Document
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 March 31, 2018.
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)
_____________________________

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of April 30, 2018, 51,795,207 shares of the registrant’s common stock were outstanding.

 
 
 
 
 



THE ENSIGN GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2018
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 101





PART I.

Item 1.        Financial Statements

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

 
March 31, 2018
 
December 31, 2017
Assets
 

 
Current assets:
 

 
Cash and cash equivalents
$
35,057


$
42,337

Accounts receivable—less allowance for doubtful accounts of $1,762 and $43,961 at March 31, 2018 and December 31, 2017, respectively (Note 3)
258,509


265,068

Investments—current
13,631


13,092

Prepaid income taxes
12,794


19,447

Prepaid expenses and other current assets
24,735


28,132

Total current assets
344,726


368,076

Property and equipment, net
541,019


537,084

Insurance subsidiary deposits and investments
28,065


28,685

Escrow deposits
10,025


228

Deferred tax assets
12,731


12,745

Restricted and other assets
17,695


16,501

Intangible assets, net
32,236


32,803

Goodwill
80,963


81,062

Other indefinite-lived intangibles
25,249


25,249

Total assets
$
1,092,709


$
1,102,433

Liabilities and equity
 

 
Current liabilities:
 

 
Accounts payable
$
31,977


$
39,043

Accrued wages and related liabilities
84,018


90,508

Accrued self-insurance liabilities—current
22,163


22,516

Other accrued liabilities
63,088


63,815

Current maturities of long-term debt
10,035


9,939

Total current liabilities
211,281


225,821

Long-term debt—less current maturities
280,449


302,990

Accrued self-insurance liabilities—less current portion
51,518


50,220

Deferred rent and other long-term liabilities
11,608


11,268

Deferred gain related to sale-leaseback (Note 16)
11,910


12,075

Total liabilities
566,766

 
602,374

 
 
 
 
Commitments and contingencies (Notes 14, 16 and 17)

 

Equity:
 
 
 
Ensign Group, Inc. stockholders' equity:
 
 
 
Common stock; $0.001 par value; 75,000 shares authorized; 54,083 and 51,764 shares issued and outstanding at March 31, 2018, respectively, and 53,675 and 51,360 shares issued and outstanding at December 31, 2017, respectively (Note 18)
54

 
53

Additional paid-in capital
270,948

 
266,058

Retained earnings
285,398

 
264,691

Common stock in treasury, at cost, 1,932 shares at March 31, 2018 and December 31, 2017, respectively
(38,405
)
 
(38,405
)
Total Ensign Group, Inc. stockholders' equity
517,995

 
492,397

Non-controlling interest
7,948

 
7,662

Total equity
525,943


500,059

Total liabilities and equity
$
1,092,709

 
$
1,102,433

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 March 31,
 
2018

2017
 
 
 
 
Revenue
 
 
 
Service revenue
$
456,021


$
409,393

Assisted and independent living revenue
36,113


32,346

Total revenue
492,134

 
441,739

Expense



Cost of services
390,243


355,486

(Return of unclaimed class action settlement)/charges related to class action lawsuit (Note 17)
(1,664
)

11,000

Losses related to divestitures (Note 6 and 16)


4,017

Rent—cost of services (Note 16)
33,850


31,900

General and administrative expense
25,104


21,270

Depreciation and amortization
11,622


10,514

Total expenses
459,155


434,187

Income from operations
32,979


7,552

Other income (expense):



Interest expense
(3,613
)

(3,445
)
Interest income
448


290

Other expense, net
(3,165
)

(3,155
)
Income before provision for income taxes
29,814


4,397

Provision for income taxes
6,521


1,441

Net income
23,293


2,956

Less: net income attributable to noncontrolling interests
161


116

Net income attributable to The Ensign Group, Inc.
$
23,132


$
2,840

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

Basic
$
0.45


$
0.06

Diluted
$
0.43


$
0.05

Weighted average common shares outstanding:
 
 
 
Basic
51,585


50,767

Diluted
53,518


52,633

 





Dividends per share
$
0.0450


$
0.0425

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)
 
Three Months Ended March 31,
 
2018

2017
Cash flows from operating activities:
 
 
 
Net income
$
23,293

 
$
2,956

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,622

 
10,514

Amortization of deferred financing fees
299

 
254

Amortization of deferred gain on sale-leaseback
(164
)
 

Impairment of long-lived assets
155

 
111

Deferred income taxes
14

 
61

Provision for doubtful accounts (Note 3)
570

 
7,350

Share-based compensation
2,309

 
2,224

Insurance proceeds received for damage to property
167

 

Gain on insurance claims for damaged property and other assets
(667
)
 

Change in operating assets and liabilities
 
 
 
Accounts receivable
6,453

 
(6,900
)
Prepaid income taxes
6,654

 
252

Prepaid expenses and other assets
2,162

 
(2,790
)
Insurance subsidiary deposits and investments
80

 
179

Charge related to class action lawsuit (Note 17)

 
11,000

Liabilities related to operational closures (Note 6 and 16)

