Company Quick10K Filing
Quick10K
Ensign Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$49.87 53 $2,644
10-Q 2019-06-30 Quarter: 2019-06-30
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 2019-10-01 M&A, Exhibits
8-K 2019-10-01 Enter Agreement, M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-09-09 Regulation FD, Exhibits
8-K 2019-08-27 Other Events, Exhibits
8-K 2019-08-01 Earnings, Exhibits
8-K 2019-06-17 Other Events
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
HCA HCA Healthcare 41,844
UHS Universal Health Services 13,121
FMS Fresenius Medical Care 10,342
THC Tenet Healthcare 2,107
MD Mednax 1,904
BKD Brookdale Senior Living 1,532
TVTY Tivity Health 858
ARA American Renal Associates Holdings 194
QHC Quorum Health 30
DVCR Diversicare Healthcare Services 15
ENSG 2019-06-30
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 ensgq22019ex311.htm
EX-31.2 ensgq22019ex312.htm
EX-32.1 ensg063019ex321.htm
EX-32.2 ensg063019ex322.htm

Ensign Group Earnings 2019-06-30

ENSG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Wdesk | Document
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Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2019.
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.)

29222 Rancho Viejo Road, Suite 127
San Juan Capistrano, CA 92675
(Address of Principal Executive Offices and Zip Code)
(949487-9500
(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. Yes 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). Yes 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
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

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.

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of July 31, 2019, 53,386,352 shares of the registrant’s common stock were outstanding.



THE ENSIGN GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.

Item 1.        Financial Statements

THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 

 
Current assets:
 

 
Cash and cash equivalents
$
39,042


$
31,083

Accounts receivable—less allowance for doubtful accounts of $3,726 and $2,886 at June 30, 2019 and December 31, 2018, respectively
296,935


276,099

Investments—current
8,003


8,682

Prepaid income taxes
5,934


6,219

Prepaid expenses and other current assets
25,632


24,130

Assets held for sale - current

 
1,859

Total current assets
375,546


348,072

Property and equipment, net
674,892


618,874

Right-of-use assets (Note 17)
1,074,449

 

Insurance subsidiary deposits and investments
38,929


36,168

Escrow deposits


7,271

Deferred tax assets
8,603


11,650

Restricted and other assets (Note 17)
16,943


20,844

Intangible assets, net (Note 17)
3,829


31,000

Goodwill
97,408


80,477

Other indefinite-lived intangibles
30,922


27,602

Total assets
$
2,321,521


$
1,181,958

Liabilities and equity
 

 
Current liabilities:
 

 
Accounts payable
$
44,694


$
44,236

Accrued wages and related liabilities
116,018


119,656

Lease liabilities—current (Note 17)
59,686

 

Accrued self-insurance liabilities—current
26,981


25,446

Other accrued liabilities
69,816

 
69,784

Current maturities of long-term debt
10,153


10,105

Total current liabilities
327,348


269,227

Long-term debt—less current maturities
268,179


233,135

Long-term lease liabilities—less current portion (Note 17)
988,145

 

Accrued self-insurance liabilities—less current portion
57,565


54,605

Other long-term liabilities
2,977


11,234

Deferred gain related to sale-leaseback (Note 17)


11,417

Total liabilities
1,644,214

 
579,618

 
 
 
 
Commitments and contingencies (Notes 15, 17 and 18)

 

Equity:
 
 
 
Ensign Group, Inc. stockholders' equity:
 
 
 
Common stock; $0.001 par value; 100,000 shares authorized; 55,809 and 53,272 shares issued and outstanding at June 30, 2019, respectively, and 55,089 and 52,584 shares issued and outstanding at December 31, 2018, respectively
55

 
55

Additional paid-in capital
298,891

 
284,384

Retained earnings
401,996

 
344,901

Common stock in treasury, at cost, 1,941 and 1,932 shares at June 30, 2019 and December 31, 2018, respectively
(38,890
)
 
(38,405
)
Total Ensign Group, Inc. stockholders' equity
662,052

 
590,935

Non-controlling interest
15,255

 
11,405

Total equity
677,307


602,340

Total liabilities and equity
$
2,321,521

 
$
1,181,958

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019

2018

2019

2018
 
 
 
