10-Q
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 September 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 November 2, 2015, 25,652,745 shares of the registrant’s common stock were outstanding.
 
 
 
 
 



THE ENSIGN GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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)

 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,069

 
$
50,408

Restricted cash—current

 
5,082

Accounts receivable—less allowance for doubtful accounts of $27,595 and $20,438 at September 30, 2015 and December 31, 2014, respectively
192,016

 
130,051

Investments—current
4,500

 
6,060

Prepaid income taxes
6,792

 
2,992

Prepaid expenses and other current assets
15,417

 
8,434

Deferred tax asset—current
10,736

 
10,615

Total current assets
269,530

 
213,642

Property and equipment, net
257,164

 
149,708

Insurance subsidiary deposits and investments
30,050

 
17,873

Escrow deposits
2,310

 
16,153

Deferred tax asset
10,597

 
11,509

Restricted and other assets
8,177

 
6,833

Intangible assets, net
47,223

 
35,568

Goodwill
39,736

 
30,269

Other indefinite-lived intangibles
17,716

 
12,361

Total assets
$
682,503

 
$
493,916

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
34,699

 
$
33,186

Accrued wages and related liabilities
65,475

 
56,712

Accrued self-insurance liabilities—current
17,069

 
15,794

Other accrued liabilities
43,492

 
24,630

Current maturities of long-term debt
613

 
111

Total current liabilities
161,348

 
130,433

Long-term debt—less current maturities
69,209

 
68,279

Accrued self-insurance liabilities—less current portion
36,938

 
34,166

Deferred rent and other long-term liabilities
3,811

 
3,235

Total liabilities
271,306

 
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; 25,961 and 25,606 shares issued and outstanding at September 30, 2015, respectively, and 22,924 and 22,591 shares issued and outstanding at December 31, 2014, respectively (Note 2)
26

 
22

Additional paid-in capital (Note 2)
231,974

 
114,293

Retained earnings
181,890

 
145,846

Common stock in treasury, at cost, 146 and 150 shares at September 30, 2015 and December 31, 2014, respectively
(1,294
)
 
(1,310
)
Total Ensign Group, Inc. stockholders' equity
412,596

 
258,851

Non-controlling interest
(1,399
)
 
(1,048
)
Total equity
411,197

 
257,803

Total liabilities and equity
$
682,503

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
Revenue
$
351,086

 
$
260,841

 
$
968,671

 
$
750,537

Expense:
 
 
 
 
 
 

Cost of services (exclusive of rent, general and administrative and depreciation and amortization expenses shown separately below)
280,545

 
209,737

 
770,293

 
601,532

Rent—cost of services (Note 3 and 19)
24,500

 
18,176

 
62,531

 
30,008

General and administrative expense
17,165

 
12,956

 
46,917

 
44,370

Depreciation and amortization
7,288

 
4,677

 
20,185

 
21,343

Total expenses
329,498

 
245,546

 
899,926

 
697,253

Income from operations
21,588

 
15,295

 
68,745

 
53,284

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(802
)
 
(407
)
 
(2,035
)
 
(12,490
)
Interest income
242

 
142

 
603

 
435

Other expense, net
(560
)
 
(265
)
 
(1,432
)
 
(12,055
)
Income before provision for income taxes
21,028

 
15,030

 
67,313

 
41,229

Provision for income taxes
7,869

 
6,659

 
25,833

 
18,284

Net income
13,159

 
8,371

 
41,480

 
22,945

Less: net loss attributable to noncontrolling interests
(313
)

(535
)
 
(351
)
 
(1,494
)
Net income attributable to The Ensign Group, Inc.
$
13,472

 
$
8,906

 
$
41,831

 
$
24,439

Net income per share attributable to The Ensign Group, Inc.:
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.40

 
$
1.67

 
$
1.10

Diluted
$
0.51

 
$
0.38

 
$
1.61

 
$
1.06

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
25,572

 
22,415

 
24,991

 
22,282

Diluted
26,535

 
23,186

 
25,940

 
23,014

 
 
 
 
 
 
 
 
Dividends per share
$
0.075

 
$
0.070

 
$
0.225

 
$
0.210


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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
13,159

 
$
8,371

 
$
41,480

 
$
22,945

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on interest rate swap, net of income tax of $78 for the nine months ended September 30, 2014.