 
3,906

Accounts payable
(6,815
)
 
(4,044
)
Accrued wages and related liabilities
(6,490
)
 
(9,410
)
Income taxes payable

 
1,175

Other accrued liabilities
(647
)
 
938

Accrued self-insurance liabilities
1,061

 
1,568

Deferred rent liability
339

 
242

Net cash provided by operating activities
40,395


19,586

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(11,082
)
 
(11,997
)
Cash payments for business acquisitions (Note 7)

 
(8,693
)
Cash payments for asset acquisitions (Note 7)
(4,447
)
 
(310
)
Escrow deposits
(10,025
)
 
(2,394
)
Escrow deposits used to fund acquisitions
228

 
1,582

Cash proceeds from the sale of assets and insurance proceeds
64

 
608

Restricted and other assets
(201
)
 
(193
)
Net cash used in investing activities
(25,463
)

(21,397
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility and other debt (Note 14)
195,000

 
345,000

Payments on revolving credit facility and other debt (Note 14)
(217,421
)
 
(362,015
)
Issuance of common stock upon exercise of options
2,920

 
957

Repurchase of shares of common stock (Note 18)

 
(6,068
)
Dividends paid
(2,328
)
 
(2,179
)
Non-controlling interest distribution
(292
)
 

Purchase of non-controlling interest

 
(83
)
Payments of deferred financing costs
(91
)
 

Net cash used in financing activities
(22,212
)

(24,388
)
Net decrease in cash and cash equivalents
(7,280
)
 
(26,199
)
Cash and cash equivalents beginning of period
42,337


57,706

Cash and cash equivalents end of period
$
35,057

 
$
31,507

See accompanying notes to condensed consolidated financial statements.

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

 
Three Months Ended March 31,
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,809

 
$
4,076

Income taxes
$

 
$
8

Non-cash financing and investing activity:
 
 
 

Accrued capital expenditures
$
3,300

 
$
5,708

Note receivable from sale of ancillary business
$
139

 
$

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, shares and options in thousands, except per share data)
(Unaudited)

1. DESCRIPTION OF BUSINESS

The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum, as well as other ancillary businesses. As of March 31, 2018, the Company operated 232 facilities, 46 home health, hospice and home care agencies and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington 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 and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 18,900 operational skilled nursing beds and 5,100 assisted living and independent living units. As of March 31, 2018, the Company owned 65 of its 232 affiliated facilities and leased an additional 167 facilities through long-term lease arrangements and had options to purchase eleven of those 167 facilities. As of December 31, 2017, the Company owned 63 of its 230 affiliated facilities and leased an additional 167 facilities through long-term lease arrangements and had options to purchase eleven of those 167 facilities.
Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide certain accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.
Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this quarterly report is not meant to imply, nor should it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc.
Other Information — The accompanying condensed consolidated financial statements as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 (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, 2017 which are included in the Company’s annual report on Form 10-K, File No. 001-33757 (the Annual Report) filed with the Securities and Exchange Commission (SEC). Management believes that the Interim Financial Statements reflect all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position and results of operations in all material respects. The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or shareholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing and assisted living operations, home health, hospice and home care operations, and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. The Company presents noncontrolling interest within the equity section of its condensed consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its condensed consolidated statements of income.
Estimates and Assumptions — The preparation of Interim Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Interim Financial Statements relate to revenue, intangible assets and goodwill, impairment of long-lived assets, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.


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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 — On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) applying the modified retrospective method. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The adoption of ASC 606 did not have a material impact on the measurement nor on the recognition of revenue of contracts, for which all revenue had not been recognized, as of January 1, 2018, therefore no cumulative adjustment has been made to the opening balance of retained earnings at the beginning of 2018. See Note 3, Revenue and Accounts Receivable.
Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts and other currently available evidence. See Note 3, Revenue and Accounts Receivable.
Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.
Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. Management has evaluated its long-lived assets and recorded an impairment charge of $155 and $111 during the three months ended March 31, 2018 and 2017, respectively.

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.
Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of favorable leases, lease acquisition costs, patient base, facility trade names and customer relationships. Favorable leases and lease acquisition costs are amortized over the life of the lease of the facility. Patient base is amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.
The Company's indefinite-lived intangible assets consist of trade names and Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. The Company did not identify any intangible asset or goodwill impairment during the three months ended March 31, 2018 and 2017.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. See further discussion at Note 10, Goodwill and Other Indefinite-Lived Intangible Assets.

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


Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. The combined self-insured retention is $500 per claim, subject to an additional one-time deductible of $750 for California affiliated operations and a separate, one-time, deductible of $1,000 for non-California operations. For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $1,000 per claim, $3,000 per operation, with a $5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits is $1,000 per claim and $3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.
The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas 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 $39,982 and $38,998 as of March 31, 2018 and December 31, 2017, respectively.
 The Company’s operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $500 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception of Washington, 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 $24,094 and $23,621 as of March 31, 2018 and December 31, 2017, respectively.
In addition, the Company has recorded an asset and equal liability of $5,278 and $5,394 at March 31, 2018 and December 31, 2017, 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 11 Restricted and Other Assets.
The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $300 for each covered person with an additional one-time aggregate individual stop loss deductible of $75. Beginning 2016, the Company's policy does not include the additional one-time aggregate individual stop loss deductible of $75. The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $4,327 and $4,723 as of March 31, 2018 and December 31, 2017, 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

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


that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows and financial condition would be adversely affected.

