Company Quick10K Filing
Quick10K
Ensign Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$52.11 53 $2,760
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-30 Shareholder Vote
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-05-06 Regulation FD, Exhibits
8-K 2019-03-18 Leave Agreement
8-K 2019-02-19 Officers, Regulation FD, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-11-28 Officers
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-08-04 Officers
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-19 Other Events, Exhibits
8-K 2018-05-31 Shareholder Vote
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-02-08 Earnings, Exhibits
8-K 2017-12-27 Enter Agreement, Off-BS Arrangement, Exhibits
CHT Chunghwa Telecom 27,480
FULT Fulton Financial 2,880
HMHC Houghton Mifflin Harcourt 845
DHT DHT Holdings 836
AUDC Audiocodes 416
AFI Armstrong Flooring 304
ERYP Erytech Pharma 129
SNES Senestech 42
XSPL Xspand Products Lab 0
CSMO Cosmo Ventures 0
ENSG 2019-03-31
Part I.
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II.
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ensgq12019ex311.htm
EX-31.2 ensgq12019ex312.htm
EX-32.1 ensg033119ex321.htm
EX-32.2 ensg033119ex322.htm

Ensign Group Earnings 2019-03-31

ENSG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ensg0331201910q.htm 10-Q Document

 
 
 
 
 
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, 2019.
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)
_____________________________

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
ENSG
Nasdaq Global Select Market
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, every Interactive Data File required to be submitted 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 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:
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o

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 May 3, 2019, 53,011,547 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, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 101
 
 
 
 
 
 
 
 



PART I.

Item 1.        Financial Statements

THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
 
March 31, 2019
 
December 31, 2018
Assets
 

 
Current assets:
 

 
Cash and cash equivalents
$
37,824


$
31,083

Accounts receivable—less allowance for doubtful accounts of $3,380 and $2,886 at March 31, 2019 and December 31, 2018, respectively
291,701


276,099

Investments—current
4,037


8,682

Prepaid income taxes
148


6,219

Prepaid expenses and other current assets
24,019


24,130

Assets held for sale - current

 
1,859

Total current assets
357,729


348,072

Property and equipment, net
627,400


618,874

Right-of-use assets (Note 17)
1,045,638

 

Insurance subsidiary deposits and investments
42,937


36,168

Escrow deposits
300


7,271

Deferred tax assets
8,603


11,650

Restricted and other assets
16,441


20,844

Intangible assets, net
4,131


31,000

Goodwill
87,062


80,477

Other indefinite-lived intangibles
28,118


27,602

Total assets
$
2,218,359


$
1,181,958

Liabilities and equity
 

 
Current liabilities:
 

 
Accounts payable
$
44,595


$
44,236

Accrued wages and related liabilities
103,170


119,656

Lease liabilities—current (Note 17)
58,220

 

Accrued self-insurance liabilities—current
25,375


25,446

Other accrued liabilities
69,954

 
69,784

Current maturities of long-term debt
10,129


10,105

Total current liabilities
311,443


269,227

Long-term debt—less current maturities
240,660


233,135

Long-term lease liabilities—less current portion (Note 17)
963,172

 

Accrued self-insurance liabilities—less current portion
56,419


54,605

Other long-term liabilities
1,662


11,234

Deferred gain related to sale-leaseback (Note 17)


11,417

Total liabilities
1,573,356

 
579,618

 
 
 
 
Commitments and contingencies (Notes 15, 17 and 18)

 

Equity:
 
 
 
Ensign Group, Inc. stockholders' equity:
 
 
 
Common stock; $0.001 par value; 75,000 shares authorized; 55,465 and 52,955 shares issued and outstanding at March 31, 2019, respectively, and 55,089 and 52,584 shares issued and outstanding at December 31, 2018, respectively
55

 
55

Additional paid-in capital
292,612

 
284,384

Retained earnings
378,443

 
344,901

Common stock in treasury, at cost, 1,932 shares at March 31, 2019 and December 31, 2018, respectively
(38,405
)
 
(38,405
)
Total Ensign Group, Inc. stockholders' equity
632,705

 
590,935

Non-controlling interest
12,298

 
11,405

Total equity
645,003


602,340

Total liabilities and equity
$
2,218,359

 
$
1,181,958

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,
 
2019

2018
 
 
 
 
Revenue
$
549,214

 
$
492,134

Expense



Cost of services
430,002


390,243

Return of unclaimed class action settlement (Note 18)


(1,664
)
Rent—cost of services (Note 17)
35,786


33,850

General and administrative expense
33,024


25,104

Depreciation and amortization
12,598


11,622

Total expenses
511,410


459,155

Income from operations
37,804


32,979

Other income (expense):



Interest expense
(3,672
)

(3,613
)
Interest income
575


448

Other expense, net
(3,097
)

(3,165
)
Income before provision for income taxes
34,707


29,814

Provision for income taxes
7,100


6,521

Net income
27,607


23,293

Less: net income attributable to noncontrolling interests
235


161

Net income attributable to The Ensign Group, Inc.
$
27,372


$
23,132

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

Basic
$
0.52


$
0.45

Diluted
$
0.49


$
0.43

Weighted average common shares outstanding:
 
 
 
Basic
53,081


51,585

Diluted
55,698


53,518

See accompanying notes to condensed consolidated financial statements.

2


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Non-Controlling Interest
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Balance - January 1, 2019
52,584

 
$
55

 
$
284,384

 
$
344,901

 
1,932

 
$
(38,405
)
 
$
11,405

 
$
602,340

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards
371

 

 
5,616

 

 

 

 

 
5,616

Dividends declared ($0.0475 per share)

 

 

 
(2,543
)
 

 

 

 
(2,543
)
Employee stock award compensation

 

 
2,612

 

 

 

 
 
 
2,612

Noncontrolling interest attributable to subsidiary equity plan (Note 16)

 

 

 
(317
)
 

 

 
658

 
341

Cumulative effect of accounting change, net of tax

 

 

 
9,030

 

 

 

 
9,030

Net income attributable to noncontrolling interest

 

 

 

 

 

 
235

 
235

Net income attributable to the Ensign Group, Inc.