 

 

 
89

Reclassification of derivative loss to income, net of income tax benefit of $638 for the nine months ended September 30, 2014.

 

 

 
1,023

Comprehensive income
13,159

 
8,371

 
41,480

 
24,057

Less: net loss attributable to noncontrolling interests
(313
)
 
(535
)
 
(351
)
 
(1,494
)
Comprehensive income attributable to The Ensign Group, Inc.
$
13,472

 
$
8,906

 
$
41,831

 
$
25,551


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)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
41,480

 
$
22,945

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

 

Depreciation and amortization
20,185

 
21,343

Amortization of deferred financing fees and debt discount
443

 
539

Deferred income taxes
778

 
(510
)
Provision for doubtful accounts
13,770

 
9,271

Share-based compensation
4,948

 
3,813

Excess tax benefit from share-based compensation
(2,791
)
 
(2,403
)
Loss on extinguishment of debt

 
4,067

Loss on termination of interest rate swap

 
1,661

Loss on disposition of property and equipment
22

 
15

Change in operating assets and liabilities
 
 
 
Accounts receivable
(75,689
)
 
(18,555
)
Prepaid income taxes
(3,801
)
 
4,811

Prepaid expenses and other assets
(6,932
)
 
853

Insurance subsidiary deposits and investments
(10,617
)
 
(1,654
)
Accounts payable
538

 
4,164

Accrued wages and related liabilities
8,763

 
6,271

Other accrued liabilities
17,937

 
8,580

Accrued self-insurance liabilities
3,689

 
1,562

Deferred rent liability
577

 
(85
)
Net cash provided by operating activities
13,300

 
66,688

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(42,300
)
 
(42,125
)
Cash payment for business acquisitions
(79,874
)
 
(42,968
)
Cash payment for asset acquisitions
(15,851
)
 
(7,939
)
Escrow deposits
(2,310
)
 
(600
)
Escrow deposits used to fund business acquisitions
16,153

 
1,000

Increase in restricted cash

 
(6,652
)
Use of restricted cash
5,082

 

Restricted and other assets
(1,476
)
 
(124
)
Net cash used in investing activities
(120,576
)
 
(99,408
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility (Note 17)
224,000

 
400,677

Payments on revolving credit facility and other debt (Note 17 and Note 2)
(234,267
)
 
(301,171
)
Proceeds from common stock offering (Note 2)
112,078

 

Issuance costs in connection with common stock offering (Note 2)
(5,961
)
 

Issuance of treasury stock upon exercise of options
16

 
175

Cash retained by CareTrust at separation

 
(78,731
)
Issuance of common stock upon exercise of options
3,828

 
2,510

Dividends paid
(5,559
)
 
(4,753
)
Excess tax benefit from share-based compensation
2,802

 
2,416

Prepayment penalty on early retirement of debt

 
(2,069
)
Payments of deferred financing costs

 
(12,883
)
Net cash provided by financing activities
96,937

 
6,171

Net decrease in cash and cash equivalents
(10,339
)
 
(26,549
)
Cash and cash equivalents beginning of period
50,408

 
65,755

Cash and cash equivalents end of period
$
40,069

 
$
39,206

See accompanying notes to condensed consolidated financial statements.

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



 
Nine Months Ended September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,967

 
$
13,102

Income taxes
$
26,002

 
$
14,690

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
4,084

 
$
1,520

Refundable deposits assumed as part of business acquisition
$
3,488

 
$

Debt assumed as part of acquisitions
$
11,699

 
$
3,417


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 September 30, 2015, the Company operated 178 facilities, fifteen home health and thirteen 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 18,700 operational skilled nursing, assisted living and independent living beds. As of September 30, 2015, the Company owned 27 of its 178 affiliated facilities and leased an additional 151 facilities through long-term lease arrangements, and had options to purchase eighteen of those 151 facilities, of which three are skilled nursing facilities and the remaining fifteen are assisted and independent living facilities, located in California, Utah, Washington and Wisconsin. 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 September 30, 2015 and for the three and nine months ended September 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. 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 $357. 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).