Income Taxes — Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.
In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ.
The Tax Cuts and Jobs Act (the Tax Act), which was enacted in December 2017, decreased the corporate income tax rate from 35.0% to 21.0% beginning on January 1, 2018. The Company’s actual effective tax rate for fiscal 2018 may differ from management’s estimate due to changes in interpretations and assumptions, and the excess tax benefits impact of share-based payment awards. See Note 13, Income Taxes for further detail.

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 consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its condensed consolidated statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

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

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

Recent Accounting Standards Adopted by the Company

In 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. Under this new standard and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. Entities may apply the new standard either retrospectively to each period presented (full retrospective method) or retrospectively with the cumulative effect recognized in beginning retained earnings as of the date of adoption (modified retrospective method). The Company adopted the new revenue standard as of January 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 did not have a material impact on the measurement nor on the recognition of revenue of contracts for which all revenue had not been recognized as of January 1, 2018, therefore no cumulative adjustment has been made to the opening balance of retained earnings at the beginning of 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented.

In May 2017, the FASB issued amended authoritative guidance to provide guidance on types of changes to the terms or conditions of share-based payments awards to which an entity would be required to apply modification accounting under ASC 718. The new guidance was effective for the Company in the first quarter of fiscal year 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.


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


In January 2017, the FASB issued amended authoritative guidance to clarify the definition of a business and reduce diversity in practice related to the evaluation of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new provisions provide the requirements needed for an integrated set of assets and activities (the set) to be a business and also establish a practical way to determine when a set is not a business. The accounting standards update (ASU) provides a screen to determine when an integrated set of assets and activities is not a business. The more robust framework helps entities to narrow the definition of outputs created by the set and align it with how outputs are described in the new revenue standard. The new guidance was effective for the Company in the first quarter of fiscal year 2018. The Company's acquisitions during the three months ended March 31, 2018 were classified as asset acquisitions as the fair value of assets acquired is concentrated in a single asset. These acquisitions would have been classified as business combination prior to the adoption of the ASU. The Company anticipates that future acquisitions will be classified as a mixture of business and asset acquisitions under the new guidance.

In March 2018, we adopted FASB ASU 2018-05, Income Taxes (topic 740): Amendments to the SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the securities and Exchange Commission (‘SEC’) interpretive guidance released in December 2017, when the Tax Cuts and Jobs Act (the ‘Tax Act’) was signed into law. Additional information regarding the adoption of this standard is contained in Note 13, Income Taxes.

In October 2016, the FASB issued amended authoritative guidance to require companies to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The new guidance was effective for the Company in the first quarter of fiscal year 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In August 2016, the FASB issued amended authoritative guidance to reduce the diversity in practice related to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The new provisions target cash flow issues related to (i) debt prepayment or debt extinguishment costs, (ii) settlement of debt instruments with coupon rates that are insignificant relative to effective interest rates, (iii) contingent consideration payments made after a business combination, (iv) proceeds from settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance and bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. The new guidance was effective for the Company in the first quarter of fiscal year 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Accounting Standards Recently Issued But Not Yet Adopted by the Company

In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test. The new provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the implied fair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for annual periods beginning after December 15, 2019, which will be the Company's fiscal year 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

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

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


3. REVENUE AND ACCOUNTS RECEIVABLE

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

Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net service revenue in the period such variances become known.
Revenue from the Medicare and Medicaid programs accounted for 67.9% and 68.2% of the Company's revenue for the three months ended March 31, 2018 and 2017, respectively. Settlement with Medicare and Medicaid payors for retroactive adjustments due to audits and reviews are considered variable consideration and are included in the determination of the estimated transaction price. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity. Consistent with healthcare industry practices, any changes to these revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue or Interim Financial Statements for the three months ended March 31, 2018 and 2017.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. A reconciliation of disaggregated revenue to segment revenue as well as revenue by payor is provided in Note 6, Business Segments.
The Company’s service specific revenue recognition policies are as follows:
Transitional and Skilled Nursing Revenue
The Company’s revenue is derived primarily from providing long-term healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rate, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.
Assisted and Independent Living Revenue
The Company's assisted and independent living revenue consists of fees for basic housing and assisted living care. Accordingly, we record revenue when services are rendered on the date services are provided at amounts billable to individual residents. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. For patients under reimbursement arrangements with Medicaid, revenue is recorded based on contractually agreed-upon amounts or rates on a per resident, daily basis or as services are rendered.
Home Health Revenue
Medicare Revenue

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


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. Revenue is also adjusted for estimates for variable consideration. 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, and adjusted for estimates for variable consideration, 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, net of estimates for variable consideration. 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, including 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 to other accrued liabilities.
Impact of New Revenue Guidance on Financial Statement Line Items
The following tables summarize the impacts of adopting ASC 606 on the Company’s condensed consolidated statements of income for the three months ended March 31, 2018. There was no impact to the condensed consolidated balance sheet as of March 31, 2018 or condensed consolidated statements of cash flows for the three months ended March 31, 2018, as such, no pro forma information is provided.