 

 

 
27,372

 

 

 

 
27,372

Balance - March 31, 2019
52,955

 
$
55

 
$
292,612

 
$
378,443

 
1,932

 
$
(38,405
)
 
$
12,298

 
$
645,003

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Non-Controlling Interest
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Balance - January 1, 2018
51,360

 
$
53

 
$
266,058

 
$
264,691

 
1,932

 
$
(38,405
)
 
$
7,662

 
$
500,059

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards
404

 
1

 
2,919

 

 

 

 

 
2,920

Dividends declared ($0.0450 per share)

 

 

 
(2,346
)
 

 

 

 
(2,346
)
Employee stock award compensation

 

 
1,971

 

 

 

 

 
1,971

Noncontrolling interest attributable to subsidiary equity plan (Note 16)

 

 

 
(79
)
 

 

 
417

 
338

Distribution to noncontrolling interest holder

 

 

 

 

 

 
(292
)
 
(292
)
Net income attributable to noncontrolling interest

 

 

 

 

 

 
161

 
161

Net income attributable to the Ensign Group, Inc.

 

 

 
23,132

 

 

 

 
23,132

Balance - March 31, 2018
51,764

 
$
54

 
$
270,948

 
$
285,398

 
1,932

 
$
(38,405
)
 
$
7,948

 
$
525,943

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


3


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019

2018
Cash flows from operating activities:
 
 
 
Net income
$
27,607

 
$
23,293

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,598

 
11,622

Impairment of long-lived assets

 
155

Amortization of deferred financing fees
293

 
299

Amortization of deferred gain on sale-leaseback (Note 17)

 
(164
)
Amortization of right-of-use assets (Note 17)
(254
)
 

Deferred income taxes

 
14

Provision for doubtful accounts
615

 
570

Share-based compensation
2,953

 
2,309

Cash received from insurance proceeds related to replacement properties and business interruptions

 
167

Gains on insurance claims and disposal of assets
(4
)
 
(667
)
Change in operating assets and liabilities
 
 
 
Accounts receivable
(16,341
)
 
6,453

Prepaid income taxes
6,072

 
6,654

Prepaid expenses and other assets
4,995

 
2,162

Insurance subsidiary deposits

 
80

Accounts payable
558

 
(6,815
)
Accrued wages and related liabilities
(13,204
)
 
(6,490
)
Income taxes payable
990

 

Other accrued liabilities
(3,345
)
 
(647
)
Accrued self-insurance liabilities
1,352

 
1,061

Other long-term liability
(43
)
 
339

Net cash provided by operating activities
24,842


40,395

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(13,645
)
 
(11,082
)
Cash payments for business acquisitions (Note 8)
(8,004
)
 

Cash payments for asset acquisitions (Note 8)
(5,763
)
 
(4,447
)
Escrow deposits
(300
)
 
(10,025
)
Escrow deposits used to fund acquisitions
7,271

 
228

Cash proceeds from the sale of assets and insurance proceeds
2,521

 
64

Change in other assets
(7,473
)
 
(201
)
Net cash used in investing activities
(25,393
)

(25,463
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility and other debt (Note 15)
265,000

 
195,000

Payments on revolving credit facility and other debt (Note 15)
(257,517
)
 
(217,421
)
Issuance of common stock upon exercise of options
2,334

 
2,920

Dividends paid
(2,525
)
 
(2,328
)
Non-controlling interest distribution

 
(292
)
Payments of deferred financing costs

 
(91
)
Net cash provided by/(used in) financing activities
7,292


(22,212
)
Net increase/(decrease) in cash and cash equivalents
6,741

 
(7,280
)
Cash and cash equivalents beginning of period
31,083


42,337

Cash and cash equivalents end of period
$
37,824

 
$
35,057

See accompanying notes to condensed consolidated financial statements.

4


THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,916

 
$
3,809

Lease liabilities
$
36,183

 
$

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
3,300

 
$
3,300

Accrued dividends declared
$
2,543

 
$
2,346

Note receivable from sale of ancillary business
$

 
$
139

Note payable due to seller from business acquisition
$
924

 
$

Right-of-use assets obtained in exchange for new operating lease obligation
$
6,348

 
$

See accompanying notes to condensed consolidated financial statements.


5


THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, shares and options 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 of March 31, 2019, the Company operated 245 facilities, 56 home health, hospice and home care agencies and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington, Wisconsin and Wyoming. 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, senior living, home health, hospice, home care and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 19,800 operational skilled nursing beds and 5,600 senior living units. As of March 31, 2019, the Company owned 72 of its 245 affiliated facilities and leased an additional 173 facilities through long-term lease arrangements and had options to purchase 12 of those 173 facilities. As of December 31, 2018, the Company owned 72 of its 244 affiliated facilities and leased an additional 172 facilities through long-term lease arrangements and had options to purchase 12 of those 172 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 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.

Proposed Spin-Off Transaction — On May 6, 2019, the Company announced a proposed plan to separate its transitional and skilled nursing services, and its home health and hospice operations and substantially all of its senior living and other ancillary operations into two separate, publicly traded companies. See Note 2, Proposed Spin-Off of Subsidiaries.

Other Information — The accompanying condensed consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 (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, 2018 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. PROPOSED SPIN-OFF OF SUBSIDIARIES

On May 6, 2019, the Company announced a proposed plan to separate its transitional and skilled nursing services, and its home health and hospice operations and substantially all of its senior living and other ancillary operations into two separate, publicly traded companies:

Ensign, which will include transitional and skilled services, rehabilitative care services, healthcare campuses, post-acute-related new business ventures and real estate investments; and
The Pennant Group, Inc. ("Pennant"), which will be a holding company of operating subsidiaries that provide home health, hospice, senior living and mobile diagnostic and clinical laboratory operations.


