Edgar Filing: ENSIGN GROUP, INC

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 June 30, 2016.



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to .

Commission file number: 001-33757

__________________________

THE ENSIGN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)



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

27101 Puerta Real, Suite 450

Mission Viejo, CA 92691

(Address of Principal Executive Offices and Zip Code)

(949) 487-9500

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

_____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of July 28, 2016, 50,481,330 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, 2016

TABLE OF CONTENTS



	Part I. Financial Information

	Item 1. Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	1

	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015	2

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	3

	Notes to Condensed Consolidated Financial Statements	5

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	60

	Item 4. Controls and Procedures	60

	Part II. Other Information

	Item 1. Legal Proceedings	62

	Item 1A. Risk Factors	63

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	96

	Item 3. Defaults Upon Senior Securities	96

	Item 4. Mine Safety Disclosures	96

	Item 5. Other Information	96

	Item 6. Exhibits	96

	Signatures	97

	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2
	Exhibit 101

Part I. Financial Information

Item 1. Financial Statements

THE ENSIGN GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)



	June 30, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	33,519		$	41,569
Accounts receivable—less allowance for doubtful accounts of $33,654 and $30,308 at June 30, 2016 and December 31, 2015, respectively	226,623			209,026
Investments—current	3,503			2,004
Prepaid income taxes	7,873			8,141
Prepaid expenses and other current assets	16,496			18,827
Total current assets	288,014			279,567
Property and equipment, net	347,203			299,633
Insurance subsidiary deposits and investments	31,018			32,713
Escrow deposits	6,704			400
Deferred tax asset	20,823			20,852
Restricted and other assets	12,507			9,631
Intangible assets, net	44,910			45,431
Goodwill	69,650			40,886
Other indefinite-lived intangibles	19,246			18,646
Total assets	$	840,075		$	747,759
Liabilities and equity
Current liabilities:
Accounts payable	$	38,085		$	36,029
Accrued wages and related liabilities	72,019			78,890
Accrued self-insurance liabilities—current	20,829			18,122
Other accrued liabilities	47,353			46,205
Current maturities of long-term debt	634			620
Total current liabilities	178,920			179,866
Long-term debt—less current maturities	183,722			99,051
Accrued self-insurance liabilities—less current portion	43,365			37,881
Deferred rent and other long-term liabilities	9,975			3,976
Total liabilities	415,982			320,774

Commitments and contingencies (Notes 16, 18 and 19)
Equity:
Ensign Group, Inc. stockholders' equity:
Common stock; $0.001 par value; 75,000 shares authorized; 52,366 and 50,403 shares issued and outstanding at June 30, 2016, respectively, and 51,918 and 51,370 shares issued and outstanding at December 31, 2015, respectively (Note 3)	52			51
Additional paid-in capital (Note 3)	244,755			235,076
Retained earnings	209,778			193,420
Common stock in treasury, at cost, 1,527 and 123 shares at June 30, 2016 and December 31, 2015, respectively (Note 3)	(31,131		)	(1,223		)
Total Ensign Group, Inc. stockholders' equity	423,454			427,324
Non-controlling interest	639			(339		)
Total equity	424,093			426,985
Total liabilities and equity	$	840,075		$	747,759

See accompanying notes to condensed consolidated financial statements.

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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,
	2016			2015			2016			2015

Revenue	$	410,517		$	311,056		$	793,750		$	617,585
Expense:
Cost of services	330,538			248,292			636,846			489,748
Losses related to operational closure (Note 18)	—			—			7,935			—
Rent—cost of services (Note 18)	30,741			19,066			57,732			38,031
General and administrative expense	19,657			15,335			37,045			29,751
Depreciation and amortization	9,772			6,379			18,069			12,896
Total expenses	390,708			289,072			757,627			570,426
Income from operations	19,809			21,984			36,123			47,159
Other income (expense):
Interest expense	(1,446		)	(567		)	(2,816		)	(1,233		)
Interest income	278			195			513			361
Other expense, net	(1,168		)	(372		)	(2,303		)	(872		)
Income before provision for income taxes	18,641			21,612			33,820			46,287
Provision for income taxes	7,278			8,379			13,167			17,964
Net income	11,363			13,233			20,653			28,323
Less: net income (loss) attributable to noncontrolling interests	37			45			155			(37		)
Net income attributable to The Ensign Group, Inc.	$	11,326		$	13,188		$	20,498		$	28,360
Net income per share attributable to The Ensign Group, Inc.:
Basic	$	0.23		$	0.26		$	0.41		$	0.57
Diluted	$	0.22		$	0.25		$	0.39		$	0.55
Weighted average common shares outstanding:
Basic	50,274			50,949			50,476			49,391
Diluted	51,931			52,866			52,134			51,272