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


 
 
Three Months Ended March 31,
 
 
2018
 
2017
Total revenue
 
 
 
 
As Reported
 
$
492,134

 
$
441,739

Adjustments
 
8,804

 

Pro forma as if the previous accounting guidance was in effect
 
$
500,938

 
$
441,739

 
 
 
 
 
Cost of Services:
 
 
 
 
As Reported
 
$
390,243

 
$
355,486

Adjustments
 
8,804

 

Pro forma as if the previous accounting guidance was in effect
 
$
399,047

 
$
355,486

 
 
 
 
 
Total Expense:
 
 
 
 
As Reported
 
$
459,155

 
$
434,187

Adjustments
 
8,804

 

Pro forma as if the previous accounting guidance was in effect
 
$
467,959

 
$
434,187

The majority of what was previously presented as bad debt expense under operating expenses has been incorporated as an implicit price concession factored into the calculation of net revenues, as shown in the "Adjustments" line in the table above. Subsequent material events that alter the payor's ability to pay are recorded as bad debt expense. The Company's bad debt expense and bad debt as a percent of total revenue for the three months ended March 31, 2018 and 2017 was $570 and 0.1%, and $7,350 and 1.7%, respectively.
Prior period results reflect reclassifications, for comparative purposes, related to the adoption of ASC 606, for the presentation of the Company’s assisted and independent living revenues. Historically, the Company only presented total revenue for all revenue services. This reclassification had no effect on the reported results of operations.
Revenue for the three months ended March 31, 2018 and 2017 is summarized in the following tables:

 
Three Months Ended March 31,
 
2018
 
2018 Pro Forma (2)

2017
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
 
Revenue
 
% of
Revenue
Medicaid
$
167,625

 
34.1
%
 
$
170,309


34.0
%
 
$
148,271

 
33.6
%
Medicare
139,314

 
28.3

 
140,381


28.0

 
129,920

 
29.4

Medicaid — skilled
27,042

 
5.5

 
27,538


5.5

 
23,017

 
5.2

Total Medicaid and Medicare
333,981

 
67.9

 
338,228


67.5

 
301,208

 
68.2

Managed care
83,716

 
17.0

 
85,845


17.1

 
75,562

 
17.1

Private and other payors(1)
74,437

 
15.1

 
76,865


15.4

 
64,969

 
14.7

Revenue
$
492,134

 
100.0
%
 
$
500,938


100.0
%
 
$
441,739

 
100.0
%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2018 and 2017.
(2) The 2018 pro forma results reflect balances assuming previous accounting guidance was still in effect.
Balance Sheet Impact
Included in the Company’s condensed consolidated balance sheet are contract assets, comprised of billed accounts receivable and unbilled receivables which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company had no material contract liabilities or activity as of and for the three months ended March 31, 2018 related to its transitional and skilled services, and home health and hospice services segments.


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


Accounts receivable as of March 31, 2018 and December 31, 2017 is summarized in the following table:
 
March 31,
 
December 31,
 
2018
 
2018 Pro Forma (1)
 
2017
Medicaid
$
99,799

 
$
112,419

 
$
119,441

Managed care
59,358

 
71,955

 
68,930

Medicare
49,765

 
55,361

 
55,667

Private and other payors
51,349

 
64,983

 
64,991

 
260,271

 
304,718

 
309,029

Less: allowance for doubtful accounts
(1,762
)
 
(46,209
)
 
(43,961
)
Accounts receivable, net
$
258,509

 
$
258,509

 
$
265,068

(1) The 2018 pro forma results reflect balances assuming previous accounting guidance was still in effect.
Practical Expedients and Exemptions
As the Company’s contracts with its patients have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

4. COMPUTATION OF NET INCOME PER COMMON SHARE

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

A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:
 
Three Months Ended March 31,
 
2018

2017
Numerator:
 
 
 
Net income
$
23,293

 
$
2,956

Less: net income attributable to noncontrolling interests
161

 
116

Net income attributable to The Ensign Group, Inc.
$
23,132

 
$
2,840

 
 
 
 
Denominator:

 
 
Weighted average shares outstanding for basic net income per share
51,585

 
50,767

Basic net income per common share attributable to The Ensign Group, Inc.
$
0.45

 
$
0.06

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

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


 
Three Months Ended March 31,
 
2018

2017
Numerator:
 
 
 
Net income
$
23,293

 
$
2,956

Less: net income attributable to noncontrolling interests
161

 
116

Net income attributable to The Ensign Group, Inc.
$
23,132

 
$
2,840

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding
51,585

 
50,767

Plus: incremental shares from assumed conversion (1)
1,933

 
1,866

Adjusted weighted average common shares outstanding
53,518


52,633

Diluted net income per common share attributable to The Ensign Group, Inc.
$
0.43

 
$
0.05

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 937 and 1,272 for the three months ended March 31, 2018 and 2017, respectively.