6

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


The Company intends to accomplish the proposed separation through a Spin-Off, in which it expects to distribute shares of Pennant common stock to the Company’s stockholders, on a pro rata basis. The Company anticipates that at the time of the Spin-Off, Pennant, which is currently a wholly-owned subsidiary of the Company, will consists of 60 home health, hospice and home care agencies, 51 senior living communities and other ancillary operations as of May 6, 2019. Ensign affiliates will retain ownership of the real estate at 28 of the 51 senior living operations that are being contributed to Pennant. The Company anticipates that after the Spin-Off, all of these properties will be leased to Pennant on a triple-net basis, under which Pennant affiliates will be responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs.

In accordance with Accounting Standards Codification (ASC) 505-60, Equity-Spinoffs and Reverse Spinoffs, the accounting for the separation of the Company follows its legal form, with Ensign as the legal and accounting spinnor and Pennant as the legal and accounting spinnee, due to the relative significance of Ensign’s healthcare business, the relative fair values of the respective companies, the retention of all senior management, and other relevant indicators.

In connection with the adoption of the stockholder rights plan, the Company anticipates that the board of directors will declare a dividend of one share of Pennant common stock for every two shares of the Company's common stock held by stockholders as of the record date. Pennant is also anticipating that awards of equity of Pennant subsidiaries granted to certain individuals will be exchanged for Pennant common stock immediately prior to the distribution. The number of shares of Ensign common stock each stockholder owns and the related proportionate interest in Ensign will not change as a result of the proposed Spin-Off. Each Ensign stockholder will receive only whole shares of Pennant common stock in the distribution, as well as cash in lieu of any fractional shares. The proposed Spin-Off is subject to customary conditions, including receipt of a tax opinion from counsel, effectiveness of the registration statement filed with the Securities and Exchange Commission, execution of third-party agreements and final approval by Ensign’s board of directors.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or stockholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing and senior living operations, home health, hospice and home care operations, 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 interests within the equity section of its condensed consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its condensed consolidated statements of income.
The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's relationship with variable interest entities was not material during the three months ended March 31, 2019.
The Company completed the sale of one of its senior living operations for a sale price of $1,838 during the three months ended March 31, 2019. The sale transaction does not meet the criteria of discontinued operations as it does not represent a strategic shift that has, or will have, a major effect on the Company's operations and financial results. The Company presented property and equipment assets of the senior living operation sold as held for sale in the consolidated balance sheet as of December 31, 2018.
Reclassifications - Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's consolidated financial position or results of operations.
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 Interim 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, intangible assets and goodwill, impairment of long-lived assets, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.


7

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


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 — On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) applying the modified retrospective method. The adoption of ASC 606 did not have a material impact on the measurement nor on the recognition of revenue of contracts, for which all revenue had not been recognized, as of January 1, 2018, therefore no cumulative adjustment has been made to the opening balance of retained earnings at the beginning of 2018. See Note 4, Revenue and Accounts Receivable.
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, net of estimates for variable consideration. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts and other currently available evidence. See Note 4, Revenue and Accounts Receivable.
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 $155 during the three months ended March 31, 2018. The Company did not record an impairment charge during the three months ended March 31, 2019.

Leases and Leasehold Improvements - The Company leases skilled nursing facilities, senior living facilities and commercial office space. On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (ASC 842), electing the transition method that allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings. The Company determines if an arrangement is a lease at the inception of each lease. At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating or finance lease. Operating leases are included in operating lease assets, current operating lease liabilities and noncurrent operating lease liabilities on the Company's condensed consolidated balance sheet. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments. The Company estimates this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. The Company records rent expense for operating leases 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 excludes lease renewals as the renewal rents are not at a bargain, there are no economic penalties for the Company to renew the lease, and it is not reasonably assured that the Company will exercise the extension options. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements.

The Company recognizes lease expense for leases with an initial term of 12 months or less on a straight-line basis over the lease term. These leases are not recorded on the condensed consolidated balance sheet. Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have material subleases. See further discussion at Note 17, Leases.
Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of patient base, facility trade names and customer relationships. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.

8

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


The Company's indefinite-lived intangible assets consist of trade names, and Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. The Company did not identify any goodwill and intangible assets impairment during the three months ended March 31, 2019 and 2018. 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. The combined self-insured retention is $500 per claim, subject to an additional one-time deductible of $750 for California affiliated operations and a separate, one-time, deductible of $1,000 for non-California operations. For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $1,000 per claim, $3,000 per operation, 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 is $1,000 per claim and $3,000 per operation, 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, Washington and Wyoming for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider.
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 $43,200 and $42,635 as of March 31, 2019 and December 31, 2018, 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 the Company has purchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception of Washington and Wyoming, are under a loss sensitive plan that insures individual claims that exceed $350 per occurrence. In Washington and Wyoming, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and benefit payments are managed through a state insurance pool. Outside of California, Texas, Washington and Wyoming, the Company has purchased insurance coverage that insures individual claims that exceed $350 per accident. In all states except Washington and Wyoming, 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 $25,171 and $24,624 as of March 31, 2019 and December 31, 2018, respectively.
In addition, the Company has recorded an asset and equal liability of $7,360 and $6,969 at March 31, 2019 and December 31, 2018, 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 $6,063 and $5,823 as of March 31, 2019 and December 31, 2018, respectively.

9

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


The Company believes that adequate provision has been made in the Interim Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows and financial condition would be adversely affected.

Income Taxes — Deferred tax assets 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 condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its condensed 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.

Share-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.

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 February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases with terms longer than 12 months on the balance sheet and disclose key information about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The classification criteria for distinguishing between operating and finance (previously capital) leases are substantially similar to the previous lease guidance, but with no explicit bright lines.