Dividends per share	$	0.0400		$	0.0375		$	0.0800		$	0.0750

See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	20,653		$	28,323
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,069			12,896
Amortization of deferred financing fees	313			296
Fixed assets impairment	137			—
Write-off of deferred financing fee	197			—
Deferred income taxes	3			16
Provision for doubtful accounts	12,081			8,468
Share-based compensation	4,665			3,226
Excess tax benefit from share-based compensation	(1,534		)	(1,900		)
Change in operating assets and liabilities
Accounts receivable	(29,295		)	(49,735		)
Prepaid income taxes	268			(1,728		)
Prepaid expenses and other assets	2,337			(3,909		)
Insurance subsidiary deposits and investments	196			(676		)
Losses related to operational closure (Note 18)	7,558			—
Accounts payable	545			(654		)
Accrued wages and related liabilities	(6,871		)	1,770
Income taxes payable	(195		)	—
Other accrued liabilities	760			7,991
Accrued self-insurance liabilities	6,814			2,301
Deferred rent liability	127			123
Net cash provided by operating activities	36,828			6,808
Cash flows from investing activities:
Purchase of property and equipment	(36,443		)	(28,774		)
Cash payment for business acquisitions	(56,081		)	(61,007		)
Cash payment for asset acquisitions	(777		)	(15,853		)
Escrow deposits	(6,704		)	(3,344		)
Escrow deposits used to fund business acquisitions	400			16,153
Use of restricted cash	—			3,601
Cash proceeds from the sale of property and equipment and insurance proceeds	371			—
Restricted and other assets	(623		)	(203		)
Net cash used in investing activities	(99,857		)	(89,427		)
Cash flows from financing activities:
Proceeds from revolving credit facility (Note 16)	332,000			129,000
Payments on revolving credit facility and other debt (Note 16 and Note 3)	(247,316		)	(154,118		)
Proceeds from common stock offering (Note 3)	—			112,078
Issuance costs in connection with common stock offering (Note 3)	—			(5,751		)
Issuance of treasury stock upon exercise of options	92			16
Issuance of common stock upon exercise of options	4,124			3,344
Repurchase of shares of common stock (Note 3)	(30,000		)	—
Dividends paid	(4,097		)	(3,629		)
Excess tax benefit from share-based compensation	1,561			1,906
Payments of deferred financing costs	(1,385		)	—
Net cash provided by financing activities	54,979			82,846
Net (decrease) increase in cash and cash equivalents	(8,050		)	227
Cash and cash equivalents beginning of period	41,569			50,408
Cash and cash equivalents end of period	$	33,519		$	50,635

See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)



	Six Months Ended June 30,
	2016		2015
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,699	$	1,280
Income taxes	$	11,552	$	17,766
Non-cash financing and investing activity:
Accrued capital expenditures	$	5,682	$	4,244
Refundable deposits assumed as part of business acquisition	$	—	$	3,488
Debt assumed as part of asset acquisition	$	—	$	6,248

See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands, except per share data)

(Unaudited)

1. DESCRIPTION OF BUSINESS

The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum as well as, urgent care centers and other ancillary businesses. As of June 30, 2016, the Company operated 206 facilities, 35 home health, hospice and home care agencies, 17 urgent care centers and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oregon, South Carolina, Texas, Utah, Washington and Wisconsin. The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted living, home health, home care, hospice, urgent care and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 22,000 operational skilled nursing, assisted living and independent living beds. As of June 30, 2016, the Company owned 34 of its 206 affiliated facilities and leased an additional 172 facilities through long-term lease arrangements, and had options to purchase 23 of those 172 facilities. As of December 31, 2015, the Company owned 32 of its 186 affiliated facilities and leased an additional 154 facilities through long-term lease arrangements, and had options to purchase 20 of those 154 facilities.

Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide certain accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.

Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this quarterly report is not meant to imply, nor should it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc.

Other Information — The accompanying condensed consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 (collectively, the Interim Financial Statements) are unaudited. Certain information and note disclosures normally included in annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations. Readers of the Interim Financial Statements should refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2015 which are included in the Company’s annual report on Form 10-K, File No. 001-33757 (the Annual Report) filed with the Securities and Exchange Commission (SEC). Management believes that the Interim Financial Statements reflect all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position and results of operations in all material respects. The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or shareholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing and assisted living operations, home health, hospice and home care operations, urgent care centers and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its consolidated statements of income.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's relationship with variable interest entities was not material at June 30, 2016.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On December 9, 2015, the Company announced a two-for-one stock split of its outstanding shares of common stock. The stock split was effected in the form of a stock dividend, paid on December 23, 2015 to shareholders of record at the close of business on December 17, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All applicable share numbers and per share amounts presented in the notes to condensed consolidated financial statements and the condensed consolidated statements of income have been retroactively adjusted to reflect the stock split. The par value of the Company's common stock remained unchanged at $0.001 per share.

