ENSG 6.30.15 10Q
Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2015
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 o
Accelerated filer x
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 31, 2015, 25,558,912 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, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 101


2


Part I. Financial Information

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

 
June 30,
2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
50,635

 
$
50,408

Restricted cash—current
1,481

 
5,082

Accounts receivable—less allowance for doubtful accounts of $23,913 and $20,438 at June 30, 2015 and December 31, 2014, respectively
171,362

 
130,051

Investments—current
4,751

 
6,060

Prepaid income taxes
4,719

 
2,992

Prepaid expenses and other current assets
12,395

 
8,434

Deferred tax asset—current
10,602

 
10,615

Total current assets
255,945

 
213,642

Property and equipment, net
243,881

 
149,708

Insurance subsidiary deposits and investments
19,857

 
17,873

Escrow deposits
3,344

 
16,153

Deferred tax asset
11,500

 
11,509

Restricted and other assets
6,825

 
6,833

Intangible assets, net
38,580

 
35,568

Goodwill
32,781

 
30,269

Other indefinite-lived intangibles
16,226

 
12,361

Total assets
$
628,939

 
$
493,916

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,843

 
$
33,186

Accrued wages and related liabilities
58,482

 
56,712

Accrued self-insurance liabilities—current
16,537

 
15,794

Other accrued liabilities
34,431

 
24,630

Current maturities of long-term debt
501

 
111

Total current liabilities
143,794

 
130,433

Long-term debt—less current maturities
49,019

 
68,279

Accrued self-insurance liabilities—less current portion
35,856

 
34,166

Deferred rent and other long-term liabilities
3,357

 
3,235

Total liabilities
232,026

 
236,113

 
 
 
 
Commitments and contingencies (Notes 17, 19, and 20)

 

Equity:
 
 
 
Ensign Group, Inc. stockholders' equity:
 
 
 
Common stock; $0.001 par value; 75,000 shares authorized; 25,868 and 25,536 shares issued and outstanding at June 30, 2015, respectively, and 22,924 and 22,591 shares issued and outstanding at December 31, 2014, respectively (Note 3)
26

 
22

Additional paid-in capital (Note 3)
228,912

 
114,293

Retained earnings
170,355

 
145,846

Common stock in treasury, at cost, 146 and 150 shares at June 30, 2015 and December 31, 2014, respectively
(1,294
)
 
(1,310
)
Total Ensign Group, Inc. stockholders' equity
397,999

 
258,851

Non-controlling interest
(1,086
)
 
(1,048
)
Total equity
396,913

 
257,803

Total liabilities and equity
$
628,939

 
$
493,916

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,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
Revenue
$
311,056

 
$
250,043

 
$
617,585

 
$
489,696

Expense:
 
 
 
 
 
 

Cost of services (exclusive of rent, general and administrative and depreciation and amortization expenses shown separately below)
248,292

 
202,057

 
489,748

 
391,795

Rent—cost of services (Note 2 and 19)
19,066

 
8,283

 
38,031

 
11,832

General and administrative expense
15,335

 
18,257

 
29,751

 
31,414

Depreciation and amortization
6,379

 
7,804

 
12,896

 
16,666

Total expenses
289,072

 
236,401

 
570,426

 
451,707

Income from operations
21,984

 
13,642

 
47,159

 
37,989

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(567
)
 
(8,720
)
 
(1,233
)
 
(12,083
)
Interest income
195

 
134

 
361

 
293

Other expense, net
(372
)
 
(8,586
)
 
(872
)
 
(11,790
)
Income before provision for income taxes
21,612

 
5,056

 
46,287

 
26,199

Provision for income taxes
8,379

 
3,523

 
17,964

 
11,625

Net income
13,233

 
1,533

 
28,323

 
14,574

Less: net income (loss) attributable to noncontrolling interests
45


(474
)
 
(37
)
 
(959
)
Net income attributable to The Ensign Group, Inc.
$
13,188

 
$
2,007

 
$
28,360

 
$
15,533

Net income per share attributable to The Ensign Group, Inc.:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.09

 
$
1.15

 
$
0.70

Diluted
$
0.50

 
$
0.09

 
$
1.11

 
$
0.68

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
25,474

 
22,259

 
24,695

 
22,214

Diluted
26,433

 
22,960

 
25,636

 
22,915

 
 
 
 
 
 
 
 
Dividends per share
$
0.075

 
$
0.070

 
$
0.150

 
$
0.140


See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015

2014
 
2015

2014
Net income
$
13,233

 
$
1,533

 
$
28,323

 
$
14,574

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on interest rate swap, net of income tax of $0 and $78 for the three and six months ended June 30, 2014.