10

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


The Company adopted the standard as of January 1, 2019, electing the transition method that allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings, if applicable. The Company has elected the package of practical expedients permitted under the transition guidance, which among other things, allows the Company to carry forward the historical lease classification. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has made an accounting policy to keep leases, with an initial term of 12 months, or less off of the balance sheet and recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its leases as the non-lease components are not significant to the overall lease costs.

The adoption of this standard resulted in recognition of net lease assets and lease liabilities of $1,051,148 and $1,029,240, respectively, on its condensed consolidated balance sheets as of January 1, 2019. The Company recorded an adjustment, net of tax, of $9,030 to retained earnings, on the adoption date, related to a deferred gain on a previous sale-leaseback transaction, which resulted in an increase in rent expense of $658 annually, as we are no longer able to recognize the gain in our consolidated statement of income as a result of the new lease standard. In addition, initial direct costs associated with its lease agreements and favorable lease assets of $26,939 were classified into right of used assets on the adoption date. The standard does not materially affect the Company's consolidated net earnings or have a notable impact on liquidity or debt-covenant compliance under the current agreements. See further discussion at Note 17, Leases.

Prior to the adoption of ASC 842, the Company recognized revenue related to its senior living residency agreements in accordance with the provisions of ASC 840, Leases ("ASC 840").  Subsequent to the adoption of ASU 2016-02, Leases, lessors are required to separately recognize and measure the lease component of a contract with a customer utilizing the provisions of ASC 842 and the non-lease components utilizing the provisions of ASC 606, Revenue from Contracts with Customers. To separately account for the components, the transaction price is allocated among the components based upon the estimated stand alone selling prices of the components. Additionally, certain components of a contract which were previously included within the lease element recognized in accordance with ASC 840 prior to the adoption of ASU 2016-02 (such as common area maintenance services, other basic services, and executory costs) are recognized as non-lease components subject to the provisions of ASC 606 subsequent to the adoption of ASU 2016-02. Entities are required to recognize a cumulative effect adjustment to beginning retained earnings as of the initial application date of ASU 2016-02 for changes to amounts recognized for these certain components for the transition from ASC 840 to ASC 606. However, entities are permitted to elect the practical expedient under ASU 2018-11, Leases, allowing lessors to not separate non-lease components from the associated lease components when certain criteria are met. Entities that elect to utilize the lease/non-lease component combination practical expedient under ASU 2018-11 upon initial application of ASC 842 are required to apply the practical expedient to all new and existing transactions within a class of underlying assets that qualify for the expedient as of the initial application date with a cumulative effect adjustment to beginning retained earnings as of the initial application date for any changes recognized related to existing transactions.

Upon adoption of ASU 2016-02 and ASU 2018-11, the Company elected the lessor practical expedient within ASU 2018-11.  The Company recognizes revenue under these resident agreements based upon the predominant component, either the lease or non-lease component, of the contracts rather than allocating the consideration and separately accounting for it under ASC Topic 842 and ASC Topic 606. The Company has concluded that the non-lease components of the agreements with respect to its senior living communities are the predominant component of the contract, therefore, the Company recognizes revenue for these residents agreements under ASC Topic 606. The timing and pattern of revenue recognition is substantially the same as that prior to the adoption of these standards.

In June 2018, the FASB issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The Company adopted this guidance effective January 1, 2019. The adoption of this guidance did not have a material impact on its consolidated financial statements and related disclosures.

Accounting Standards Recently Issued But Not Yet Adopted by the Company


11

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


In August 2018, the FASB issued amended guidance to simplify fair value measurement disclosure requirements. The new provisions eliminate the requirements to disclose (1) transfers between Level 1 and Level 2 of the fair value hierarchy, (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy, and (3) net asset value disclosure of estimates of timing of future liquidity events. The FASB also modified disclosure requirements of Level 3 fair value measurements. 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 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 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 FASB 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. The new guidance does not amend the optional qualitative assessment of goodwill impairment. 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.


4. REVENUE AND ACCOUNTS RECEIVABLE

The Company's revenue is derived primarily from providing healthcare services to its patients. Revenues are recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care. The healthcare services in transitional and skilled, home health and hospice patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not capable of being distinct. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such variances become known.
Revenue from the Medicare and Medicaid programs accounted for 67.9% of the Company's revenue for both the three months ended March 31, 2019 and 2018. Settlement with Medicare and Medicaid payors for retroactive adjustments due to audits and reviews are considered variable consideration and are included in the determination of the estimated transaction price. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity. Consistent with healthcare industry practices, any changes to these 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 or Interim Financial Statements for the three months ended March 31, 2019 and 2018.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. A reconciliation of disaggregated revenue to segment revenue as well as revenue by payor is provided in Note 7, Business Segments.
The Company’s service specific revenue recognition policies are as follows:
Transitional and Skilled Nursing Revenue

12

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


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, adjusted for estimates for variable consideration. 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, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.
Senior Living Revenue
The Company's senior living revenue consists of fees for basic housing and assisted living care. Accordingly, we record revenue when services are rendered on the date services are provided at amounts billable to individual residents. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. For residents under reimbursement arrangements with Medicaid, revenue is recorded based on contractually agreed-upon amounts or rates on a per resident, daily basis or as services are rendered.
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 the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services; (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 and other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.
In addition to revenue recognized on completed episodes, the Company also recognizes a portion of revenue associated with episodes in progress. Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per episode and the Company’s 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 payment is adjusted 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 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 to other accrued liabilities.
Prior period results reclassifications, for comparative purposes, for only presenting total revenue for all revenue services. In the prior year, the Company presented its senior living revenue due to the adoption of ASC 606. This reclassification had no effect on the reported results of operations.
Revenue for the three months ended March 31, 2019 and 2018 is summarized in the following tables:

13

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


 
Three Months Ended March 31,
 
2019
 
2018
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
195,003

 
35.5
%
 
$
167,625

 
34.1
%
Medicare
147,720

 
26.9

 
139,314

 
28.3

Medicaid — skilled
30,451

 
5.5

 
27,042

 
5.5

Total Medicaid and Medicare
373,174

 
67.9

 
333,981

 
67.9

Managed care
89,848

 
16.4

 
83,716

 
17.0

Private and other payors(1)
86,192

 
15.7

 
74,437

 
15.1

Revenue
$
549,214

 
100.0
%
 
$
492,134

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2018 and 2017.
Balance Sheet Impact
Included in the Company’s condensed consolidated balance sheet are contract assets, comprised of billed accounts receivable and unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company had no material contract liabilities as of March 31, 2019 and December 31, 2018, or activity during the three months ended March 31, 2019 and 2018.