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


3. 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.
The Company incurred transaction costs associated with the Spin-Off of $0 and $8,871 for the three and nine months ended September 30, 2014, respectively, which are included in general and administrative expenses within the condensed consolidated statements of income.

4. 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 September 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.

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 66.7% and 68.0% of the Company's revenue for the three and nine months ended September 30, 2015, respectively, and 70.3% and 70.6% for the three and nine months ended September 30, 2014, respectively. The Company records revenue from these governmental and managed care programs as services are

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


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 nine months ended September 30, 2015 and 2014.
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 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

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


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 nine months ended September 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.
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

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


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 $29,147 and $29,313 as of September 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 $17,612 and $14,590 as of September 30, 2015 and December 31, 2014, respectively.
In addition, the Company has recorded an asset and equal liability of $2,615 and $2,256 at September 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 $4,633 and $3,801 as of September 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 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

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


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) 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 October 2015, the FASB voted to finalize its standard on presentation of deferred income taxes, which requires presentation of deferred tax assets and liabilities as non-current in a classified balance sheet. This guidance applies to all entities and is effective for annual periods beginning after December 15, 2016, which will be the Company's fiscal year 2017, with early adoption permitted. The deferred tax amounts currently classified as current assets and liabilities will be classified as long-term assets and liabilities in the consolidated balance sheet upon the implementation of the final standard. There is no effect on the consolidated statements of income or statements of cash flow.

In September 2015, the FASB issued its final standard to simplify the accounting for measurement-period adjustments related to acquisitions, which require acquirers to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new standard also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. 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 does not expect 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

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THE ENSIGN GROUP, INC.
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.

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. In August 2015, the FASB amended the standard to include that it would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. 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 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.

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 September 30,
 
Nine Months Ended September 30,
 
2015

2014
 
2015

2014
Numerator:
 
 
 
 
 
 
 
Net Income
$
13,159

 
$
8,371

 
$
41,480

 
$
22,945

Less: net loss attributable to noncontrolling interests
(313
)
 
(535
)
 
(351
)
 
(1,494
)
Net income attributable to The Ensign Group, Inc.
$
13,472

 
$
8,906

 
$
41,831

 
$
24,439

 
 
 
 
 
 
 
 
Denominator:

 
 
 
 
 
 
Weighted average shares outstanding for basic net income per share
25,572

 
22,415

 
24,991

 
22,282

Basic net income per common share attributable to The Ensign Group, Inc.
$
0.53

 
$
0.40

 
$
1.67

 
$
1.10



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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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net Income
$
13,159

 
$
8,371

 
$
41,480

 
$
22,945

Less: net income attributable to noncontrolling interests
(313
)
 
(535
)
 
(351
)
 
(1,494
)
Net income attributable to The Ensign Group, Inc.
$
13,472

 
$
8,906

 
$
41,831

 
$
24,439

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,572

 
22,415

 
24,991

 
22,282

Plus: incremental shares from assumed conversion (1)
963

 
771

 
949

 
732

Adjusted weighted average common shares outstanding
26,535

 
23,186

 
25,940

 
23,014

Diluted net income per common share attributable to The Ensign Group, Inc.
$
0.51

 
$
0.38

 
$
1.61

 
$
1.06

(1)    Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 220 and 101 for the three and nine months ended September 30, 2015, respectively, and 693 and 508 for the three and nine months ended September 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 September 30, 2015 and December 31, 2014:
 
 
September 30, 2015
 
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
 
$
40,069

 
$

 
$

 
$
50,408

 
$

 
$

Restricted cash
 
$

 
$

 
$

 
$
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 September 30, 2015 and December 31, 2014, the Company had approximately $34,550 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 September 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 nine months ended September 30, 2015 and 2014 is summarized in the following tables:
 