 
(30
)
 

 
89

Reclassification of derivative loss to income, net of income tax benefit of $638 for the three and six months ended June 30, 2014.

 
1,023

 

 
1,023

Comprehensive income
13,233

 
2,526

 
28,323

 
15,686

Less: net income (loss) attributable to noncontrolling interests
45

 
(474
)
 
(37
)
 
(959
)
Comprehensive income attributable to The Ensign Group, Inc.
$
13,188

 
$
3,000

 
$
28,360

 
$
16,645


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,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
28,323

 
$
14,574

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

 

Depreciation and amortization
12,896

 
16,666

Amortization of deferred financing fees and debt discount
296

 
391

Deferred income taxes
16

 
(543
)
Provision for doubtful accounts
8,468

 
6,634

Share-based compensation
3,226

 
2,383

Excess tax benefit from share-based compensation
(1,900
)
 
(1,932
)
Loss on extinguishment of debt

 
4,067

Loss on termination of interest rate swap

 
1,661

Loss on disposition of property and equipment

 
5

Change in operating assets and liabilities
 
 
 
Accounts receivable
(49,735
)
 
(19,712
)
Prepaid income taxes
(1,728
)
 
(329
)
Prepaid expenses and other assets
(3,909
)
 
1,605

Insurance subsidiary deposits and investments
(676
)
 
267

Accounts payable
(654
)
 
3,733

Accrued wages and related liabilities
1,770

 
4,521

Other accrued liabilities
7,991

 
3,233

Accrued self-insurance liabilities
2,301

 
(72
)
Deferred rent liability
123

 
(75
)
Net cash provided by operating activities
6,808

 
37,077

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(28,774
)
 
(32,577
)
Cash payment for business acquisitions
(61,007
)
 
(38,442
)
Cash payment for asset acquisitions
(15,853
)
 
(7,513
)
Escrow deposits
(3,344
)
 
(1,880
)
Escrow deposits used to fund business acquisitions
16,153

 
1,000

Increase in restricted cash

 
(8,219
)
Use of restricted cash
3,601

 

Restricted and other assets
(203
)
 
226

Net cash used in investing activities
(89,427
)
 
(87,405
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility (Note 17)
129,000

 
340,677

Payments on revolving credit facility and other debt
(154,118
)
 
(241,171
)
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
16

 
171

Cash retained by CareTrust at separation

 
(78,731
)
Issuance of common stock upon exercise of options
3,344

 
2,197

Dividends paid
(3,629
)
 
(3,166
)
Excess tax benefit from share-based compensation
1,906

 
1,941

Prepayment penalty on early retirement of debt

 
(2,069
)
Payments of deferred financing costs

 
(12,883
)
Net cash provided by financing activities
82,846

 
6,966

Net increase (decrease) in cash and cash equivalents
227

 
(43,362
)
Cash and cash equivalents beginning of period
50,408

 
65,755

Cash and cash equivalents end of period
$
50,635

 
$
22,393

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,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,280

 
$
6,976

Income taxes
$
17,766

 
$
13,683

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
4,244

 
$
676

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 skilled nursing, rehabilitative care services, home health, home care, hospice care, assisted living and urgent care services. As of June 30, 2015, the Company operated 150 facilities, fourteen home health and twelve hospice agencies, three home care operations, one transitional care management company, seventeen urgent care centers and a mobile x-ray and diagnostic company, located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Oregon, 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, mobile x-ray and diagnostic and urgent care services. The Company's operating subsidiaries have a collective capacity of approximately 16,000 operational skilled nursing, assisted living and independent living beds. As of June 30, 2015, the Company owned 26 of its 150 affiliated facilities and leased an additional 124 facilities through long-term lease arrangements, and had options to purchase three of those 124 facilities. As of December 31, 2014, the Company owned 11 of its 136 affiliated facilities and leased an additional 125 facilities through long-term lease arrangements, and had options to purchase three of those 125 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, as well as the use of the terms “we,” “us,” “our” and similar terms 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.
Other Information — The accompanying condensed consolidated financial statements as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 (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, 2014 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. SPIN-OFF OF REAL ESTATE ASSETS THROUGH A REAL ESTATE INVESTMENT TRUST
On June 1, 2014, the Company completed its plan to separate into two separate publicly traded companies by creating a newly formed, publicly traded real estate investment trust (REIT), known as CareTrust REIT, Inc. (CareTrust), through a tax free spin-off (the Spin-Off). The Company effected the Spin-Off by distributing to its stockholders one share of CareTrust common stock for each share of Ensign common stock held at the close of business on May 22, 2014, the record date for the Spin-Off. The Company received a private letter ruling from the Internal Revenue Service (IRS) substantially to the effect that the Spin-Off will qualify as a tax-free transaction for U.S. federal income tax purposes. The private letter ruling relies on certain facts, representations, assumptions and undertakings.
In connection with the Spin-Off, the Company contributed to CareTrust the assets and liabilities associated with 94 real property and three independent living facilities that CareTrust now operates and that were previously owned by the Company. The Company also retired all outstanding borrowings as of the date of the Spin-Off with a portion of the proceeds received from the Spin-Off.
As a result of the Spin-Off, CareTrust owns all of the 94 real property and leases back those assets to the Company under eight “triple-net” master lease agreements (collectively, the Master Leases), which have terms ranging from 12 to 19 years that,