Accounts receivable as of March 31, 2019 and December 31, 2018 is summarized in the following table:
 
March 31, 2019
 
December 31, 2018
Medicaid
$
123,268

 
$
117,984

Managed care
61,991

 
54,682

Medicare
53,879

 
50,994

Private and other payors
55,943

 
55,325

 
295,081

 
278,985

Less: allowance for doubtful accounts
(3,380
)
 
(2,886
)
Accounts receivable, net
$
291,701

 
$
276,099

Practical Expedients and Exemptions
As the Company’s contracts with its patients have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

5. COMPUTATION OF NET INCOME PER COMMON SHARE

Basic net income per share is computed by dividing income from continuing operations attributable to stockholders of The Ensign Group, Inc. 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.

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

14

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


 
Three Months Ended March 31,
 
2019

2018
Numerator:
 
 
 
Net income
$
27,607

 
$
23,293

Less: net income attributable to noncontrolling interests
235

 
161

Net income attributable to The Ensign Group, Inc.
$
27,372

 
$
23,132

 
 
 
 
Denominator:

 
 
Weighted average shares outstanding for basic net income per share
53,081

 
51,585

Basic net income per common share attributable to The Ensign Group, Inc.
$
0.52

 
$
0.45

         
A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows:
 
Three Months Ended March 31,
 
2019

2018
Numerator:
 
 
 
Net income
$
27,607

 
$
23,293

Less: net income attributable to noncontrolling interests
235

 
161

Net income attributable to The Ensign Group, Inc.
$
27,372

 
$
23,132

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding
53,081

 
51,585

Plus: incremental shares from assumed conversion (1)
2,617

 
1,933

Adjusted weighted average common shares outstanding
55,698


53,518

Diluted net income per common share attributable to The Ensign Group, Inc.
$
0.49

 
$
0.43


(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 489 and 937 for the three months ended March 31, 2019 and 2018, respectively.

6. 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, 2019 and December 31, 2018:
 
 
March 31, 2019
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
 
$
37,824

 
$

 
$

 
$
31,083

 
$

 
$


The Company's non-financial assets, which includes 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, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. See Note 3, Summary of Significant Accounting Policies for further discussion of the Company's significant accounting policies.

Debt Security Investments - Held to Maturity

15

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



At March 31, 2019 and December 31, 2018, the Company had approximately $46,974 and $44,850, 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 based on Level 1 inputs. The Company has the intent and ability to hold these debt securities to maturity. Further, as of March 31, 2019, the debt security investments were held in AA, A and BBB rated debt securities.

7. BUSINESS SEGMENTS

The Company has three reportable operating segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities; (2) senior 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, hospice and home care businesses. The Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, reviews financial information at the operating segment level.

The Company also reports an “all other” category that includes results from its mobile diagnostics and other ancillary operations. 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 are managed separately to provide greater visibility into those operations.

As of March 31, 2019, transitional and skilled services included 166 wholly-owned affiliated skilled nursing operations and 24 campuses that provide skilled nursing and rehabilitative care services and senior living services. The Company provided room and board and social services through 55 wholly-owned affiliated senior living operations and 24 campuses as mentioned above. Home health, hospice and home care services were provided to patients through 56 affiliated agencies. As of March 31, 2019, 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 3, 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, 2019
 
 
Transitional and Skilled Services
 
Senior Living Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
Medicaid
 
$
181,294

 
$
9,802

 
$
3,907

 
$

 
$
195,003

 
35.5
%
Medicare
 
116,701

 

 
31,019

 

 
147,720

 
26.9

Medicaid-skilled
 
30,451

 

 

 

 
30,451

 
5.5

Subtotal
 
328,446

 
9,802

 
34,926

 

 
373,174

 
67.9

Managed care
 
83,172

 

 
6,676

 

 
89,848

 
16.4

Private and other
 
37,640

 
30,892

 
4,515

 
13,145

(1)
86,192

 
15.7

Total revenue
 
$
449,258

 
$
40,694

 
$
46,117

 
$
13,145

 
$
549,214

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2019.


16

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


 
 
Three Months Ended March 31, 2018
 
 
Transitional and Skilled Services
 
Senior Living Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
Medicaid
 
$
156,511

 
$
8,264

 
$
2,850

 
$

 
$
167,625

 
34.1
%
Medicare
 
111,953

 

 
27,361

 

 
139,314

 
28.3

Medicaid-skilled
 
27,042

 

 

 

 
27,042

 
5.5

Subtotal
 
295,506

 
8,264

 
30,211

 

 
333,981

 
67.9

Managed care
 
77,800

 

 
5,916

 

 
83,716

 
17.0

Private and other
 
33,710

 
27,849

 
3,631

 
9,247

(1)
74,437

 
15.1

Total revenue
 
$
407,016

 
$
36,113

 
$
39,758

 
$
9,247

 
$
492,134

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2018.