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

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
 
$
35,057

 
$

 
$

 
$
42,337

 
$

 
$


The Company's 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, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. See Note 2, Summary of Significant Accounting Policies for further discussion of the Company's significant accounting policies.

Debt Security Investments - Held to Maturity

At March 31, 2018 and December 31, 2017, the Company had approximately $41,696 and $41,777, respectively, in debt security investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value based on Level 1. The Company has the intent and ability to hold these debt securities to maturity. Further, as of March 31, 2018, the debt security investments were held in AA, A and BBB+ rated debt securities.

6. BUSINESS SEGMENTS

The Company has three reportable operating segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities; (2) assisted and independent living services, which includes the operation of assisted and independent living facilities; and (3) home health and hospice services, which includes the Company's home health, home care and hospice businesses. The Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, reviews financial information at the operating segment level.

The Company also reports an “all other” category that includes results from its mobile diagnostics and other ancillary operations for the three months ended March 31, 2018 and 2017. These operations 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 are managed separately to provide greater visibility into those operations.

As of March 31, 2018, transitional and skilled services included 160 wholly-owned affiliated skilled nursing facilities and 21 campuses that provide skilled nursing and rehabilitative care services and assisted and independent living services. The Company provided room and board and social services through 51 wholly-owned affiliated assisted and independent living facilities and 21 campuses as mentioned above. Home health, home care and hospice services were provided to patients through 46 affiliated agencies. As of March 31, 2018, the Company held majority membership interests in other ancillary operations, which operating results are included in the "all other" category.

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

Segment revenues by major payor source were as follows:
 
 
Three Months Ended March 31, 2018
 
 
 
Transitional and Skilled Services
 
Assisted and Independent Living Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
156,511

 
$
8,264

 
$
2,850

 
$

 
$
167,625

 
34.1
%
 
Medicare
 
111,953

 

 
27,361

 

 
139,314

 
28.3

 
Medicaid-skilled
 
27,042

 

 

 

 
27,042

 
5.5

 
Subtotal
 
295,506

 
8,264

 
30,211

 

 
333,981

 
67.9

 
Managed care
 
77,800

 

 
5,916

 

 
83,716

 
17.0

 
Private and other
 
33,710

 
27,849

 
3,631

 
9,247

(1)
74,437

 
15.1

 
Total revenue
 
$
407,016

 
$
36,113

 
$
39,758

 
$
9,247

 
$
492,134

 
100.0
%
 
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2018.
 
 
Three Months Ended March 31, 2017
 
 
 
Transitional and Skilled Services
 
Assisted and Independent Living Services
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
138,825

 
$
7,036

 
$
2,410

 
$

 
$
148,271

 
33.6
%
 
Medicare
 
107,928

 

 
21,992

 

 
129,920

 
29.4

 
Medicaid-skilled
 
23,017

 

 

 

 
23,017

 
5.2

 
Subtotal
 
269,770

 
7,036

 
24,402

 

 
301,208

 
68.2

 
Managed care
 
70,357

 

 
5,205

 

 
75,562

 
17.1

 
Private and other
 
32,212

 
25,310

 
2,526

 
4,921

(1)
64,969

 
14.7

 
Total revenue
 
$
372,339

 
$
32,346

 
$
32,133

 
$
4,921

 
$
441,739

 
100.0
%
 
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2017.
  
The following pro forma table demonstrates the impact of adopting ASC 606 on the Company's segment revenues by major payor source for the three months ended March 31, 2018, by showing revenue amounts as if the previous accounting guidance was still in effect.

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


 
 
Three Months Ended March 31, 2018 (Pro forma)
 
 
 
Transitional and Skilled Services
 
Assisted and Independent Living Services (2)
 
Home Health and Hospice Services
 
All Other
 
Total Revenue
 
Revenue %
 
Medicaid
 
$
159,104

 
$
8,264

 
$
2,941

 
$

 
$
170,309

 
34.0
%
 
Medicare
 
112,777

 

 
27,604

 

 
140,381

 
28.0

 
Medicaid-skilled
 
27,538

 

 

 

 
27,538

 
5.5

 
Subtotal
 
299,419

 
8,264

 
30,545

 

 
338,228

 
67.5

 
Managed care
 
79,698

 

 
6,147

 

 
85,845

 
17.1

 
Private and other
 
36,104

 
27,849

 
3,665

 
9,247

(1)
76,865

 
15.4

 
Total revenue
 
$
415,221

 
$
36,113

 
$
40,357

 
$
9,247

 
$
500,938

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

The following table sets forth selected financial data consolidated by business segment:
 
 
Three Months Ended March 31, 2018
 
 
Transitional and Skilled Services(3)
 