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


at the Company’s option, may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The Company continues to operate the affiliated skilled nursing, assisted living and independent living facilities that are leased from CareTrust pursuant to the Master Leases.
Commencing in the third year of the term of the Master Leases, the rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%. Annual rent expense under the Master Leases will be approximately $56,000 during each of the first two years of the Master Leases. In addition to rent, the Company is required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. See further discussion at Note 19, Leases.
The Company incurred transaction costs of $7,281 and $8,871 for the three and six months ended June 30, 2014 associated with the Spin-Off, which are included in general and administrative expenses within the condensed consolidated statements of income, which did not recur in 2015.
3. COMMON STOCK OFFERING
On July 15, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for future public offerings of any combination of common stock, preferred stock and warrants.
On February 9, 2015, the Company entered into an underwriting agreement with Wells Fargo Securities, LLC as representative of the underwriters named therein (collectively, the Underwriters), pursuant to which the Company agreed to issue and sell to the Underwriters 2,500 shares of its common stock and also agreed to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of up to 375 additional shares of common stock (the Common Stock Offering).
Subsequently, the Company issued 2,734 shares for approximately $41.00 per share. After deducting $5,604 in underwriting discounts and commissions, the Company received net proceeds of $106,474, before other issuance costs of $321. The Company used $94,000 of the net proceeds to pay off the outstanding amounts under its revolving credit facility with a lending consortium arranged by SunTrust (the Credit Facility).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted (GAAP) in the United States. 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, 2015.
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, worker’s compensation, and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.


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


Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations.
Revenue Recognition — 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 68.5% and 68.8% of the Company's revenue for the three and six months ended June 30, 2015, respectively, and 70.2% and 70.7% for the three and six months ended June 30, 2014, 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, 2015 and 2014, except for additional payments from the State of California for quality improvements under the Quality and Accountability Supplemental Payment Program.
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.
The Company is participating in the recently established Upper Payment Limit (UPL) supplemental payment program in the state of Texas that provides supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as county hospital districts. The Company's operating subsidiaries, previously operating ten company-owned Texas skilled nursing facilities, entered into transactions with several such hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts through management agreements with the respective hospital districts, and providing further for the Company's operating subsidiaries to retain the management of those facilities on behalf of the hospital districts, which are all participating in the UPL program. Each affected operating subsidiary therefore retains operations of its skilled nursing facility and each agreement between the hospital district and the Company's subsidiary is terminable by either party to fully restore the prior license status.
Home Health Revenue
Medicare Revenue
Net service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.
The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.

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


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 has not identified any asset impairment during the three and six months ended June 30, 2015 or 2014.
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, typically ranging from five to 52 years. 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 up to 20 years.

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


The Company's indefinite-lived intangible assets consist of trade names and home health and hospice Medicare 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 or one level below an 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 13, 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 $28,700 and $29,313 as of June 30, 2015 and December 31, 2014, 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 $17,180 and $14,590 as of June 30, 2015 and December 31, 2014, respectively.
In addition, the Company has recorded an asset and equal liability of $2,388 and $2,256 at June 30, 2015 and December 31, 2014, 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 14, 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. The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $4,125 and $3,801 as of June 30, 2015 and December 31, 2014, 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

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


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

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

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 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.

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

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

Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) 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.