Reclassifications - Prior period results reflect reclassifications, for comparative purposes, related to the early adoption of authoritative guidance for the presentation of deferred taxes. Deferred tax assets have been presented on the balance sheet as a non-current asset for all periods presented. Historically, these assets were classified as either current or non-current assets, as applicable.

Estimates and Assumptions — The preparation of Interim Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Interim Financial Statements relate to revenue, allowance for doubtful accounts, intangible assets and goodwill, impairment of long-lived assets, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations.

Revenue Recognition — The Company recognizes revenue when the following four conditions have been met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured. The Company's revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to the individual. For reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.

Revenue from the Medicare and Medicaid programs accounted for 66.4% and 65.8% of the Company's revenue for the three and six months ended June 30, 2016, respectively, and 68.5% and 68.8% for the three and six months ended June 30, 2015, respectively. The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the three and six months ended June 30, 2016 and 2015.

The Company’s service specific revenue recognition policies are as follows:

Skilled Nursing, Assisted and Independent Living Revenue

The Company’s revenue is derived primarily from providing long-term healthcare services to residents and is recognized on the date services are provided at amounts billable to individual residents. For residents under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rate on a per patient, daily basis or as services are performed.

Home Health Revenue

Medicare Revenue

Net service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.

The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed episodes, the Company also recognizes a portion of revenue associated with episodes in progress. Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per episode and its estimate of the average percentage complete based on visits performed.

Non-Medicare Revenue

Episodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.

Non-episodic Based Revenue - Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimated per-visit rates, as applicable.

Hospice Revenue

Revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment rates are daily rates for each of the levels of care the Company delivers. The Company makes adjustments to revenue for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall payment cap, the Company monitors its provider numbers and estimates amounts due back to Medicare if a cap has been exceeded. The Company records these adjustments as a reduction to revenue and increases other accrued liabilities.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.

In evaluating the collectability of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type and the status of ongoing disputes with third-party payors. On an annual basis, the historical collection percentages are reviewed by payor and by state and are updated to reflect the recent collection experience of the Company. In order to determine the appropriate reserve rate percentages which ultimately establish the allowance, the Company analyzes historical cash collection patterns by payor and by state. The percentages applied to the aged receivable balances are based on the Company’s historical experience and time limits, if any, for managed care, Medicare, Medicaid and other payors. The Company periodically refines its estimates of the allowance for doubtful accounts based on experience with the estimation process and changes in circumstances.

Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

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 $137 related to the closure of one

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

facility during the six months ended June 30, 2016. The Company did not identify any asset impairment during the three months ended June 30, 2016 or during the three and six months ended June 30, 2015.

Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of favorable leases, lease acquisition costs, patient base, facility trade names and customer relationships. Favorable leases and lease acquisition costs are amortized over the life of the lease of the facility. Patient base is amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.

The Company's indefinite-lived intangible assets consist of trade names and Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit (operating segment) below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. See further discussion at Note 12, Goodwill and Other Indefinite-Lived Intangible Assets.

Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. For claims made after January 1, 2013, the combined self-insured retention was $500 per claim, subject to an additional one-time deductible of $1,000 for California affiliated facilities and a separate, one-time, deductible of $750 for non-California facilities. For all California affiliated facilities, the third-party coverage above these limits was $1,000 per claim, $3,000 per facility, with a $5,000 blanket aggregate limit. For all facilities outside of California, except those located in Colorado, the third-party coverage above these limits was $1,000 per claim, $3,000 per facility, with a $5,000 blanket aggregate and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits was $1,000 per claim and $3,000 per facility for skilled nursing facilities, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.

The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas and Washington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider. These requirements include, but are not limited to, maintaining statutory capital. The Company’s policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis. Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $34,257 and $29,772 as of June 30, 2016 and December 31, 2015, respectively.

The Company’s operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $500 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and, effective February 1, 2011, the Company has purchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. As of July 1, 2014, the Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $350 per occurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and pay benefits are managed through a state insurance pool. Outside of California, Texas, and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $350 per accident. In all states except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost 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 $19,664 and $18,276 as of June 30, 2016 and December 31, 2015, respectively.

In addition, the Company has recorded an asset and equal liability of $4,258 and $2,881 at June 30, 2016 and December 31, 2015, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis. See Note 13, Restricted and Other Assets.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $6,015 and $5,074 as of June 30, 2016 and December 31, 2015, respectively.

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

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

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

For interim reporting purposes, the provision for income taxes is determined based on the estimated annual effective income tax rate applied to pre-tax income, adjusted for certain discrete items occurring during the period. In determining the effective income tax rate for interim financial statements, the Company must consider expected annual income, permanent differences between financial reporting and tax recognition of income or expense and other factors. When the Company takes uncertain income tax positions that do not meet the recognition criteria, it records a liability for underpayment of income taxes and related interest and penalties, if any. In considering the need for and magnitude of a liability for such positions, the Company must consider the potential outcomes from a review of the positions by the taxing authorities.

In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ.

Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented within total equity in the Company's 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 consolidated statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

In April 2016, the FASB issued its standard to simplify several aspects the accounting for employee share-based payment transactions, which includes the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance will be effective for annual periods beginning after December 15, 2016, which will be the Company's fiscal year 2017, with early adoption permitted. The Company is currently assessing whether the adoption of the guidance will have a material impact on its consolidated financial statements.

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

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company's fiscal year 2018. The Company is currently assessing whether the adoption of the guidance will have a material impact on the Company's consolidated financial statements.

3. COMMON STOCK

Common Stock Repurchase Program

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

Common Stock Offering

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

4. COMPUTATION OF NET INCOME PER COMMON SHARE

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

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Numerator:
Net Income	$	11,363	$	13,233	$	20,653	$	28,323
Less: net income (loss) attributable to noncontrolling interests	37		45		155		(37		)
Net income attributable to The Ensign Group, Inc.	$	11,326	$	13,188	$	20,498	$	28,360

Denominator:
Weighted average shares outstanding for basic net income per share	50,274		50,949		50,476		49,391
Basic net income per common share attributable to The Ensign Group, Inc.	$	0.23	$	0.26	$	0.41	$	0.57

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Numerator:
Net Income	$	11,363	$	13,233	$	20,653	$	28,323
Less: net income (loss) attributable to noncontrolling interests	37		45		155		(37		)
Net income attributable to The Ensign Group, Inc.	$	11,326	$	13,188	$	20,498	$	28,360

Denominator:
Weighted average common shares outstanding	50,274		50,949		50,476		49,391
Plus: incremental shares from assumed conversion⁽¹⁾	1,657		1,917		1,658		1,881
Adjusted weighted average common shares outstanding	51,931		52,866		52,134		51,272
Diluted net income per common share attributable to The Ensign Group, Inc.	$	0.22	$	0.25	$	0.39	$	0.55

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 850 and 774 for the three and six months ended June 30, 2016, respectively, and 213 and 285 for the three and six months ended June 30, 2015, respectively.

5. FAIR VALUE MEASUREMENTS

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

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015:



	June 30, 2016						December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Cash and cash equivalents	$	33,519	$	—	$	—	$	41,569	$	—	$	—

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

Debt Security Investments - Held to Maturity

At June 30, 2016 and December 31, 2015, the Company had approximately $34,521 and $34,717, respectively, in debt security investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value. The Company has the intent and ability to hold these debt securities to maturity. Further, as of June 30, 2016, the debt security investments are held in AA, A and BBB+ rated debt securities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. REVENUE AND ACCOUNTS RECEIVABLE

Revenue for the three and six months ended June 30, 2016 and 2015 is summarized in the following tables:



	Three Months Ended June 30,
	2016				2015
	Revenue		% of Revenue		Revenue		% of Revenue
Medicaid	$	132,763	32.3	%	$	100,873	32.4	%
Medicare	119,443		29.1		95,396		30.7
Medicaid — skilled	20,661		5.0		16,745		5.4
Total Medicaid and Medicare	272,867		66.4		213,014		68.5
Managed care	65,178		15.9		47,633		15.3
Private and other payors⁽¹⁾	72,472		17.7		50,409		16.2
Revenue	$	410,517	100.0	%	$	311,056	100.0	%

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



	Six Months Ended June 30,
	2016				2015
	Revenue		% of Revenue		Revenue		% of Revenue
Medicaid	$	250,338	31.6	%	$	202,502	32.8	%
Medicare	229,721		28.9		189,752		30.7
Medicaid — skilled	42,327		5.3		32,282		5.3
Total Medicaid and Medicare	522,386		65.8		424,536		68.8
Managed care	129,721		16.4		93,963		15.2
Private and other payors⁽¹⁾	141,643		17.8		99,086		16.0
Revenue	$	793,750	100.0	%	$	617,585	100.0	%

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

Accounts receivable as of June 30, 2016 and December 31, 2015 is summarized in the following table:



	June 30, 2016			December 31, 2015
Medicaid	$	96,999		$	90,677
Managed care	63,244			56,411
Medicare	53,707			49,970
Private and other payors	46,327			42,276
	260,277			239,334
Less: allowance for doubtful accounts	(33,654		)	(30,308		)
Accounts receivable, net	$	226,623		$	209,026

7. BUSINESS SEGMENTS

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

As of June 30, 2016, TSA services included 206 wholly-owned affiliated skilled nursing facilities that provide skilled nursing and rehabilitative care services, as well as wholly-owned affiliated assisted and independent living facilities that provide room and board and social services. Home health, home care and hospice services were provided to patients through the Company's 35 agencies. The Company's urgent care services, which is included in the "all other" category, were provided to patients by the Company's wholly owned urgent care operating subsidiaries. As of June 30, 2016, the Company held majority membership interests in other ancillary operations, which operating results are included in the "all other" category.

