future minimum lease payments for all leases as of March 31, 2017 are as follows:
Year
 
Amount
2017 (remainder)
 
94,387

2018
 
134,072

2019
 
133,368

2020
 
132,877

2021
 
132,127

2022
 
130,200

Thereafter
 
999,713

 
 
$
1,756,744

Twenty-two of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under five separate master lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.
In March 2017, the Company entered into definitive agreements to sell the properties of two skilled nursing facilities and one assisted living community.  Upon closing the transaction, the Company will lease the properties under a triple-net master lease with an initial 20 -year term, with three 5 -year optional extensions, at CPI-based annual escalators. The transaction is expected to close in the second quarter of 2017. The Company expects to receive approximately $38,000 in proceeds.
During the first quarter of 2017, the Company terminated its lease obligations on four transitional care facilities that are currently under development and one newly constructed stand-alone skilled nursing operation. The Company recorded $1,187 in lease termination costs and long-lived asset impairment.


25

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


18. COMMITMENTS AND CONTINGENCIES
Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which requires healthcare providers (among other things) to safeguard and keep confidential protected health information. In late December of 2016, the Company learned of a potential issue at one of its independent operating entities in Arizona which involved the limited and inadvertent disclosure of certain confidential information. The issue has been fully investigated, addressed and disclosed as per the HIPAA obligations. The Company believes that it is presently in compliance in all material respects with all applicable laws and regulations.
Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.
Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationships. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented.
Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents served by the Company's operating subsidiaries. The Company, its operating subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.
In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation may provide the basis for exclusion from federally-funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial performance. Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. In addition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which it does business.
In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes to the Federal False Claims Act (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any government overpayment. The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents. Thus, there is generally no need for an employment relationship in order to qualify for protection against retaliation for whistleblowing.
Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company is routinely subjected to varying types of claims. One particular type of suit arises from alleged violations of state-established minimum staffing requirements for skilled nursing facilities. Failure to meet these requirements can, among other things, jeopardize a facility's compliance with conditions of participation under certain state and federal healthcare programs; it may also subject the facility to a notice of deficiency, a citation, a civil money penalty, or litigation. These class-action “staffing”

26

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


suits have the potential to result in large jury verdicts and settlements, and have become more prevalent in the wake of a previous substantial jury award against one of the Company's competitors. The Company expects the plaintiff's bar to continue to be aggressive in their pursuit of these staffing and similar claims.
The Company has in the past been subject to class action litigation involving claims of alleged violations of regulatory requirements related to staffing. While the Company has been able to settle these claims without a material ongoing adverse effect on its business, future claims could be brought that may materially affect its business, financial condition and results of operations. Other claims and suits, including class actions, continue to be filed against the Company and other companies in its industry. If there were a significant increase in the number of these claims or an increase in amounts owing should plaintiffs be successful in their prosecution of these claims, this could materially adversely affect the Company’s business, financial condition, results of operations and cash flows.
The Company and its operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment as well as employment related claims. Since 2011, the Company has been involved in a class action litigation claim alleging violations of state and federal wage and hour laws. In January 2017, the Company participated in an initial mediation session with plaintiffs' counsel. As a result of this discussion and due to (i) the fact no class had been certified (ii) the lack of specificity as to legal theories put forth by the plaintiffs, (iii) the nature of the remedies sought and (iv) the lack of any basis on which to compute estimated compensatory and/or exemplary damages, the Company could not predict what the outcome of the pending purported class action lawsuit would be, what the timing of the ultimate resolution of this lawsuit would be, or an estimate and/or range of possible loss related to the pending class action lawsuit. In light of the inherent uncertainties involved in the pending class action lawsuit, the Company determined that we were not able to estimate the costs or range of costs for the year ended December 31, 2016.
In March 2017, the Company was invited to engage in further mediation discussions to determine whether settlement in advance of a determination on class certification was possible. In April 2017, the Company reached an agreement in principle to settle the subject class action litigation, without any admission of liability and subject to approval by the California Superior Court.  Based upon the recent change in case status, the Company recorded an accrual for estimated probable losses of $11,000 in the first interim financial statements. The settlement remains subject to final documentation and the approval of the California Superior Court following notice to affected class members.