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


In February 2015, the FASB issued amendments to the consolidation analysis, which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. This guidance applies to all entities and is effective for annual periods beginning after December 15, 2015, which will be the Company's fiscal year 2016, with early adoption permitted. The Company is currently assessing whether the adoption of the guidance will have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued its final standard on presentation of debt issuance costs, which changes the presentation of debt issuance costs in the financial statement to represent such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. This guidance applies to all entities and is effective for annual periods beginning after December 15, 2015, which will be the Company's fiscal year 2016, with early adoption permitted. The Company is currently assessing whether the adoption of the guidance will have a material impact on the Company's consolidated financial statements.

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

5. 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.

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,
 
2015

2014
 
2015

2014
Numerator:
 
 
 
 
 
 
 
Net Income
$
13,233

 
$
1,533

 
$
28,323

 
$
14,574

Less: net income (loss) attributable to noncontrolling interests
45

 
(474
)
 
(37
)
 
(959
)
Net income attributable to The Ensign Group, Inc.
$
13,188

 
$
2,007

 
$
28,360

 
$
15,533

 
 
 
 
 
 
 
 
Denominator:

 
 
 
 
 
 
Weighted average shares outstanding for basic net income per share
25,474

 
22,259

 
24,695

 
22,214

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

 
$
0.09

 
$
1.15

 
$
0.70



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THE ENSIGN GROUP, INC.
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,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net Income
$
13,233

 
$
1,533

 
$
28,323

 
$
14,574

Less: net income (loss) attributable to noncontrolling interests
45

 
(474
)
 
(37
)
 
(959
)
Net income attributable to The Ensign Group, Inc.
$
13,188

 
$
2,007

 
$
28,360

 
$
15,533

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,474

 
22,259

 
24,695

 
22,214

Plus: incremental shares from assumed conversion (1)
959

 
701

 
941

 
701

Adjusted weighted average common shares outstanding
26,433

 
22,960

 
25,636

 
22,915

Diluted net income per common share attributable to The Ensign Group, Inc.
$
0.50

 
$
0.09

 
$
1.11

 
$
0.68

(1)    Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 107 and 143 for the three and six months ended June 30, 2015, respectively, and 608 and 447 for the three and six months ended June 30, 2014, respectively.

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

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
 
$
50,635

 
$

 
$

 
$
50,408

 
$

 
$

Restricted cash
 
$
1,481

 
$

 
$

 
$
5,082

 
$

 
$


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 4, Summary of Significant Accounting Policies for further discussion of the Company's significant accounting policies.

Debt Security Investments - Held to Maturity

At June 30, 2015 and December 31, 2014, the Company had approximately $24,608 and $23,933, 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, 2015, the debt security investments are held in AA, A and BBB+ rated debt securities.


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


7. REVENUE AND ACCOUNTS RECEIVABLE

Revenue for the three and six months ended June 30, 2015 and 2014 is summarized in the following tables:
 
Three Months Ended June 30,
 
2015
 
2014
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
100,873

 
32.4
%
 
$
85,937

 
34.4
%
Medicare
95,396

 
30.7

 
77,333

 
30.9

Medicaid — skilled
16,745

 
5.4

 
12,353

 
4.9

Total Medicaid and Medicare
213,014

 
68.5

 
175,623

 
70.2

Managed care
47,633

 
15.3

 
35,776

 
14.3

Private and other payors(1)
50,409

 
16.2

 
38,644

 
15.5

Revenue
$
311,056

 
100.0
%
 
$
250,043

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

 
Six Months Ended June 30,
 
2015
 
2014
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
202,502

 
32.8
%
 
$
169,279

 
34.6
%
Medicare
189,752

 
30.7

 
153,803

 
31.4

Medicaid — skilled
32,282

 
5.3

 
22,961

 
4.7

Total Medicaid and Medicare
424,536

 
68.8

 
346,043

 
70.7

Managed care
93,963

 
15.2

 
68,754

 
14.0

Private and other payors(1)
99,086

 
16.0

 
74,899

 
15.3

Revenue
$
617,585

 
100.0
%
 
$
489,696

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

Accounts receivable as of June 30, 2015 and December 31, 2014 is summarized in the following table:
 
June 30, 2015
 
December 31,
2014
Medicaid
$
69,954

 
$
45,943

Managed care
48,410

 
39,782

Medicare
40,509

 
32,861

Private and other payors
36,402

 
31,903

 
195,275

 
150,489

Less: allowance for doubtful accounts
(23,913
)
 
(20,438
)
Accounts receivable
$
171,362

 
$
130,051


8. BUSINESS SEGMENTS

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

The Company also reports an “all other” category that includes revenue from its urgent care centers and a mobile x-ray and diagnostic company. The urgent care centers and mobile x-ray and diagnostic business are neither significant individually nor in

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


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. Previously, the Company had a single reportable segment, healthcare services, which included providing skilled nursing, assisted living, home health and hospice, urgent care and related ancillary services. The Company has presented 2014 financial information on a comparative basis to conform with the current period segment presentation.