Assisted and Independent Living Services(3)
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Service revenue
 
$
407,016

 
$

 
$
39,758

 
$
9,247

 
$

 
$
456,021

Assisted and independent living revenue
 

 
36,113

 

 

 

 
36,113

Revenue from external customers
 
$
407,016

 
$
36,113

 
$
39,758

 
$
9,247

 
$

 
$
492,134

Intersegment revenue(1)
 
689

 

 

 
1,082

 
(1,771
)
 

Total revenue
 
$
407,705

 
$
36,113

 
$
39,758

 
$
10,329

 
$
(1,771
)
 
$
492,134

Segment income (loss)(2)
 
$
46,195

 
$
4,662

 
$
6,058

 
$
(23,936
)
 
$

 
$
32,979

Interest expense, net of interest income
 

 

 

 

 
 
 
$
(3,165
)
Income before provision for income taxes
 

 

 

 

 
 
 
$
29,814

Depreciation and amortization
 
$
7,802

 
$
1,597

 
$
245

 
$
1,978

 
$

 
$
11,622

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.
(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, assisted and independent living services and home health and hospice services segments. General and administrative expense, including the return of unclaimed class action settlement for the three months ended March 31, 2018, is included in the "All Other" category.
(3) The Company's campuses represent facilities that offer skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independent living services have been allocated and recorded in the respective reportable segment. Due to the adoption of ASC 606, the presentation of revenue changed from presenting total revenue to service revenue and assisted and independent living revenue.

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


 
 
Three Months Ended March 31, 2017
 
 
Transitional and Skilled Services(3)
 
Assisted and Independent Living Services(3)
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Service revenue
 
$
372,339

 
$

 
$
32,133

 
$
4,921

 
$

 
$
409,393

Assisted and independent living revenue
 

 
$
32,346

 
$

 
$

 

 
32,346

Revenue from external customers
 
$
372,339

 
$
32,346

 
$
32,133

 
$
4,921

 
$

 
$
441,739

Intersegment revenue(1)
 
744

 

 

 
884

 
(1,628
)
 

Total revenue
 
$
373,083

 
$
32,346

 
$
32,133

 
$
5,805

 
$
(1,628
)
 
$
441,739

Segment income (loss)(2)
 
$
31,790

 
$
4,439

 
$
4,294

 
$
(32,971
)
 
$

 
$
7,552

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
 
$
(3,155
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
 
$
4,397

Depreciation and amortization
 
$
6,953

 
$
1,623

 
$
235

 
$
1,703

 
$

 
$
10,514

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.
(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, assisted and independent living services and home health and hospice services segments. General and administrative expense, including charges related to class action lawsuit during the three months ended March 31, 2017, is included in the "All Other" category.
(3) The Company's campuses represent facilities that offer skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independent living services have been allocated and recorded in the respective reportable segment. Due to the adoption of ASC 606, the presentation of revenue changed from presenting total revenue to service revenue and assisted and independent living revenue.

The following pro forma table demonstrates the impact of adopting ASC 606 on the Company's selected financial data consolidated by business segment for the three months ended March 31, 2018, by showing revenue amounts as if the previous accounting guidance was still in effect.

 
 
Three Months Ended March 31, 2018 (Pro forma)
 
 
Transitional and Skilled Services(3)
 
Assisted and Independent Living Services(3)
 
Home Health and Hospice Services
 
All Other
 
Elimination
 
Total
Service revenue
 
$
415,221

 
$

 
$
40,357

 
$
9,247

 
$

 
$
464,825

Assisted and independent living revenue
 

 
36,113

 

 

 

 
36,113

Revenue from external customers
 
$
415,221

 
$
36,113

 
$
40,357

 
$
9,247

 
$

 
$
500,938

Intersegment revenue(1)
 
689

 

 

 
1,082

 
(1,771
)
 

Total revenue
 
$
415,910

 
$
36,113

 
$
40,357

 
$
10,329

 
$
(1,771
)
 
$
500,938

Segment income (loss)(2)
 
$
46,195

 
$
4,662

 
$
6,058

 
$
(23,936
)
 
$

 
$
32,979

Interest expense, net of interest income
 

 

 

 

 
 
 
$
(3,165
)
Income before provision for income taxes
 

 

 

 

 
 
 
$
29,814

Depreciation and amortization
 
$
7,802

 
$
1,597

 
$
245

 
$
1,978

 
$

 
$
11,622

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.
(2) Segment income (loss) includes depreciation and amortization expense and excludes general and administrative expense and interest expense for transitional and skilled services, assisted and independent living services and home health and hospice services segments. General and administrative expense, including the return of unclaimed class action settlement for the three months ended March 31, 2018, is included in the "All Other" category.
(3) The Company's campuses represent facilities that offer skilled nursing, assisted and/or independent living services. Revenue and expenses related to skilled nursing, assisted and independent living services have been allocated and recorded in the respective reportable segment. Due to the adoption of ASC 606, the presentation of revenue changed from presenting total revenue to service revenue and assisted and independent living revenue.