Three Months Ended September 30,
 
2015
 
2014
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
114,106

 
32.5
%
 
$
91,707

 
35.2
%
Medicare
101,212

 
28.8

 
78,056

 
29.9

Medicaid — skilled
18,924

 
5.4

 
13,614

 
5.2

Total Medicaid and Medicare
234,242

 
66.7

 
183,377

 
70.3

Managed care
54,411

 
15.5

 
36,562

 
14.0

Private and other payors(1)
62,433

 
17.8

 
40,902

 
15.7

Revenue
$
351,086

 
100.0
%
 
$
260,841

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

 
Nine Months Ended September 30,
 
2015
 
2014
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
316,608

 
32.7
%
 
$
260,986

 
34.8
%
Medicare
290,964

 
30.0

 
231,860

 
30.9

Medicaid — skilled
51,206

 
5.3

 
36,575

 
4.9

Total Medicaid and Medicare
658,778

 
68.0

 
529,421

 
70.6

Managed care
148,374

 
15.3

 
105,316

 
14.0

Private and other payors(1)
161,519

 
16.7

 
115,800

 
15.4

Revenue
$
968,671

 
100.0
%
 
$
750,537

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

Accounts receivable as of September 30, 2015 and December 31, 2014 is summarized in the following table:
 
September 30, 2015
 
December 31, 2014
Medicaid
$
78,908

 
$
45,943

Managed care
51,148

 
39,782

Medicare
46,517

 
32,861

Private and other payors
43,038

 
31,903

 
219,611

 
150,489

Less: allowance for doubtful accounts
(27,595
)
 
(20,438
)
Accounts receivable
$
192,016

 
$
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 businesses are neither significant individually nor

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


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. 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 September 30, 2015, TSA services included 178 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 28 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 September 30, 2015 and December 31, 2014, the Company held 80% of the membership interests in a mobile x-ray and diagnostic operation, 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 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 September 30, 2015
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
111,613

 
$
2,493

 
$

 
$
114,106

 
32.5
%
 
Medicare
 
83,410

 
17,802

 

 
101,212

 
28.8

 
Medicaid-skilled
 
18,924

 

 

 
18,924

 
5.4

 
Subtotal
 
213,947

 
20,295

 

 
234,242

 
66.7

 
Managed care
 
51,099

 
3,312

 

 
54,411

 
15.5

 
Private and other
 
52,115

 
1,643

 
8,675

 
62,433

 
17.8

 
Total revenue
 
$
317,161

 
$
25,250

 
$
8,675

 
$
351,086

 
100.0
%
 
 
 
Three Months Ended September 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
90,320

 
$
1,387

 
$

 
$
91,707

 
35.2
%
 
Medicare
 
67,678

 
10,378

 

 
78,056

 
29.9

 
Medicaid-skilled
 
13,614

 

 

 
13,614

 
5.2

 
Subtotal
 
171,612

 
11,765

 

 
183,377

 
70.3

 
Managed care
 
34,619

 
1,943

 

 
36,562

 
14.0

 
Private and other
 
34,162

 
877

 
5,863

 
40,902

 
15.7

 
Total revenue
 
$
240,393

 
$
14,585

 
$
5,863

 
$
260,841

 
100.0
%
 


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


 
 
Nine Months Ended September 30, 2015
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
309,781

 
$
6,827

 
$

 
$
316,608

 
32.7
%
 
Medicare
 
246,931

 
44,033

 

 
290,964

 
30.0
%
 
Medicaid-skilled
 
51,206

 
$

 

 
51,206

 
5.3
%
 
Subtotal
 
607,918

 
50,860

 

 
658,778

 
68.0
%
 
Managed care
 
140,447

 
$
7,927

 

 
148,374

 
15.3
%
 
Private and other
 
129,206

 
4,722

 
27,591

 
161,519

 
16.7
%
 
Total revenue
 
$
877,571

 
$
63,509

 
$
27,591

 
$
968,671

 
100.0
%
 

 
 
Nine Months Ended September 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
257,545

 
$
3,441

 
$

 
$
260,986

 
34.8
%
 
Medicare
 
204,632

 
27,228

 

 
231,860

 
30.9
%
 
Medicaid-skilled
 
36,575

 

 
$

 
36,575

 
4.9
%
 
Subtotal
 
498,752

 
30,669

 

 
529,421

 
70.6
%
 
Managed care
 
99,799

 
5,517

 
$

 
105,316

 
14.0
%
 
Private and other
 
97,979

 
2,249

 
15,572

 
115,800

 
15.4
%
 
Total revenue
 
$
696,530

 
$
38,435

 
$
15,572

 
$
750,537

 
100.0
%
 

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

 
 