 
 
 
 
 
Revenue
$
575,651

 
$
496,386

 
$
1,124,865

 
$
988,520

Expense







Cost of services
457,000


396,132


887,002


786,375

Return of unclaimed class action settlement (Note 18)






(1,664
)
Rent—cost of services (Note 17)
37,060


34,472


72,846


68,322

General and administrative expense
30,561


22,386


63,585


47,490

Depreciation and amortization
13,184


11,621


25,782


23,243

Total expenses
537,805


464,611


1,049,215


923,766

Income from operations
37,846


31,775


75,650


64,754

Other income (expense):







Interest expense
(3,941
)

(3,869
)

(7,613
)

(7,482
)
Interest income
572


562


1,147


1,010

Other expense, net
(3,369
)

(3,307
)

(6,466
)

(6,472
)
Income before provision for income taxes
34,477


28,468


69,184


58,282

Provision for income taxes
5,552


6,142


12,652


12,663

Net income
28,925


22,326


56,532


45,619

Less: net income attributable to noncontrolling interests
316


315


551


476

Net income attributable to The Ensign Group, Inc.
$
28,609


$
22,011


$
55,981


$
45,143

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

 
 
 
 
Basic
$
0.54


$
0.42


$
1.05


$
0.87

Diluted
$
0.51


$
0.41


$
1.00


$
0.84

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
53,408


51,880


53,246


51,733

Diluted
56,078


54,251


55,896


53,909

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards
326

 

 
3,213

 

 

 

 

 
3,213

Shares of common stock used to satisfy tax withholding obligations
(9
)
 

 

 

 
9

 
(485
)
 

 
(485
)
Dividends declared ($0.0475 per share)

 

 

 
(2,559
)
 

 

 

 
(2,559
)
Employee stock award compensation

 

 
3,066

 

 

 

 

 
3,066

Noncontrolling interest attributable to subsidiary equity plan (Note 16)

 

 

 
(2,497
)
 

 

 
2,733

 
236

Distribution to noncontrolling interest holder

 

 

 

 

 

 
(92
)
 
(92
)
Net income attributable to noncontrolling interest

 

 

 

 

 

 
316

 
316

Net income attributable to the Ensign Group, Inc.

 

 

 
28,609

 

 

 

 
28,609

Balance - June 30, 2019
53,272

 
$
55

 
$
298,891

 
$
401,996

 
1,941

 
$
(38,890
)
 
$
15,255

 
$
677,307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3

Table of Contents

 
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

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards
269

 

 
1,857

 

 

 

 

 
1,857

Dividends declared ($0.0450 per share)

 

 

 
(2,367
)
 

 

 

 
(2,367
)
Employee stock award compensation

 

 
2,177

 

 

 

 

 
2,177

Noncontrolling interest attributable to subsidiary equity plan (Note 16)

 

 

 
(1,885
)
 

 

 
2,228

 
343

Net income attributable to noncontrolling interest

 

 

 

 

 

 
315

 
315

Net income attributable to the Ensign Group, Inc.

 

 

 
22,011

 

 

 

 
22,011

Balance - June 30, 2018
52,033

 
$
54

 
$
274,982

 
$
303,157

 
1,932

 
$
(38,405
)
 
$
10,491

 
$
550,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


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Table of Contents

THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019

2018
Cash flows from operating activities:
 
 
 
Net income
$
56,532

 
$
45,619

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25,782

 
23,243

Impairment of long-lived assets

 
860

Amortization of deferred financing fees
583

 
588

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

 
(329
)
Non-cash leasing arrangement (Note 17)
(688
)
 

Provision for doubtful accounts
1,155

 
972

Share-based compensation
6,255

 
4,829

Cash received from insurance proceeds related to replacement properties and business interruptions
638

 

Income tax refund

 
11,000

Change in operating assets and liabilities
 
 
 
Accounts receivable
(22,716
)
 
13,476

Prepaid income taxes
229

 
(129
)
Prepaid expenses and other assets
3,332

 
(3,454
)
Insurance subsidiary deposits

 
(2,571
)
Operating lease obligations
(2,248
)
 