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


The Company's transitional and skilled services segment income for the three months ended March 31, 2017 included continued obligations under the lease related to closed operations, lease termination costs and related closing expenses of $4,017. This amount includes the present value of future rental payments of approximately $2,715 and long-lived assets impairment of $111. See Note 16, Leases for further detail.

7. ACQUISITIONS
The acquisition focus of the subsidiaries is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business or otherwise advance the Company's strategy. The results of all operating subsidiaries are included in the accompanying Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The affiliate operations also enters into long-term leases that may include options to purchase the facilities. As a result, from time to time, the affiliated operations will acquire facilities that has been operating under third-party leases.
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 805, Clarifying the Definition of a Business (ASC 805) prospectively, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under the new standard, when substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. The new standard may result in more transactions being accounted for as asset acquisitions rather than business combinations. The Company anticipates that future acquisitions will be classified as a mixture of business and asset acquisitions under the new guidance.
During the three months ended March 31, 2018, the Company acquired two stand-alone assisted living operations for an aggregate purchase price of $4,447. The addition of these operations added 74 assisted living units to be operated by the Company's operating subsidiaries. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction. Substantially all of the fair value of the assets acquired is concentrated in property and equipment and as such, the transactions, which occurred during the first quarter, were classified as asset acquisitions in accordance with ASC 805.
During the three months ended March 31, 2017, the Company acquired operations for an aggregate purchase price of $8,693, consisting of building and improvements of $5,290, equipment of $449, goodwill of $1,826, other indefinite-lived intangible assets of $1,094, assembled occupancy of $59 and other liabilities assumed of $25.

Subsequent to March 31, 2018, the Company acquired one stand-alone skilled nursing operation and one campus operation for an aggregate purchase price of $19,500. The addition of these operations added 253 operational skilled nursing beds and 143 assisted living units operated by the Company's operating subsidiaries. In addition, with the stand-alone skilled nursing operation acquisition, the Company acquired real estate that included an adjacent 50 bed long-term acute care hospital that is currently operated by a third party under a lease arrangement. As of the date of this filing, the preliminary allocation of the purchase price for the acquisitions acquired subsequent to March 31, 2018 was not completed as necessary valuation information was not yet available. As such, the Company has not made the determination whether these acquisitions should be classified as business combinations or asset acquisitions under ASC 805.

8. PROPERTY AND EQUIPMENT— Net
Property and equipment, net consist of the following:

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


 
March 31, 2018
 
December 31, 2017
Land
$
49,382

 
$
49,081

Buildings and improvements
348,977

 
342,641

Equipment
185,342

 
181,530

Furniture and fixtures
5,268

 
5,244

Leasehold improvements
99,511

 
97,221

Construction in progress
7,595

 
5,460

 
696,075

 
681,177

Less: accumulated depreciation
(155,056
)
 
(144,093
)
Property and equipment, net
$
541,019

 
$
537,084


See also Note 7, Acquisitions for information on acquisitions during the three months ended March 31, 2018.

9. INTANGIBLE ASSETS — Net
 
 
Weighted Average Life (Years)
 
March 31, 2018
 
December 31, 2017
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
Intangible Assets
 
 
 
 
Net
 
 
 
Net
Lease acquisition costs
 
24.0
 
$
483

 
$
(104
)
 
$
379

 
$
483

 
$
(99
)
 
$
384

Favorable leases
 
30.2
 
35,116

 
(7,063
)
 
28,053

 
35,116

 
(6,568
)
 
28,548

Assembled occupancy
 
0.4
 
2,707

 
(2,671
)
 
36

 
2,659

 
(2,631
)
 
28

Facility trade name
 
30.0
 
733

 
(299
)
 
434

 
733

 
(293
)
 
440

Customer relationships
 
17.3
 
4,933

 
(1,599
)
 
3,334

 
4,933

 
(1,530
)
 
3,403

Total
 
 
 
$
43,972

 
$
(11,736
)
 
$
32,236

 
$
43,924

 
$
(11,121
)
 
$
32,803


Amortization expense was $615 and $611 for the three months ended March 31, 2018 and 2017, respectively.
Estimated amortization expense for each of the years ending December 31 is as follows:
Year
Amount
2018 (remainder)
$
1,762

2019
2,301

2020
1,593

2021
1,497

2022
1,471

2023
1,409

Thereafter
22,203

 
$
32,236


10. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. The Company performs its analysis for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment, in accordance with the provisions of Accounting Standards Codification topic 350, Intangibles—Goodwill and Other (ASC 350). This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, a "Step 0" analysis. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs "Step 1" of the traditional two-step goodwill impairment test by comparing the net assets of each reporting unit to their respective fair values. The Company determines the estimated fair value of each reporting unit using a discounted

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


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 three months ended March 31, 2018:
 
Goodwill
 
Transitional and Skilled Services
 
Assisted and Independent Living Services
 
Home Health and Hospice Services
 
All Other
 
Total
January 1, 2018
$
45,486

 
$
3,958

 
$
24,322

 
$
7,296

 
$
81,062

Purchase price adjustment

 

 

 
(99
)
 
(99
)
March 31, 2018
$
45,486

 
$
3,958


$
24,322

 
$
7,197

 
$
80,963


The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of March 31, 2018. See further discussion of goodwill acquired at Note 7, Acquisitions.