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

Segment revenues by major payor source were as follows:



	Three Months Ended June 30, 2016
	TSA Services		Home Health and Hospice Services		All Other		Total Revenue		Revenue %
Medicaid	$	130,052	$	2,711	$	—	$	132,763	32.3	%
Medicare	99,184		20,259		—		119,443		29.1
Medicaid-skilled	20,661		—		—		20,661		5.0
Subtotal	249,897		22,970		—		272,867		66.4
Managed care	61,121		4,057		—		65,178		15.9
Private and other	60,107		1,466		10,899		72,472		17.7
Total revenue	$	371,125	$	28,493	$	10,899	$	410,517	100.0	%



	Three Months Ended June 30, 2015
	TSA Services		Home Health and Hospice Services		All Other		Total Revenue		Revenue %
Medicaid	$	98,461	$	2,412	$	—	$	100,873	32.4	%
Medicare	81,831		13,565		—		95,396		30.7
Medicaid-skilled	16,745		—		—		16,745		5.4
Subtotal	197,037		15,977		—		213,014		68.5
Managed care	45,241		2,392		—		47,633		15.3
Private and other	39,358		1,575		9,476		50,409		16.2
Total revenue	$	281,636	$	19,944	$	9,476	$	311,056	100.0	%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Six Months Ended June 30, 2016
	TSA Services		Home Health and Hospice Services		All Other		Total Revenue		Revenue %
Medicaid	$	245,052	$	5,286	$	—	$	250,338	31.6	%
Medicare	190,828		38,893		—		229,721		28.9
Medicaid-skilled	42,327		—		—		42,327		5.3
Subtotal	478,207		44,179		—		522,386		65.8
Managed care	121,660		8,061		—		129,721		16.4
Private and other	116,641		2,919		22,083		141,643		17.8
Total revenue	$	716,508	$	55,159	$	22,083	$	793,750	100.0	%



	Six Months Ended June 30, 2015
	TSA Services		Home Health and Hospice Services		All Other		Total Revenue		Revenue %
Medicaid	$	198,168	$	4,334	$	—	$	202,502	32.8	%
Medicare	163,521		26,231		—		189,752		30.7
Medicaid-skilled	32,282		—		—		32,282		5.3
Subtotal	393,971		30,565		—		424,536		68.8
Managed care	89,348		4,615		—		93,963		15.2
Private and other	77,090		3,080		18,916		99,086		16.0
Total revenue	$	560,409	$	38,260	$	18,916	$	617,585	100.0	%

The following table sets forth selected financial data consolidated by business segment:



	Three Months Ended June 30, 2016
	TSA Services		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	371,125	$	28,493	$	10,899					$	410,517
Intersegment revenue (1)	781		—		694			(1,475		)	—
Total revenue	$	371,906	$	28,493	$	11,593		$	(1,475	)	$	410,517
Segment income (loss) (2)	$	36,098	$	4,349	$	(20,638	)	$	—		$	19,809
Interest expense, net of interest income											(1,168		)
Income before provision for income taxes											$	18,641
Depreciation and amortization	$	7,775	$	229	$	1,768		$	—		$	9,772

(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.

(2) Segment income excludes general and administrative expense for TSA services and home health and hospice services. General and administrative expense is included in "All Other" category.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Three Months Ended June 30, 2015
	TSA Services		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	281,636	$	19,944	$	9,476					$	311,056
Intersegment revenue (1)	573		—		188			(761		)	—
Total revenue	$	282,209	$	19,944	$	9,664		$	(761	)	$	311,056
Segment income (loss) (2)	$	35,067	$	2,996	$	(16,079	)	$	—		$	21,984
Interest expense, net of interest income											(372		)
Income before provision for income taxes											$	21,612
Depreciation and amortization	$	4,877	$	224	$	1,278		$	—		$	6,379

(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.

(2) Segment income excludes general and administrative expense for TSA services and home health and hospice services. General and administrative expense is included in "All Other" category.



	Six Months Ended June 30, 2016
	TSA Services		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	716,508	$	55,159	$	22,083					$	793,750
Intersegment revenue (1)	1,491		—		965			(2,456		)	—
Total revenue	$	717,999	$	55,159	$	23,048		$	(2,456	)	$	793,750
Segment income (loss) (2)	$	66,954	$	7,525	$	(38,356	)	$	—		$	36,123
Interest expense, net of interest income											(2,303		)
Income before provision for income taxes											$	33,820
Depreciation and amortization	$	14,077	$	496	$	3,496		$	—		$	18,069

(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.

(2) Segment income excludes general and administrative expense for TSA services and home health and hospice services. General and administrative expense is included in "All Other" category.