As of June 30, 2015, TSA services included 150 wholly-owned skilled nursing affiliated facilities that offer post-acute, rehabilitative custodial and specialty skilled nursing care, as well as wholly-owned assisted and independent living affiliated facilities that provide room and board and social services. Home health and hospice services were provided to patients through the Company's 26 agencies. The Company's urgent care services, which is included in "all other" category, were provided to patients by the Company's wholly owned urgent care operating subsidiaries. As of June 30, 2015, the Company held 80% of the membership interest of a mobile x-ray and diagnostic company, which revenue is 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 4, 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, 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
%
 
 
 
Three Months Ended June 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
84,838

 
$
1,099

 
$

 
$
85,937

 
34.4
%
 
Medicare
 
68,447

 
8,886

 

 
77,333

 
30.9

 
Medicaid-skilled
 
12,353

 

 

 
12,353

 
4.9

 
Subtotal
 
165,638

 
9,985

 

 
175,623

 
70.2

 
Managed care
 
33,883

 
1,893

 

 
35,776

 
14.3

 
Private and other
 
32,494

 
826

 
5,324

 
38,644

 
15.5

 
Total revenue
 
$
232,015

 
$
12,704

 
$
5,324

 
$
250,043

 
100.0
%
 


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


 
 
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
%
 

 
 
Six Months Ended June 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
167,225

 
$
2,054

 
$

 
$
169,279

 
34.6
%
 
Medicare
 
136,954

 
16,849

 

 
153,803

 
31.4
%
 
Medicaid-skilled
 
$
22,961

 
$

 
$

 
$
22,961

 
4.7
%
 
Subtotal
 
327,140

 
18,903

 

 
346,043

 
70.7
%
 
Managed care
 
$
65,179

 
$
3,575

 
$

 
$
68,754

 
14.0
%
 
Private and other
 
63,818

 
1,372

 
9,709

 
74,899

 
15.3
%
 
Total revenue
 
$
456,137

 
$
23,850

 
$
9,709

 
$
489,696

 
100.0
%
 

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

 
 
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

 
Income from operations
 
$
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, mobile x-ray and diagnostic company and urgent care centers to the Company's other operating subsidiaries.
 

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


 
 
Three Months Ended June 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
 
Revenue from external customers
 
$
232,015

 
$
12,704

 
$
5,324

 

 
$
250,043

 
Intersegment revenue (1)
 
470

 

 
150

 
(620
)
 

 
Total revenue
 
$
232,485

 
$
12,704

 
$
5,474

 
$
(620
)
 
$
250,043

 
Income from operations
 
$
31,372

 
$
2,213

 
$
(19,943
)
 
$

 
$
13,642

 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
$
8,586

 
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
5,056

 
Depreciation and amortization
 
$
6,600

 
$
126

 
$
1,078

 
$

 
$
7,804

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, mobile x-ray and diagnostic company and urgent care centers to the Company's other operating subsidiaries.
 

 
 
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

 
Income from operations
 
$
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, mobile x-ray and diagnostic company and urgent care centers to the Company's other operating subsidiaries.
 
 
 
Six Months Ended June 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
 
Revenue from external customers
 
$
456,137

 
$
23,850

 
$
9,709

 

 
$
489,696

 
Intersegment revenue (1)
 
916

 

 
332

 
(1,248
)
 

 
Total revenue
 
$
457,053

 
$
23,850

 
$
10,041

 
$
(1,248
)
 
$
489,696

 
Income from operations
 
$
68,304

 
$
4,085

 
$
(34,400
)
 
$

 
$
37,989

 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
$
11,790

 
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
26,199

 
Depreciation and amortization
 
$
14,461

 
$
247

 
$
1,958

 
$

 
$
16,666

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, mobile x-ray and diagnostic company and urgent care centers to the Company's other operating subsidiaries.
 