The following table sets forth selected financial data consolidated by business segment:
 
 
Three Months Ended March 31, 2019
 
 
Transitional and Skilled Services(4)
 
Senior Living Services(4)
 
Home Health and Hospice Services
 
All Other(3)
 
Elimination
 
Total
Revenue from external customers
 
$
449,258

 
$
40,694

 
$
46,117

 
$
13,145

 
$

 
$
549,214

Intersegment revenue(1)
 
715

 

 

 
1,712

 
(2,427
)
 

Total revenue
 
$
449,973

 
$
40,694

 
$
46,117

 
$
14,857

 
$
(2,427
)
 
$
549,214

Segment income (loss)(2)
 
$
58,764

 
$
5,038

 
$
6,868

 
$
(32,866
)
 
$

 
$
37,804

Interest expense, net of interest income
 

 

 

 

 
 
 
$
(3,097
)
Income before provision for income taxes
 

 

 

 

 
 
 
$
34,707

Depreciation and amortization
 
$
8,614

 
$
1,900

 
$
260

 
$
1,824

 
$

 
$
12,598

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's operating subsidiaries between the Company's business lines.
(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, senior living services and home health and hospice services segments. Home health and hospice services segment income also excludes intercompany expenses for services provided at transitional and skilled operations of $715. Including these expenses, home health and hospice services segment income would be $6,153. Transitional and skilled services, senior living services and home health and hospice services segment income excludes intercompany expenses for services provided by the business lines that are included in the "All Other" category of $1,712.
(3) General and administrative expense are included in the "All Other" category.
(4) The Company's campuses represent facilities that offer both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective reportable segment.

 
 
Three Months Ended March 31, 2018
 
 
Transitional and Skilled Services(4)
 
Senior Living Services(4)
 
Home Health and Hospice Services
 
All Other(3)
 
Elimination
 
Total
Revenue from external customers
 
$
407,016

 
$
36,113

 
$
39,758

 
$
9,247

 
$

 
$
492,134

Intersegment revenue(1)
 
689

 

 

 
1,082

 
(1,771
)
 

Total revenue
 
$
407,705

 
$
36,113

 
$
39,758

 
$
10,329

 
$
(1,771
)
 
$
492,134

Segment income (loss)(2)
 
$
46,195

 
$
4,662

 
$
6,058

 
$
(23,936
)
 
$

 
$
32,979

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
 
$
(3,165
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
 
$
29,814

Depreciation and amortization
 
$
7,802

 
$
1,597

 
$
245

 
$
1,978

 
$

 
$
11,622

 
 
 
 
 
 
 
 
 
 
 
 
 

17

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


(1) Intersegment revenue represents services provided at the Company's operating subsidiaries between the Company's business lines.
(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, senior living services and home health and hospice services segments. Home health and hospice services segment income also excludes intercompany expenses for services provided at transitional and skilled operations of $689.  Including these expenses, home health and hospice services segment income would be $5.369. Transitional and skilled services, senior living services and home health and hospice services segment income excludes intercompany expenses for services provided by the business lines that are included in the "All Other" category of $1,082.
(3) General and administrative expense is included in the "All Other" category.
(4) The Company's campuses represent facilities that offer both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective reportable segment.
The Company completed the sale of one of its senior living operations for an aggregate sale price of $1,838 during the three months ended March 31, 2019. The sale transaction does not meet the criteria of discontinued operations as it does not represent a strategic shift that has, or will have, a major effect on the Company's operations and financial results.

8. ACQUISITIONS
The acquisition focus of the subsidiaries is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business or otherwise advance the Company's strategy. The results of all 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's affiliated operations also enter into long-term leases that may include options to purchase the facilities. As a result, from time to time, the affiliated operations will acquire facilities that have been operating under third-party leases.
During the three months ended March 31, 2019, the Company expanded its operations through a combination of a long-term lease and real estate purchases, with the addition of two stand-alone skilled nursing operations, one home health agency and one hospice agency. 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 addition of these operations added a total of 218 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries. The Company also invested in new ancillary services that are complementary to its existing businesses. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction. The aggregate purchase price for these acquisitions during the three months ended March 31, 2019 was $14,691.
During the first quarter of 2019, the fair value of assets for two of the acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions in accordance with Accounting Standards Codification Topic 805, Clarifying the Definition of a Business (ASC 805). The purchase price for the two asset acquisitions was $5,763, which mainly consisted of building and improvements of $5,033. The fair value of assets for the remaining three acquisitions was concentrated in goodwill and as such, these transactions were classified as business acquisitions in accordance with ASC 805. The purchase price for the three business combinations was $8,928, which mainly consisted of goodwill and indefinite-lived intangible assets of $7,101. The Company also entered into a note payable with the seller of $924. As of the date of this filing, the preliminary allocation of the purchase price for the acquisitions in the first quarter was not finalized as necessary valuation information was not yet available.
During the first quarter of 2018, all of the fair value of the assets acquired were concentrated in property and equipment and as such, the transactions were classified as asset acquisitions in accordance with ASC 805. During the three months ended March 31, 2018, the aggregate purchase price for those acquisitions was $4,447.

The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities for return on invested capital. The operating subsidiaries acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior operating results are not a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries. The businesses acquired during the three months ended March 31, 2019 were not material acquisitions to the Company individually or in the aggregate. Accordingly, pro forma financial information is not presented. These acquisitions have been included in the March 31, 2019 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the dates the Company gained effective control.


18

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


Subsequent to March 31, 2019, the Company expanded its operations through a combination of a long-term lease and real estate purchases, with the addition of five stand-alone skilled nursing operations, one stand-alone senior living operation, two campus operations, two hospice agencies and two home care agencies. 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 addition of these operations added a total of 810 operational skilled nursing beds and 222 assisted living units to be 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 aggregate purchase price for these acquisitions was $35,060. As of the date of this report, the preliminary allocation of the purchase price for the acquisitions subsequent to March 31, 2019 were not completed as necessary valuation information was not yet available. As such, the determination whether these acquisitions should be classified as business combinations or asset acquisitions under ASC 805 will be determined upon completion of the allocation of the purchase price.