	Six Months Ended June 30, 2015
	TSA Services		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	560,409	$	38,260	$	18,916					$	617,585
Intersegment revenue (1)	1,047		—		391			(1,438		)	—
Total revenue	$	561,456	$	38,260	$	19,307		$	(1,438	)	$	617,585
Segment income (loss) (2)	$	72,366	$	5,671	$	(30,878	)	$	—		$	47,159
Interest expense, net of interest income											(872		)
Income before provision for income taxes											$	46,287
Depreciation and amortization	$	9,826	$	445	$	2,625		$	—		$	12,896

(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, urgent care centers and other ancillary operations to the Company's other operating subsidiaries.

(2) Segment income excludes general and administrative expense for TSA services and home health and hospice services. General and administrative expense is included in "All Other" category.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. ACQUISITIONS

The Company’s acquisition focus is to purchase or lease operating subsidiaries that are complementary to the Company’s current affiliated operations, accretive to the Company's business or otherwise advance the Company's strategy. The results of all the Company’s operating subsidiaries are included in the accompanying Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company also enters into long-term leases that may include options to purchase the affiliated facilities. As a result, from time to time, the Company will acquire affiliated facilities that the Company has been operating under third-party leases.

During the six months ended June 30, 2016, the Company expanded its operations with the addition of one home health agency and two hospice agencies. In addition, the Company acquired eighteen stand-alone skilled nursing operations through purchases, a long-term master lease agreement and a sub-lease agreement. As part of this acquisition, the Company acquired the real estate at two of the skilled nursing operations and entered into long term leases for sixteen skilled nursing operations. The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company has also invested in new ancillary services that are complementary to its existing TSA services and home health and hospice businesses. The aggregate purchase price for these acquisitions for the six months ended June 30, 2016 was $56,292. The expansion of skilled nursing operations added 2,177 operational skilled nursing beds operated by the Company's operating subsidiaries. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

The Company also entered into three long-term lease agreements for newly constructed post-acute care campuses, which added 230 operational skilled nursing beds and 95 operational assisted living units, operated by the Company's operating subsidiaries.

The table below presents the allocation of the purchase price for the operations acquired in business combinations during the six months ended June 30, 2016 and 2015:



	Six Months Ended June 30,
	2016		2015
Land	$	866	$	8,321
Building and improvements	16,056		44,877
Equipment, furniture, and fixtures	7,998		2,204
Assembled occupancy	1,220		287
Definite-lived intangible assets	363		360
Goodwill	28,790		2,512
Favorable leases	393		2,069
Other indefinite-lived intangible assets	600		3,865
Other assets acquired, net of liabilities assumed	6		—
Total acquisitions	$	56,292	$	64,495

Subsequent to June 30, 2016, the Company entered into one long-term agreement for newly constructed post-acute care campus and acquired one stand-alone skilled nursing operation for a purchase price of $5,500, which included real estate. The expansion of the skilled nursing operations added 231 operational skilled nursing beds and 40 operational assisted living units operated by the Company's operating subsidiaries.

9. ACQUISITIONS - PRO FORMA FINANCIAL INFORMATION

The Company has established an acquisition strategy that is focused on identifying acquisitions within its target markets that offer the greatest opportunity for investment return at attractive prices. The facilities acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming facilities, is often inadequate, inaccurate or unavailable. As a result, the Company has developed an acquisition assessment program that is based on existing and potential resident mix, the local available market, referral sources and operating expectations based on the Company's experience with its existing facilities. Following an acquisition, the Company implements a well-developed integration program to provide a plan for transition and generation of profits from facilities that have a history

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of significant operating losses. Consequently, the Company believes that prior operating results are not meaningful as the information is not generally representative of the Company's current operating results or indicative of the integration potential of its newly acquired facilities.

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Revenue	$	425,468	$	352,180	$	849,331	$	699,832
Net income attributable to The Ensign Group, Inc.	11,477		13,213		20,363		28,252
Diluted net income per common share	$	0.22	$	0.25	$	0.39	$	0.55

Our pro forma assumptions are as follows:

•

Revenues and operating costs were based on actual results from the prior operator or from regulatory filings where available. If actual results were not available, revenues and operating costs were estimated based on available partial operating results of the prior operator of the facility, or if no information was available, estimates were derived from the Company’s post-acquisition operating results for that particular facility. Prior year results for the 2016 acquisitions were obtained from available financial information provided by prior operators or available cost reports filed by the prior operators.


•	Interest expense is based upon the purchase price and average cost of debt borrowed during each respective year when applicable, and depreciation is calculated using the purchase price allocated to the related assets through acquisition accounting.