9. ACQUISITIONS
The Company’s acquisition strategy is to purchase or lease operating subsidiaries that are complementary to the Company’s current affiliated facilities, 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

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


acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company also enters into long-term leases that 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, 2015, the Company continued to expand its operations with the addition of nine stand-alone skilled nursing operations, five assisted and independent living operations, two home health agencies, one home care operation and three urgent care centers to its operations. The aggregate purchase price of the 18 business acquisitions was approximately $64,495, which was paid with cash of $61,007 and assumed liabilities of $3,488. In addition, the Company also entered into a long-term lease agreement for one skilled nursing operation. The details of the operating subsidiaries acquired during the three and six months ended June 30, 2015 are as follows:
On January 1, 2015, the Company acquired three skilled nursing operations, one assisted and independent living operation, one home health agency and two urgent care centers for an aggregate purchase price of approximately $19,045, which included the real estate of the skilled nursing and assisted and independent living operations. The acquisitions for the skilled nursing and assisted living operations added 244 and 17 operational skilled nursing beds and operational assisted and independent living units, respectively, operated by the Company's operating subsidiaries. The acquisition of the home health agency and urgent care centers did not impact the Company's operational bed count. 
On February 1, 2015, the Company acquired two skilled nursing operations and one assisted and independent living operation for an aggregate purchase price of approximately $23,152, which included assumed liabilities of $3,488. The Company acquired the real estate of the skilled nursing and assisted and independent living operations as part of the acquisitions. The acquisitions added 163 and 328 operational skilled nursing beds and operational assisted and independent living units, respectively, operated by the Company's operating subsidiaries.
On April 1, 2015, the Company entered into a long-term lease agreement for one skilled nursing operation, which includes an option to purchase the real estate. 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 long-term lease added 60 operational skilled nursing beds operated by the Company's operating subsidiaries.
On April 15, 2015, the Company acquired three assisted living operations for an aggregate purchase price of approximately $11,305, including the real estate of the assisted living operations. The acquisitions added 263 operational assisted living units operated by the Company's operating subsidiaries.
On May 1, 2015, the Company acquired three skilled nursing operations and one home care operation for an aggregate purchase price of approximately $10,043, including the real estate of the skilled nursing operations. The acquisitions of the skilled nursing operations added 262 operational skilled nursing beds operated by the Company's operating subsidiaries. The acquisition of the home care operation did not impact the Company's operational bed count. 
On June 1, 2015, the Company acquired one home health agency for a purchase price of approximately $950. This acquisition did not impact the Company's operational bed count.

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


The table below presents the allocation of the purchase price for the operations acquired in business combinations during the six months ended June 30, 2015 and 2014:
 
June 30,
 
2015
 
2014
Land
$
8,321

 
$
8,094

Building and improvements
44,877

 
27,228

Equipment, furniture, and fixtures
2,204

 
1,344

Assembled occupancy
287

 
425

Definite-lived intangible assets
360

 
360

Goodwill
2,512

 
391

Favorable leases
2,069

 

Other indefinite-lived intangible assets
3,865

 
600

 
$
64,495

 
$
38,442


In addition to the business combinations above, the Company acquired the following assets during the six months ended June 30, 2015:

On April 1, 2015, the Company acquired the underlying assets of one skilled nursing operation, which the Company previously operated under a long-term lease agreement. The purchase price of the asset acquisition was $7,378, which included a promissory note of $6,248. This acquisition did not impact the Company's operational bed count. 

On June 29, 2015, the Company acquired the underlying assets of one skilled nursing operation, which the Company previously operated under a long-term lease agreement. The purchase price of the asset acquisition was $10,576. This acquisition did not impact the Company's operational bed count. As of the date of this filing, the preliminary allocation of the purchase price was not completed as necessary valuation information was not yet available

In addition, the Company acquired land for an aggregate purchase price of $4,147 in June 2015. These acquisitions did not impact the Company's operational bed count.

Subsequent to June 30, 2015, the Company acquired one skilled nursing operation for approximately $5,500, which was acquired through the assumption of an existing HUD-insured mortgage loan. The Company acquired the real estate of the skilled nursing operation as part of the acquisition. In addition, the Company assumed a long-term lease agreement for fifteen assisted and independent living operations. The Company paid $12,000 to assume the long-term lease agreement. Further, the Company entered into a long-term lease agreement for seven skilled nursing operations and five assisted and independent living operations, which include an option to purchase the real estate. The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term leases. The purchase of one skilled nursing facility and the operations acquired through long-term lease agreements added 855 and 1,733 operational skilled nursing beds and operational assisted and independent living units, respectively, operated by the Company's operating subsidiaries.