Other claims and suits continue to be filed against the Company and other companies in its industry. By way of recent example, a general/premises liability lawsuit was filed against one of the Company’s independent operating entities in San Luis Obispo, California, in connection with an alleged injury to a non-employee/contractor. Further, another one of the Company’s independent operating entities was sued on allegations of professional negligence, which the claim was recently settled. The Company does not expect that there will be any material ongoing adverse effect on the Company's business, financial condition or results of operations in connection with the resolution of these matters.

The Company cannot predict or provide any assurance as to the possible outcome of any litigation. If any litigation were to proceed, and the Company and its operating subsidiaries are subjected to, alleged to be liable for, or agrees to a settlement of, claims or obligations under Federal Medicare statutes, the Federal False Claims Act, or similar State and Federal statutes and related regulations, the Company's business, financial condition and results of operations and cash flows could be materially and adversely affected and its stock price could be adversely impacted. Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the Company or its subsidiaries going forward under a corporate integrity agreement and/or other arrangement with the government.
Medicare Revenue Recoupments — The Company is subject to reviews relating to Medicare services, billings and potential overpayments. During the three months ended March 31, 2017 , seven of the Company's operating subsidiaries had probes scheduled or in process, both pre- and post-payment. The Company anticipates that these probe reviews will increase in frequency in the future. If a facility fails a probe review and subsequent re-probes, the facility could then be subject to extended pre-pay review or extrapolation of the identified error rate to all billing in the same time period. None of the Company's operating subsidiaries are currently on extended prepayment review or subject to extrapolation, although that may occur in the future.
U.S. Government Inquiry — In October 2013, the Company completed and executed a settlement agreement (the Settlement Agreement) with the DOJ, which received the final approval of the Office of Inspector General-HHS and the United States District Court for the Central District of California. Pursuant to the Settlement Agreement, the Company made a single lump-sum remittance to the government in the amount of $48,000 in October 2013. The Company has denied engaging in any illegal conduct and has

27

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


agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and to avoid the uncertainty and expense of protracted litigation.

In connection with the settlement and effective as of October 1, 2013, the Company entered into a five-year corporate integrity agreement (the CIA) with the Office of Inspector General-HHS. The CIA acknowledges the existence of the Company’s current compliance program, which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance program, and requires that the Company continue during the term of the CIA to maintain a program designed to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health care programs. The Company is also required to notify the Office of Inspector General-HHS in writing, of, among other things: (i) any ongoing government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with federal healthcare programs; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by federal health care programs. The Company is also required to retain an Independent Review Organization (IRO) to review certain clinical documentation annually for the term of the CIA. 

The Company has met the requirements of its third year under the Settlement Agreement and passed its IRO audits. Participation in federal healthcare programs by the Company is not affected by the Settlement Agreement or the CIA. In the event of an uncured material breach of the CIA, the Company could be excluded from participation in federal healthcare programs and/or subject to prosecution.

Concentrations
Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s receivables from Medicare and Medicaid payor programs accounted for approximately 57.2% and 58.6% of its total accounts receivable as of March 31, 2017 and December 31, 2016 , respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 68.2% and 66.8% of the Company's revenue for the three months ended March 31, 2017 and 2016 , respectively.
Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250 . In addition, the Company has uninsured bank deposits with a financial institution outside the U.S. As of April 26, 2017 , the Company had approximately $1,100 in uninsured cash deposits. All uninsured bank deposits are held at high quality credit institutions.