The foregoing unaudited pro forma information is not indicative of what the results of operations would have been if the acquisitions had actually occurred at the beginning of the periods presented, and is not intended as a projection of future results or trends. Included in the table above are pro forma revenue generated during the three and six months ended June 30, 2016, by individually immaterial business acquisitions completed through the issuance date of the Interim Financial Statements of $14,951 and $55,581, respectively, $41,124 and $82,247 for the three and six months ended June 30, 2015, respectively. Included in the table above are pro forma income and loss generated during the three and six months ended June 30, 2016, by individually immaterial business acquisitions completed through the issuance date of the financial statements of $151 and $135, respectively, and $25 and $108, for the three and six months ended June 30, 2015, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. PROPERTY AND EQUIPMENT— Net

Property and equipment, net consist of the following:



	June 30, 2016			December 31, 2015
Land	$	42,888		$	41,451
Buildings and improvements	171,598			151,434
Equipment	145,868			114,752
Furniture and fixtures	5,659			5,504
Leasehold improvements	77,712			68,405
Construction in progress	1,586			781
	445,311			382,327
Less: accumulated depreciation	(98,108		)	(82,694		)
Property and equipment, net	$	347,203		$	299,633

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

11. INTANGIBLE ASSETS — Net



	Weighted Average Life (Years)	June 30, 2016							December 31, 2015
		Gross Carrying Amount		Accumulated Amortization					Gross Carrying Amount		Accumulated Amortization
Intangible Assets		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Lease acquisition costs	24.7	$	483	$	(68	)	$	415	$	604	$	(577	)	$	27
Favorable leases	27.8	43,248		(4,257		)	38,991		43,248		(2,923		)	40,325
Assembled occupancy	0.3	1,817		(1,208		)	609		4,779		(4,476		)	303
Facility trade name	30.0	733		(256		)	477		733		(244		)	489
Customer relationships	17.4	5,653		(1,235		)	4,418		5,300		(1,013		)	4,287
Total		$	51,934	$	(7,024	)	$	44,910	$	54,664	$	(9,233	)	$	45,431

Amortization expense was $1,410 and $2,497 for the three and six months ended June 30, 2016, respectively, and $665 and $1,818 for the three and six months ended June 30, 2015, respectively. Of the $2,497 in amortization expense incurred during the six months ended June 30, 2016, approximately $913 related to the amortization of patient base intangible assets at recently acquired facilities, which is typically amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. In addition, the Company identified intangible assets that have become fully amortized during the year and removed the fully amortized balances from the gross asset and accumulated amortization amounts.

Estimated amortization expense for each of the years ending December 31 is as follows:



Year	Amount
2016 (remainder)	$	2,882
2017	3,049
2018	3,049
2019	2,920
2020	2,276
2021	2,836
Thereafter	27,898
	$	44,910

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

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

The following table represents activity in goodwill by segment as of and for the six months ended June 30, 2016:



	Goodwill
	TSA Services		Home Health and Hospice Services		All Other			Total
January 1, 2016	$	17,759	$	16,102	$	7,025		$	40,886
Purchase price adjustment	—		—		(26		)	(26		)
Additions	26,415		245		2,130			28,790
June 30, 2016	$	44,174	$	16,347	$	9,129		$	69,650

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

Other indefinite-lived intangible assets consists of the following:



	June 30, 2016		December 31, 2015
Trade name	$	1,915	$	1,915
Medicare and Medicaid Licenses	17,331		16,731
	$	19,246	$	18,646

13. RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:



	June 30, 2016		December 31, 2015
Debt issuance costs, net	$	2,896	$	2,021
Long-term insurance losses recoverable asset	4,258		2,881
Deposits with landlords	4,519		3,969
Capital improvement reserves with landlords and lenders	834		760
Restricted and other assets	$	12,507	$	9,631

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:



	June 30, 2016		December 31, 2015
Quality assurance fee	$	4,019	$	6,120
Refunds payable	15,424		13,252
Deferred revenue	5,058		6,696
Cash held in trust for patients	2,372		3,016
Resident deposits	5,918		5,884
Dividends payable	2,045		2,072
Property taxes	5,752		4,230
Charges related to operational closure	1,987		—
Other	4,778		4,935
Other accrued liabilities	$	47,353	$	46,205

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

15. INCOME TAXES

The Company is not currently under examination by any major income tax jurisdiction. During 2016, the statutes of limitations will lapse on the Company's 2012 Federal tax year and certain 2011 and 2012 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three and six months ended June 30, 2016 or 2015.

The Company recorded total pre-tax charges and expenses related to the closure of one facility during the six months ended June 30, 2016 for a total charge of $7,935. There were no similar charges during the three months ended June 30, 2016. The Company recorded estimated tax benefits of $0 and $3,065 for the three and six months ended June 30, 2016, respectively. Similar charges did not occur during the three and six months ended June 30, 2015. See Note 18, Leases.