9. PROPERTY AND EQUIPMENT— Net
Property and equipment, net consist of the following:
 
March 31, 2019
 
December 31, 2018
Land
$
60,895

 
$
60,420

Buildings and improvements
417,204

 
411,096

Equipment
210,224

 
202,346

Furniture and fixtures
5,194

 
5,079

Leasehold improvements
115,344

 
112,935

Construction in progress
12,893

 
9,729

 
821,754

 
801,605

Less: accumulated depreciation
(194,354
)
 
(182,731
)
Property and equipment, net
$
627,400

 
$
618,874


See also Note 8, Acquisitions for information on acquisitions during the three months ended March 31, 2019 and 2018.

10. INTANGIBLE ASSETS — Net
 
 
Weighted Average Life (Years)
 
March 31, 2019
 
December 31, 2018
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
Intangible Assets
 
 
 
 
Net
 
 
 
Net
Lease acquisition costs
 
1.7
 
$
360

 
$
(185
)
 
175

 
$
843

 
$
(251
)
 
$
592

Favorable leases
 
2.1
 
534

 
(249
)
 
285

 
35,650

 
(8,724
)
 
26,926

Assembled occupancy
 
0.4
 
2,964

 
(2,951
)
 
13

 
2,936

 
(2,870
)
 
66

Facility trade name
 
30.0
 
733

 
(324
)
 
409

 
733

 
(317
)
 
416

Customer relationships
 
16.7
 
5,110

 
(1,861
)
 
3,249

 
4,670

 
(1,670
)
 
3,000

Total
 
 
 
$
9,701

 
$
(5,570
)
 
$
4,131

 
$
44,832

 
$
(13,832
)
 
$
31,000


Amortization expense was $893 and $615 for the three months ended March 31, 2019 and 2018, respectively. The majority of favorable leases were reclassed to right-of-use assets as of March 31, 2019, as a part of the adoption of ASC 842. See Note 17, Leases.
Estimated amortization expense for each of the years ending December 31 is as follows:

19

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


Year
Amount
2019 (remainder)
$
868

2020
345

2021
249

2022
249

2023
237

2024
234

Thereafter
1,949

 
$
4,131


11. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. The Company performs its analysis 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 Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of March 31, 2019. See further discussion of goodwill acquired at Note 8, Acquisitions.

The following table represents activity in goodwill by segment as of and for the three months ended March 31, 2019:
 
Goodwill
 
Transitional and Skilled Services
 
Senior Living Services
 
Home Health and Hospice Services
 
All Other
 
Total
January 1, 2019
$
45,486

 
$
3,958


$
27,250

 
$
3,783

 
$
80,477

Additions

 

 
1,154

 
5,431

 
6,585

March 31, 2019
$
45,486

 
$
3,958

 
$
28,404

 
$
9,214

 
$
87,062


Other indefinite-lived intangible assets consists of the following:
 
March 31, 2019

December 31, 2018
Trade name
$
1,245

 
$
1,217

Medicare and Medicaid licenses
26,873

 
26,385

 
$
28,118

 
$
27,602


12. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:

20

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


 
March 31, 2019
 
December 31, 2018
Debt issuance costs, net
$
1,664

 
$
1,892

Long-term insurance losses recoverable asset
7,360

 
6,969

Deposits with landlords
3,917

 
8,694

Capital improvement reserves with landlords and lenders
3,417

 
3,196

Note receivable from sale of ancillary business
83

 
93

Restricted and other assets
$
16,441

 
$
20,844


Included in restricted and other assets as of March 31, 2019 and December 31, 2018 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. Prepaid rent of $5,220, previously included in deposits with landlords above, were reclassed to right-of-use assets as of March 31, 2019 as part of the adoption of ASC 842. See Note 17, Leases.

13. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:
 
March 31, 2019
 
December 31, 2018
Quality assurance fee
$
5,120

 
$
5,375

Refunds payable
25,575

 
25,118

Resident advances
7,219

 
8,495

Cash held in trust for patients
2,831

 
2,824

Resident deposits
6,766

 
6,665

Dividends payable
2,543

 
2,525

Property taxes
7,404

 
9,426

Other
12,496

 
9,356

Other accrued liabilities
$
69,954

 
$
69,784


Quality assurance fee represents the aggregate of 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, duplicate payments and credit balances from various payor sources. Resident advances occur 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.

14. INCOME TAXES

The Company recorded income tax expense of $7,100 and $6,521 during the three months ended March 31, 2019 and 2018, respectively, or 20.5% of earnings before income taxes for the three months ended March 31, 2019, compared to 21.9% for the three months ended March 31, 2018. The effective tax rate for both three month periods include excess tax benefits from stock-based compensation which were offset by non-deductible expenses including non-deductible compensation.

The Company is not currently under examination by any major income tax jurisdiction. During 2019, the statutes of limitations will lapse on the Company's 2015 Federal tax year and certain 2014 and 2015 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, 2019 and 2018.


21

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


The Company implemented ASC 842 as described in the Summary of Significant Accounting Policies. The new lease standard reduced net deferred assets by $3,044 reflected in a retained earnings adjustment.

15. DEBT
Long-term debt consists of the following:
 
March 31, 2019
 
December 31, 2018
Term loan with SunTrust
$
111,250

 
$
113,125

Revolving credit facility with SunTrust
20,000

 
10,000

Mortgage loans and promissory note
122,313

 
122,955

 
253,563

 
246,080

Less: current maturities
(10,129
)
 
(10,105
)
Less: debt issuance costs
(2,774
)
 
(2,840
)
 
$
240,660

 
$
233,135


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). The Company originally entered into the Credit Facility in an aggregate principal amount of $150,000 in May 2014. Under the Credit Facility, the Company could seek to obtain incremental revolving or term loans in an aggregate amount not to exceed $75,000.

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.

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 is 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 5.00% 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.


22

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


The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and 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 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, 2019, the Company's operating subsidiaries had $131,250 outstanding under the Credit Facility. The outstanding balance on the term loan was $111,250, of which $7,500 is classified as short-term and the remaining $103,750 is classified as long-term. The outstanding balance on the revolving Credit Facility was $20,000, which is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2019.