In addition, subsequent to June 30, 2015, the Company acquired one hospice agency for a purchase price of approximately $4,500, which was purchased with cash. In connection with this transaction, the Company began operating an affiliated home health agency under a management agreement.  The acquisition of the hospice agency did not have an impact on the Company’s operational bed count.

As of the date of this filing, the preliminary allocation of the purchase price was not completed as necessary valuation information was not yet available for the acquisitions subsequent to June 30, 2015.


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


10. ACQUISITIONS - PRO FORMA FINANCIAL INFORMATION

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

The following table represents pro forma results of consolidated operations as if the acquisitions through the issuance date of the financial statements had occurred at the beginning of 2014, after giving effect to certain adjustments.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
347,769

 
$
305,466

 
$
697,564

 
$
600,542

Net income attributable to The Ensign Group, Inc.
16,803

 
4,111

 
35,424

 
19,741

Diluted net income per common share
$
0.64

 
$
0.18

 
$
1.38

 
$
0.86

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 2015 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 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, 2015 by individually immaterial business acquisitions completed through June 30, 2015 of $36,713 and $79,979, respectively, and $55,423 and $110,846 for the three and six months ended June 30, 2014, respectively. Included in the table above are pro forma income incurred during the three and six months ended June 30, 2015, by individually immaterial business acquisitions completed through June 30, 2015, of $3,614 and $7,065, respectively, and $2,104 and $4,208 for the three and six months ended June 30, 2014, respectively.



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


11. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
 
June 30, 2015
 
December 31, 2014
Land
$
34,176

 
$
18,994

Buildings and improvements
118,940

 
57,947

Equipment
97,821

 
80,112

Furniture and fixtures
6,807

 
5,732

Leasehold improvements
61,196

 
50,671

Construction in progress
88

 
423

 
319,028

 
213,879

Less: accumulated depreciation
(75,147
)
 
(64,171
)
Property and equipment, net
$
243,881

 
$
149,708


See Note 9, Acquisitions for information on acquisitions during the six months ended June 30, 2015.

12. INTANGIBLE ASSETS — Net
 
 
Weighted Average Life (Years)
 
June 30, 2015
 
December 31, 2014
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
Intangible Assets
 
 
 
 
Net
 
 
 
Net
Lease acquisition costs
 
19.9
 
$
604

 
$
(575
)
 
$
29

 
$
684

 
$
(634
)
 
$
50

Favorable lease
 
31.8
 
35,074

 
(1,697
)
 
33,377

 
30,890

 
(783
)
 
30,107

Assembled occupancy
 
0.6
 
4,171

 
(4,056
)
 
115

 
3,884

 
(3,461
)
 
423

Facility trade name
 
30.0
 
733

 
(232
)
 
501

 
733

 
(220
)
 
513

Customer relationships
 
11.1
 
5,300

 
(742
)
 
4,558

 
4,940

 
(465
)
 
4,475

Total
 
 
 
$
45,882

 
$
(7,302
)
 
$
38,580

 
$
41,131

 
$
(5,563
)
 
$
35,568

Amortization expense was $665 and $1,818 for the three and six months ended June 30, 2015, respectively, and $258 and $406 for the three and six months ended June 30, 2014, respectively. Of the $1,818 in amortization expense incurred during the six months ended June 30, 2015, approximately $593 related to the amortization of patient base intangible assets at recently acquired facilities, which is typically amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date.
Estimated amortization expense for each of the years ending December 31 is as follows:
Year
Amount
2015 (remainder)
$
1,372

2016
2,914

2017
2,914

2018
2,914

2019
2,914

2020
2,914

Thereafter
22,638

 
$
38,580



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


13. 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, 2015:
 
Goodwill
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total
January 1, 2015
$
15,977

 
$
10,929

 
$
3,363

 
$
30,269

Impairments

 

 

 

Additions

 

 
2,512

 
2,512

June 30, 2015
$
15,977

 
$
10,929

 
$
5,875

 
$
32,781


As of June 30, 2015, the Company anticipates that total goodwill recognized will be fully deductible for tax purposes. See further discussion of goodwill acquired at Note 9, Acquisitions.