Three Months Ended September 30, 2015
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
 
Revenue from external customers
 
$
317,161

 
$
25,250

 
$
8,675

 

 
$
351,086

 
Intersegment revenue (1)
 
694

 

 
246

 
(940
)
 

 
Total revenue
 
$
317,855

 
$
25,250

 
$
8,921

 
$
(940
)
 
$
351,086

 
Income from operations
 
$
36,226

 
$
4,067

 
$
(18,705
)
 
$

 
$
21,588

 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
$
560

 
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
21,028

 
Depreciation and amortization
 
$
5,542

 
$
258

 
$
1,488

 
$

 
$
7,288

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, mobile x-ray and diagnostic operations 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 September 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
 
Revenue from external customers
 
$
240,393

 
$
14,585

 
$
5,863

 

 
$
260,841

 
Intersegment revenue (1)
 
516

 

 
220

 
(736
)
 

 
Total revenue
 
$
240,909

 
$
14,585

 
$
6,083

 
$
(736
)
 
$
260,841

 
Income from operations
 
$
27,262

 
$
2,707

 
$
(14,674
)
 
$

 
$
15,295

 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
$
265

 
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
15,030

 
Depreciation and amortization
 
$
3,459

 
$
124

 
$
1,094

 
$

 
$
4,677

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

 
 
Nine Months Ended September 30, 2015
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
 
Revenue from external customers
 
$
877,571

 
$
63,509

 
$
27,591

 

 
$
968,671

 
Intersegment revenue (1)
 
1,741

 

 
637

 
(2,378
)
 

 
Total revenue
 
$
879,312

 
$
63,509

 
$
28,228

 
$
(2,378
)
 
$
968,671

 
Income from operations
 
$
108,592

 
$
9,738

 
$
(49,585
)
 
$

 
$
68,745

 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
$
1,432

 
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
67,313

 
Depreciation and amortization
 
$
15,368

 
$
703

 
$
4,114

 
$

 
$
20,185

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's skilled nursing facilities, mobile x-ray and diagnostic operations and urgent care centers to the Company's other operating subsidiaries.
 
 
Nine Months Ended September 30, 2014
 
 
 
TSA Services
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
 
Revenue from external customers
 
$
696,530

 
$
38,435

 
$
15,572

 

 
$
750,537

 
Intersegment revenue (1)
 
1,432

 

 
552

 
(1,984
)
 

 
Total revenue
 
$
697,962

 
$
38,435

 
$
16,124

 
$
(1,984
)
 
$
750,537

 
Income from operations
 
$
95,566

 
$
6,792

 
$
(49,074
)
 
$

 
$
53,284

 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
$
12,055

 
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
$
41,229

 
Depreciation and amortization
 
$
17,920

 
$
371

 
$
3,052

 
$

 
$
21,343

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



19

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


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 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 nine months ended September 30, 2015, the Company continued to expand its operations with the addition of seventeen stand-alone skilled nursing operations, twenty-five assisted and independent living operations, three home health agencies, one hospice agency, one home care operation, and three urgent care centers to its operations. The Company acquired these operations for an aggregate purchase price of $88,813 and through long-term lease agreements. The details of the operating subsidiaries acquired during the nine months ended September 30, 2015 are as follows:
During the first quarter of 2015, the Company acquired five skilled nursing operations, two assisted and independent living operations, one home health agency and two urgent care centers for an aggregate purchase price of $42,197, which included assumed liabilities of $3,488. The Company acquired the real estate of seven of the skilled nursing and assisted and independent living operations it acquired. The acquisitions of skilled nursing and assisted and independent living operations added 407 and 345 operational skilled nursing beds and operational assisted and independent living units, respectively, operated by the Company's operating subsidiaries.
During the second quarter of 2015, the Company acquired four skilled nursing operations, three assisted living operations, one home health agency and one home care operation for an aggregate purchase price of $22,299 and through a long-term lease agreement. The Company acquired the real estate of three of the skilled nursing and three assisted and independent living operations it acquired. The Company entered into a long-term lease agreement for the remaining 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 acquisitions of skilled nursing and assisted living facilities and the operations acquired through long-term lease agreements added 322 and 263 operational skilled nursing beds and operational assisted living units, respectively, to the Company's operating subsidiaries.
During the third quarter of 2015, the Company acquired eight skilled nursing operations, twenty assisted and independent living operations, one hospice agency and one home health agency for an aggregate purchase price of $24,317 and through long-term lease agreements. The Company acquired the real estate of one skilled nursing operation, assumed a long-term lease agreement for fifteen assisted and independent living operations, which includes an option to purchase the real estate, and entered into long-term lease agreements for seven skilled nursing operations and five assisted and independent living 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 leases. In addition, the Company also began operating an affiliated home health agency under a management agreement in connection with the acquisition of the hospice agency. The acquisitions of skilled nursing and assisted and independent living operations added 999 and 1,719 operational skilled nursing beds and operational assisted and independent living units, respectively, to the Company's operating subsidiaries.
The table below presents the allocation of the purchase price for the operations acquired in business combinations during the nine months ended September 30, 2015 and 2014:

20

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


 
September 30,
 
2015
 
2014
Land
$
10,879

 
$
8,814

Building and improvements
48,822

 
30,988

Equipment, furniture, and fixtures
3,032

 
1,550

Assembled occupancy
697

 
545

Definite-lived intangible assets
360

 
360

Goodwill
9,467

 
1,784

Favorable leases
10,201

 

Other indefinite-lived intangible assets
5,355

 
2,344

 
$
88,813

 
$
46,385


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

During the second quarter of 2015, the Company acquired the underlying assets of two skilled nursing operations, which the Company previously operated under long-term lease agreements. The purchase price of the asset acquisition was $17,952, which included a promissory note of $6,248. In a separate transaction, the Company acquired land for an aggregate purchase price of $4,147. These acquisitions did not impact the Company's operational bed count.

Subsequent to September 30, 2015, the Company acquired three skilled nursing operations for an aggregate purchase price of $8,300 and opened its first newly constructed post-acute care campus. The Company acquired the real estate of one skilled nursing operation and entered into long-term leases for the remaining two skilled nursing operations it acquired and the newly constructed post-acute care campus. The acquisitions of skilled nursing operations and newly constructed post-acute care campus added 482 and 30 operational skilled nursing beds and operational assisted living units operated by the Company's operating subsidiaries. In addition, the Company acquired the underlying asset of one skilled nursing operation, which the Company previously operated under a long-term lease agreement. The purchase price of the asset acquisition was $1,900. 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 for the acquisitions subsequent to September 30, 2015.

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 acquired from January 1, 2015 through the issuance date of the financial statements had occurred at the beginning of 2014, after giving effect to certain adjustments.

21

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


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
360,239

 
$
323,169

 
$
1,070,631

 
$
936,539

Net income attributable to The Ensign Group, Inc.
12,623

 
10,874

 
48,693

 
31,216

Diluted net income per common share
$
0.48

 
$
0.47

 
$
1.88

 
$
1.36

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 nine months ended September 30, 2015 by individually immaterial business acquisitions completed through September 30, 2015 of $9,153 and $101,960, respectively, and $62,328 and $186,002 for the three and nine months ended September 30, 2014, respectively. Included in the table above are pro forma loss and income incurred during the three and nine months ended September 30, 2015, by individually immaterial business acquisitions completed through September 30, 2015, of $849 and $6,862, respectively, and pro forma income of $1,968 and $6,777 for the three and nine months ended September 30, 2014, respectively.

11. PROPERTY AND EQUIPMENT— Net
Property and equipment, net consist of the following:
 
September 30, 2015
 
December 31, 2014
Land
$
36,734

 
$
18,994

Buildings and improvements
122,591

 
57,947

Equipment
107,649

 
80,112

Furniture and fixtures
5,914

 
5,732

Leasehold improvements
65,499

 
50,671

Construction in progress
169

 
423

 
338,556

 
213,879

Less: accumulated depreciation
(81,392
)
 
(64,171
)
Property and equipment, net
$
257,164

 
$
149,708


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



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


12. INTANGIBLE ASSETS — Net
 
 
Weighted Average Life (Years)
 
September 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

 
$
(576
)
 
$
28

 
$
684

 
$
(634
)
 