As of May 2, 2019, there was approximately $111,250 outstanding under the Revolving Credit Facility.

Mortgage Loans and Promissory Note

In December 2017, 17 of the Company's subsidiaries entered into mortgage loans in the aggregate amount of $112,000. The mortgage loans are insured with Department of Housing and Urban Development (HUD), which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans and note bear fixed interest rates of 3.3% per annum. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment. During the first three years, the prepayment fee is 10% and is reduced by 3% in the fourth year of the loan, and reduced by 1.0% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The terms of the mortgage loans are 30 to 35 years. The borrowings were arranged by Lancaster Pollard Mortgage Company, LLC, and insured by HUD. Loan proceeds were used to pay down previously drawn amounts on Ensign's revolving line of credit. In addition to refinancing existing borrowings, the proceeds of the HUD-insured debt helped fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

In addition to the HUD mortgage loans above, the Company had outstanding indebtedness under mortgage loans insured with HUD and a promissory note issued in connection with various acquisitions. These 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 11 of the loan. There is no prepayment penalty after year 11. 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, 2019, the Company's operating subsidiaries had $122,313 outstanding under the mortgage loans and note, of which $2,629 is classified as short-term and the remaining $119,684 is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2019.
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, 2019, the Company had approximately $4,782 on the credit facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

16. OPTIONS AND AWARDS

23

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


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, 2019 and 2018 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
2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the 2017 Plan). The 2017 Plan provides for the issuance of 6,881 shares of common stock. The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than three years, on the completion of each year of service measured from the grant date. All other options generally vest over 5 years at 20% per year on the anniversary of the grant date. Options expire 10 years from the date of grant. At March 31, 2019, there were 4,379 unissued shares of common stock available for issuance under this plan.
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 141 options and 105 restricted stock awards from the 2017 Plan during the three months ended March 31, 2019.
The Company used the following assumptions for stock options granted during the three months ended March 31, 2019 and 2018:
Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2019
 
141
 
2.5%
 
6.3 years
 
33.6%
 
0.3%
2018
 
168
 
2.7%
 
6.2 years
 
32.0%
 
0.7%
For the three months ended March 31, 2019 and 2018, 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
2019
 
141

 
$
53.99

 
$
19.70

2018
 
168

 
$
26.53

 
$
9.01


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, 2019 and 2018 and therefore, the intrinsic value was $0 at the date of grant.

The following table represents the employee stock option activity during the three months ended March 31, 2019 and 2018:
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise Price
 
Number of
Options Vested
 
Weighted
Average
Exercise Price
of Options
Vested
January 1, 2019
4,188

 
$
17.35

 
2,431

 
$
12.37

Granted
141

 
53.99

 
 
 
 
Forfeited
(13
)
 
25.63

 
 
 
 
Exercised
(274
)
 
8.52

 
 
 
 
March 31, 2019
4,042

 
$
19.20

 
2,345

 
$
13.22


24

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



The following summary information reflects stock options outstanding, vested and related details as of March 31, 2019:
 
 
Stock Options Outstanding
 
Stock Options Vested
 
 
 
 
 
 
 
Number Outstanding
 
Black-Scholes Fair Value
 
Remaining Contractual Life (Years)
 
Vested and Exercisable
Year of Grant
 
Exercise Price
 
 
 
 
2009
 
4.06
-
4.56
 
67

 
$
140

 
0
 
67

2010
 
4.77
-
4.96
 
65

 
158

 
1
 
65

2011
 
5.90
-
7.99
 
81

 
278

 
2
 
81

2012
 
6.56
-
7.96
 
234

 
863

 
3
 
234

2013
 
7.98
-
11.49
 
390

 
1,888

 
4
 
390

2014
 
10.55
-
18.94
 
1,161

 
6,571

 
5
 
924

2015
 
21.47
-
25.24
 
465

 
4,225

 
6
 
286

2016
 
18.79
-
19.89
 
395

 
2,754

 
7
 
170

2017
 
18.64
-
22.90
 
427

 
2,985

 
8
 
98

2018
 
26.53
-
38.59
 
616

 
7,453

 
9
 
30

2019
 
53.99
 
141

 
2,786


10


Total
 
 
 
 
 
4,042

 
$
30,101

 
 

2,345

Restricted Stock Awards
The Company granted 105 and 57 restricted stock awards during the three months ended March 31, 2019 and 2018, respectively. All awards were granted at an issued 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, 2019 and 2018 ranged from $41.68 to $53.99 and $23.61 to $27.70 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, 2019 and changes during the three months ended March 31, 2019 is presented below:
 
Non-Vested Restricted Awards
 
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2019
573

 
$
29.31

Granted
105

 
51.15

Vested
(97
)
 
42.62

Forfeited
(3
)
 
26.43

Nonvested at March 31, 2019
578

 
$
31.06


During the three months ended March 31, 2019, the Company granted 7 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 $41.68 based on the market price on the grant date.

Share-based compensation expense recognized for the Company's equity incentive plans for the three months ended March 31, 2019 and 2018 was as follows:

25

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


 
Three Months Ended March 31,
 
2019
 
2018
Share-based compensation expense related to stock options
$
1,343

 
$
1,216

Share-based compensation expense related to restricted stock awards
998

 
578

Share-based compensation expense related to stock options and restricted stock awards to non-employee directors
271

 
177

Total
$
2,612

 
$
1,971


In future periods, the Company expects to recognize approximately $14,429 and $15,747 in share-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2019. Future share-based compensation expense will be recognized over 3.7 and 3.9 weighted average years for unvested options and restricted stock awards, respectively. There were 1,697 unvested and outstanding options at March 31, 2019, of which 1,593 are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest at March 31, 2019 was 6.0 years.

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of and for the three months ended March 31, 2019 and December 31, 2018 is as follows:
Options