Accounts payable
356

 
(74
)
Accrued wages and related liabilities
(355
)
 
(1,046
)
Other accrued liabilities
(1,566
)
 
2,531

Accrued self-insurance liabilities
3,717

 
5,349

Other long-term liability
1,272

 
376

Net cash provided by operating activities
72,278


101,240

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(35,762
)
 
(24,295
)
Cash payments for business acquisitions (Note 8)
(21,262
)
 

Cash payments for asset acquisitions (Note 8)
(43,176
)
 
(55,546
)
Escrow deposits

 
(2,652
)
Escrow deposits used to fund acquisitions
7,271

 
228

Cash proceeds from the sale of assets and insurance proceeds
2,575

 
1,610

Investments and change in other assets
(7,902
)
 
(589
)
Net cash used in investing activities
(98,256
)

(81,244
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility and other debt (Note 15)
535,000

 
405,000

Payments on revolving credit facility and other debt (Note 15)
(500,965
)
 
(439,922
)
Issuance of common stock upon exercise of options
5,547

 
4,778

Repurchase of shares of common stock to satisfy tax withholding obligations
(485
)
 

Proceeds from sale of subsidiary shares (Note 16)
2,293

 

Repurchase of shares of common stock and subsidiary shares (Note 16)
(2,293
)
 

Dividends paid
(5,068
)
 
(4,695
)
Non-controlling interest distribution
(92
)
 
(292
)
Payments of deferred financing costs

 
(18
)
Net cash provided by/(used in) financing activities
33,937


(35,149
)
Net increase/(decrease) in cash and cash equivalents
7,959

 
(15,153
)
Cash and cash equivalents beginning of period
31,083


42,337

Cash and cash equivalents end of period
$
39,042

 
$
27,184

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
7,500

 
$
7,321

Income taxes
$
12,375

 
$
12,925

Lease liabilities
$
73,748

 
$

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
3,600

 
$
3,600

Accrued dividends declared
$
2,559

 
$
2,367

Note receivable from sale of ancillary business
$

 
$
282

Right-of-use assets obtained in exchange for new operating lease obligation
$
47,748

 
$

See accompanying notes to condensed consolidated financial statements.


6

Table of Contents

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 June 30, 2019, the Company operated 254 facilities, 62 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 20,700 operational skilled nursing beds and 5,900 senior living units. As of June 30, 2019, the Company owned 77 of its 254 affiliated facilities and leased an additional 177 facilities through long-term lease arrangements and had options to purchase 12 of those 177 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, its home health and hospice operations and substantially all of its senior living 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 June 30, 2019 and for the three and six months ended June 30, 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, its home health and hospice operations and substantially all of its senior living 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 and senior living.


7

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


The Company intends to accomplish the proposed separation through a spin-off (the 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 62 home health, hospice and home care agencies and 51 senior living communities as of June 30, 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, 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 and six months ended June 30, 2019 and 2018.
The Company completed the sale of one of its senior living operations for a sale price of $1,838 during the first quarter of 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.
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.

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.

8

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



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 $705 and $860 during the three and six months ended June 30, 2018. The Company did not record an impairment charge during the three and six months ended June 30, 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 right-of-use assets, current lease liabilities and long-term 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.
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.

9

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


Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. The Company did not identify any goodwill or intangible assets impairment during the three and six months ended June 30, 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 $45,106 and $42,635 as of June 30, 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 $25,317 and $24,624 as of June 30, 2019 and December 31, 2018, respectively.
In addition, the Company has recorded an asset and equal liability of $7,747 and $6,969 at June 30, 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 $6,376 and $5,823 as of June 30, 2019 and December 31, 2018, respectively.
The Company believes that adequate provision has been made in the Interim Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific

10

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


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.

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.

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The adoption of this standard resulted in recognition of right-of-use 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-use 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

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.


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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.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of credit Losses on Financial Instruments”, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance will be effective for fiscal year beginning after December 15, 2019, which will be the Company's fiscal year 2020, with early adoption is permitted. The Company has not yet determined the effect of the ASU on its results of operations, financial condition or cash flows.


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 68.0% the Company's revenue for both the three and six months ended June 30, 2019, respectively and 68.2%