16. DEBT

Long-term debt consists of the following:



	June 30, 2016			December 31, 2015
Credit facility with SunTrust, interest payable monthly and quarterly	$	170,000		$	85,000
Mortgage loans and promissory note, principal and interest payable monthly, interest at fixed rate	14,356			14,671
	184,356			99,671
Less current maturities	(634		)	(620		)
	$	183,722		$	99,051

Amended Credit Facility with a Lending Consortium Arranged by SunTrust (the Amended Credit Facility)

On February 5, 2016, the Company amended its existing revolving credit facility with a lending consortium arranged by SunTrust to increase its aggregate principal amount available to $250,000 (the Amended Credit Facility). Under the Amended

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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 Amended 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 Amended 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 our subsidiaries. Loans made under the Amended Credit Facility are not subject to interim amortization. The Company is not required to repay any loans under the Amended Credit Facility prior to maturity, other than to the extent the outstanding borrowings exceed the aggregate commitments under the Amended Credit Facility. The Company is permitted to prepay all or any portion of the loans under the Amended Credit Facility prior to maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders. As of June 30, 2016, the Company's operating subsidiaries had $170,000 outstanding under the Amended Credit Facility.

The Amended Credit Facility is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The Amended 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 Amended 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 current 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 June 30, 2016, the Company was in compliance with all loan covenants.

On July 19, 2016, the Company entered into the second amendment to the Amended Credit Facility (Second Amended Credit Facility), which amended the existing credit agreement, dated as of February 5, 2016, to increase the aggregate principal amount up to $450,000 comprised of a $300,000 revolving credit facility and a $150,000 term loan. Borrowings under the term loan portion of the Second Amended Credit Facility mature on February 5, 2021 and amortize in equal quarterly installments, in an aggregate annual amount equal to 5.0% per annum of the original principal amount. The interest rates and commitment fee applicable to the Second Amended Credit Facility are similar to the Amended Credit Facility. 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 above.

As of July 29, 2016, there was approximately $177,000 outstanding under the Second Amended Credit Facility.

Mortgage Loans and Promissory Note

The Company had outstanding indebtedness under mortgage loans and promissory note issued in connection with various acquisitions. The mortgage loans are insured with the U.S. Department of Housing and Urban Development (HUD), which subjects the Company's operating subsidiaries to HUD oversight and periodic inspections. The mortgage loans and note bear fixed interest rates between 2.6% and 5.3% per annum. Amounts borrowed under the mortgage loans may be prepaid starting after the second anniversary of the notes subject to prepayment fees of the principal balance on the date of prepayment. These prepayment fees are reduced by 1.0% per year for years three through eleven of the loan. There is no prepayment penalty after year eleven. The term of the mortgage loans and 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 June 30, 2016, the Company's operating subsidiaries had $14,356 outstanding under the mortgage loans and note, of which $634 is classified as short-term and the remaining $13,722 is classified as long-term. As of June 30, 2016, the Company was in compliance with all loan covenants.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of June 30, 2016, the Company had approximately $2,310 on the Amended Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

17. OPTIONS AND AWARDS

All per share amounts and numbers of common shares outstanding presented below reflect the two-for-one stock split that was effected in the fourth quarter of 2015. See further details in Note 2, Summary of Significant Accounting Policies.

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 consolidated condensed statements of income for the three and six months ended June 30, 2016 and 2015 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.

Stock Options

The Company has three option plans, the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive Plan (2005 Plan) and the 2007 Omnibus Incentive Plan (2007 Plan), all of which have been approved by the Company's stockholders. The total number of shares available under all of the Company’s stock incentive plans was 3,252 as of June 30, 2016.

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 288 options and 214 restricted stock awards from the 2007 Plan during the six months ended June 30, 2016 .

The Company used the following assumptions for stock options granted during the three months ended June 30, 2016 and 2015:



Grant Year	Options Granted	Weighted Average Risk-Free Rate	Expected Life	Weighted Average Volatility	Weighted Average Dividend Yield
2016	121	1.49%	6.5 years	41.1%	0.79%
2015	150	1.71%	6.5 years	40.0%	0.62%

The Company used the following assumptions for stock options granted during the six months ended June 30, 2016 and 2015:



Grant Year	Options Granted	Weighted Average Risk-Free Rate	Expected Life	Weighted Average Volatility	Weighted Average Dividend Yield
2016	288	1.40%	6.5 years	39.2%	0.78%
2015	294	1.58%	6.5 years	42.1%	0.63%

For the six months ended June 30, 2016 and 2015, 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
2016	288	$	19.76	$	7.42
2015	294	$	22.57	$	9.23

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 June 30, 2016 and 2015 and therefore, the intrinsic value was $0 at date of grant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table represents the employee stock option activity during the six months ended June 30, 2016:



	Number of Options Outstanding		Weighted Average Exercise Price		Number of Options Vested	Weighted Average Exercise Price of Options Vested
January 1, 2016	5,448		$	10.36	2,526	$	6.35
Granted	288		19.76
Forfeited	(50	)	12.56
Exercised	(288	)	5.90
June 30, 2016	5,398		$	11.08	2,795	$	7.52

The following summary information reflects stock options outstanding, vested and related details as of June 30, 2016:

Stock Options Vested

Stock Options Outstanding

Number Outstanding

Black-Scholes Fair Value

Remaining Contractual Life (Years)

Vested and Exercisable

Year of Grant

Exercise Price