Item 2.         Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K (Annual Report), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Forms 10-Q and 8-K, for additional information. The section entitled “Risk Factors” contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, also describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.
This Report contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained in Part II, Item 1A of this Report. These forward-looking statements speak only as of the date of this Report, and are based on our current expectations, estimates and projections about our industry and business, management’s beliefs,

28


and certain assumptions made by us, all of which are subject to change. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law. As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the words, “we,” “our” and “us” refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our affiliated operations, the Service Center and the Captive are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. The use of “we,” “us,” “our” and similar verbiage in this quarterly report is not meant to imply that any of our affiliated operations, the Service Center or the Captive are operated by the same entity. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included the Annual Report.
Overview
We are a provider of health care services across the post-acute care continuum, as well as other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oregon, South Carolina, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries, each of which strives to be the service of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted living, home health and hospice and other ancillary services. As of March 31, 2017 , we offered skilled nursing, assisted living and rehabilitative care services through 212 skilled nursing and assisted living facilities across 13 states. Of the 212 facilities, we owned 51 and operated an additional 161 facilities under long-term lease arrangements, and had options to purchase 10 of those 161 facilities. Our home health and hospice business provides home health, hospice and home care services from 40 agencies across nine states.

The following table summarizes our affiliated facilities and operational skilled nursing, assisted living and independent living beds by ownership status as of March 31, 2017 :
 
Owned
 
Leased (with a Purchase Option)
 
Leased (without a Purchase Option)
 
Total
Number of facilities
51

 
10

 
151

 
212

Percentage of total
24.1
%
 
4.7
%
 
71.2
%
 
100.0
%
Operational skilled nursing beds
2,973

 
997

 
13,949

 
17,919

Percentage of total
16.6
%
 
5.6
%
 
77.8
%
 
100.0
%
Assisted and independent living units
1,621

 
184

 
2,718

 
4,523

Percentage of total
35.8
%
 
4.1
%
 
60.1
%
 
100.0
%

The Ensign Group, Inc. (collectively, Ensign or the Company) is a holding company with no direct operating assets, employees or revenues. Our operating subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets. In addition, certain of our wholly-owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. We also have a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.  References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this quarterly report, are not meant to imply, nor should they 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.
Recent Activities
Common Stock Repurchase Program - On February 8, 2017, we announced that our Board of Directors authorized a stock repurchase program, under which we may repurchase up to $30.0 million of our common stock under the program for a period of 12 months. During the first quarter of 2017, we repurchased 0.3 million shares of our common stock for a total of $6.1 million .
Sale and Lease Transaction - In March 2017, we entered into definitive agreements to sell the properties of two skilled nursing facilities and one assisted living community.  Upon closing the transaction, we will lease the properties under a triple-net master lease with an initial 20 year term, with three 5-year optional extensions, at CPI-based annual escalators. The transaction is expected to close in the second quarter of 2017. We expect to receive approximately $38.0 million in proceeds.
Lease Terminations - During the first quarter of 2017, we terminated our lease obligations on four transitional care facilities that are currently under development and one newly constructed stand-alone skilled nursing operation. We recorded $1.2 million in lease termination costs and long-lived asset impairment.

29


Closure of facility - In March 2017, we voluntarily discontinued operations at one of our skilled nursing facilities after determining that the facility cannot competitively operate in the marketplace without substantial investment renovating the building. After careful consideration, we determined that the costs to renovate the facility could outweigh the future returns from the operation. As part of this closure, we entered into an agreement with our landlord allowing for the closure of the property as well as other provisions to allow our landlord to transfer the property and the licenses free and clear of the applicable master lease. We recorded a continued obligation liability under the lease and related closing expenses of $2.8 million , including the present value of rental payments of approximately $2.7 million , which was recognized in the first quarter of 2017. Residents of the affected facility were transferred to local skilled nursing facilities.
Class action lawsuit - During the three months ended March 31, 2017 , we accrued an estimated liability of $11.0 million related to the settlement of the class action lawsuit.
Acquisition History

The following table sets forth the location of our facilities and the number of operational beds and units located at our facilities as of March 31, 2017 :
 
CA
 
TX
 
AZ
 
WI
 
UT
 
CO
 
WA
 
ID
 
NE
 
KS
 
IA
 
SC
 
NV
 
Total
Number of facilities
Skilled nursing operations
39

 
42

 
21

 
2

 
13

 
7

 
9