$
50

Favorable lease
 
27.2
 
44,294

 
(2,338
)
 
41,956

 
30,890

 
(783
)
 
30,107

Assembled occupancy
 
0.7
 
4,581

 
(4,259
)
 
322

 
3,884

 
(3,461
)
 
423

Facility trade name
 
30.0
 
733

 
(238
)
 
495

 
733

 
(220
)
 
513

Customer relationships
 
18.0
 
5,300

 
(878
)
 
4,422

 
4,940

 
(465
)
 
4,475

Total
 
 
 
$
55,512

 
$
(8,289
)
 
$
47,223

 
$
41,131

 
$
(5,563
)
 
$
35,568

Amortization expense was $987 and $2,805 for the three and nine months ended September 30, 2015, respectively, and $282 and $688 for the three and nine months ended September 30, 2014, respectively. Of the $2,805 in amortization expense incurred during the nine months ended September 30, 2015, approximately $797 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)
$
1,089

2016
4,357

2017
4,357

2018
4,357

2019
4,357

2020
4,357

Thereafter
24,349

 
$
47,223


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 nine months ended September 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
1,782

 
5,173

 
2,512

 
9,467

September 30, 2015
$
17,759

 
$
16,102

 
$
5,875

 
$
39,736


23

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



As of September 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:
 
September 30, 2015
 
December 31, 2014
Trade name
$
1,916

 
$
1,055

Home health and hospice Medicare license
15,800

 
11,306

 
$
17,716

 
$
12,361


14. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:
 
September 30, 2015
 
December 31, 2014
Debt issuance costs, net
$
2,169

 
$
2,612

Long-term insurance losses recoverable asset
2,615

 
2,256

Deposits with landlords
3,083

 
1,143

Capital improvement reserves with landlords and lenders
310

 
774

Other long-term assets

 
48

Restricted and other assets
$
8,177

 
$
6,833

Included in restricted and other assets as of September 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.

15. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:
 
September 30, 2015
 
December 31, 2014
Quality assurance fee
$
4,098

 
$
2,855

Refunds payable
12,497

 
7,014

Deferred revenue
7,661

 
3,471

Cash held in trust for patients
2,121

 
1,824

Resident deposits
5,854

 
1,593

Dividends payable
1,936

 
1,708

Property taxes
4,835

 
3,043

Other
4,490

 
3,122

Other accrued liabilities
$
43,492

 
$
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. 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

24

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


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 successfully completed the Internal Revenue Service 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 three and nine months ended September 30, 2015 or 2014.

17. DEBT
Long-term debt consists of the following:
 
September 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.
$
55,000

 
$
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.
3,307

 
3,390

Mortgage note, principal and interest payable monthly and continuing through March 2045, interest at fixed rate, collateralized by deed of trust on real property, assignment of rents and security agreement.
5,425

 

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.
6,090

 

 
69,822

 
68,390

Less current maturities
(613
)
 
(111
)
 
$
69,209

 
$
68,279


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 September 30, 2015, the Company's operating subsidiary had $6,090 outstanding under the note, of which $392 is classified as short-term and the remaining $5,698 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 $5,451 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. As of September 30, 2015, the Company's operating subsidiary had $5,425 outstanding under the mortgage loan, of which $108 is classified as short-term and the remaining $5,317 is classified as long-term.

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.


25

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


Off-Balance Sheet Arrangements

As of September 30, 2015, the Company had approximately $1,860 on the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

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 nine months ended September 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 1,397 as of September 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 256 options and 138 restricted stock awards from the 2007 Plan during the nine months ended September 30, 2015.

The Company used the following assumptions for stock options granted during the three months ended September 30, 2015 and 2014:
Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2015
 
109

 
1.82%
 
6.5 years
 
38%
 
0.58%
2014
 
72

 
1.91%
 
6.5 years
 
55%
 
0.64%

The Company used the following assumptions for stock options granted during the nine months ended September 30, 2015 and 2014:
Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2015
 
256

 
1.45%
-
1.82
%
 
6.5 years
 
38%
-
44
%
 
0.58%
-
0.61%
2014
 
1,003

 
1.80%
-
1.91
%
 
6.5 years
 
55%