Other indefinite-lived intangible assets consists of the following:
 
June 30,
2015
 
December 31,
2014
Trade name
$
1,855

 
$
1,055

Home health and hospice Medicare license
14,371

 
11,306

 
$
16,226

 
$
12,361


14. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:
 
June 30,
2015
 
December 31,
2014
Debt issuance costs, net
$
2,316

 
$
2,612

Long-term insurance losses recoverable asset
2,388

 
2,256

Deposits with landlords
1,650

 
1,143

Capital improvement reserves with landlords and lenders
471

 
774

Other long-term assets

 
48

Restricted and other assets
$
6,825

 
$
6,833

Included in restricted and other assets as of June 30, 2015 and December 31, 2014, 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 and capitalized debt issuance costs.


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


15. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:
 
June 30,
2015
 
December 31, 2014
Quality assurance fee
$
3,572

 
$
2,855

Refunds payable
10,528

 
7,014

Deferred revenue
3,473

 
3,471

Cash held in trust for patients
1,970

 
1,824

Resident deposits
5,796

 
1,593

Dividends payable
1,929

 
1,708

Property taxes
2,771

 
3,043

Other
4,392

 
3,122

Other accrued liabilities
$
34,431

 
$
24,630

Quality assurance fee represents amounts payable to Arizona, California, Colorado, Idaho, Iowa, 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 assumed from acquisitions. See Note 8, Acquisitions. 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.

16. INCOME TAXES
During the second quarter of 2015, the Company completed the Internal Revenue Service (IRS) examination of the Company's 2012 tax return without adjustment. The Company is not currently under examination by any major income tax jurisdiction. During 2015, the statutes of limitations will lapse on the Company's 2011 federal tax year and certain 2010 and 2011 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 six months ended June 30, 2015 or 2014.

17. DEBT
Long-term debt consists of the following:
 
June 30,
2015
 
December 31, 2014
Credit Facility with SunTrust, interest payable monthly and quarterly, balance due at May 1, 2019, secured by substantially all of the Company’s personal property.
$
40,000

 
$
65,000

Mortgage note, principal and interest payable monthly and continuing through October 2037, interest at fixed rate, collateralized by deed of trust on real property, assignment of rents and security agreement.
3,335

 
3,390

Promissory note, principal and interest payable monthly and continuing through April 30, 2027, interest at fixed rate, collateralized by deed of trust on real property, assignment of rents and security agreement.
6,185

 

 
49,520

 
68,390

Less current maturities
(501
)
 
(111
)
 
$
49,019

 
$
68,279



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


Promissory Note with Vannovi Properties, LLC

On April 1, 2015, the Company entered into a promissory note with Vannovi Properties, LLC for approximately $6,248 in connection with an acquisition. The unpaid balance of principal and accrued interest from the note is due on April 30, 2027. The note bears interest at a rate of 5.3% per annum. As of June 30, 2015, the Company's operating subsidiary had $6,185 outstanding under the note, of which $389 is classified as short-term and the remaining $5,796 is classified as long-term.

Mortgage Loan with Ziegler Financing Corporation

On July 1, 2015, the Company assumed an existing mortgage loan with Ziegler Financing Corporation of approximately $5,500 in connection with an acquisition. The mortgage loan is insured with the U.S. Department of Housing and Urban Development (HUD), which subjects the facility to HUD oversight and periodic inspections. The mortgage loan bears interest at a rate of 3.5% per annum. Amounts borrowed under the mortgage loan may be prepaid starting after the second anniversary of the note subject to prepayment fees of 8.0% of the principal balance on the date of prepayment. These prepayment fees are reduced by 1.0% per year for years three through ten of the loan. There is no prepayment penalty after year eleven. The term of the mortgage loan is 33 years, with monthly principal and interest payments through March 1, 2045. The mortgage loan is secured by the real property comprising the facility and the rents, issues and profits thereof, as well as all personal property used in the operation of the facility.

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

Off-Balance Sheet Arrangements

As of June 30, 2015, the Company had approximately $2,726 on the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit. Subsequent to June 30, 2015, the Company increased the letters of credit by $500.

18. OPTIONS AND AWARDS
Stock-based compensation expense consists of share-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2015 and 2014 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.
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 1,514 as of June 30, 2015.

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 147 options and 91 restricted stock awards from the 2007 Plan during the six months ended June 30, 2015.

The Company used the following assumptions for stock options granted during the three months ended June 30, 2015 and 2014:
Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2015
 
75

 
1.71%
 
6.5 years
 
40%
 
0.62%
2014
 
664

 
1.80%
 
6.5 years
 
55%
 
0.64%

The Company used the following assumptions for stock options granted during the six months ended June 30, 2015 and 2014:

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


Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2015
 
147