Other indefinite-lived intangible assets consists of the following:
 
March 31, 2018

December 31, 2017
Trade name
$
1,181

 
$
1,181

Medicare and Medicaid licenses
24,068

 
24,068

 
$
25,249

 
$
25,249


11. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist of the following:
 
March 31, 2018
 
December 31, 2017
Debt issuance costs, net
$
2,568

 
$
2,799

Long-term insurance losses recoverable asset
5,278

 
5,394

Deposits with landlords
7,205

 
5,981

Capital improvement reserves with landlords and lenders
2,535

 
2,327

Note receivable from sale of ancillary business
109

 

Restricted and other assets
$
17,695

 
$
16,501

Included in restricted and other assets as of March 31, 2018, are anticipated insurance recoveries related to the Company's workers' compensation, general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Update issued by the FASB.

12. OTHER ACCRUED LIABILITIES


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


Other accrued liabilities consist of the following:
 
March 31, 2018
 
December 31, 2017
Quality assurance fee
$
4,908

 
$
4,864

Refunds payable
22,971

 
21,661

Deferred revenue
6,251

 
7,066

Cash held in trust for patients
2,660

 
2,609

Resident deposits
6,841

 
6,574

Dividends payable
2,346

 
2,328

Property taxes
8,409

 
10,088

Operational closure liability
900

 
910

Other
7,802

 
7,715

Other accrued liabilities
$
63,088

 
$
63,815

Quality assurance fee represents amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds. Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Deferred revenue occurs when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to patients. Cash held in trust for patients reflects monies received from, or on behalf of, patients. Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the accompanying consolidated balance sheets. Operational closure liability includes the short-term portion of the closing costs that are payable within the next 12 months. The remaining long-term portion is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.

13. INCOME TAXES

The Tax Act was enacted on December 22, 2017. Effective January 1, 2018 the Tax Act reduces the corporate rate from 35.0% to 21.0%.The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations of the Tax Act, any legislative action to address uncertainties that arise because of the Tax Act, and additional guidance that may be issued by the U.S. government.

The Company has adopted ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows the company to record provisional amounts during the period of enactment. Any change to the provisional amounts will be recorded as an adjustment to the provision for income taxes in the period the amounts are determined. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year of the enactment date. 

As of March 31, 2018 the Company has not completed its accounting for the tax effects of the enactment of the Tax Act.  The Company continues to analyze certain aspects of the Tax Act and refining the estimates of its calculations, which could potentially impact the measurement of the Company's tax balances. In the three months ended March 31, 2018, there were no adjustments to the provisional amounts recorded in the period ended December 31, 2017.

The Company recorded income tax expense of $6,521 in the three months ended March 31, 2018, or 21.9% of earnings before income taxes, compared to 32.8% for the three month period ended March 31, 2017. The Company’s effective tax rate for 2018 includes the benefit of the lower federal income tax rate of 21.0%, offset by various non-deductible expenses from the enactment of the Tax Act. The effective tax rate for the three months ended March 31, 2018 also includes excess tax benefits from stock-based compensation which were offset by tax expense due to the receipt of unclaimed class action settlement.

The Company is not currently under examination by any major income tax jurisdiction. During 2018, the statutes of limitations will lapse on the Company's 2014 Federal tax year and certain 2013 and 2014 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three months ended March 31, 2018 or 2017.


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



14. DEBT
Long-term debt consists of the following:
 
March 31, 2018
 
December 31, 2017
Term loan with SunTrust, interest payable quarterly
$
138,750

 
$
140,625

Credit facility with SunTrust
30,000

 
50,000

Mortgage loans and promissory note, principal and interest payable monthly, interest at fixed rate
124,847

 
125,394

 
293,597

 
316,019

Less: current maturities
(10,035
)
 
(9,939
)
Less: debt issuance costs
(3,113
)
 
(3,090
)
 
$
280,449

 
$
302,990


Credit Facility with a Lending Consortium Arranged by SunTrust
The Company maintains a credit facility with a lending consortium arranged by SunTrust (as amended to date, the Credit Facility). The Company originally entered into the Credit Facility in an aggregate principal amount of $150,000 in May 2014. Under the Credit Facility, the Company could seek to obtain incremental revolving or term loans in an aggregate amount not to exceed $75,000. The interest rates applicable to loans under the Credit Facility are, at the Company’s option, equal to either a base rate plus a margin ranging from 1.25% to 2.25% per annum or LIBOR plus a margin ranging from 2.25% to 3.25% per annum, based on the debt to Consolidated EBITDA ratio of the Company and its operating subsidiaries as defined in the agreement. In addition, the Company will pay a commitment fee on the unused portion of the commitments under the Credit Facility that will range from 0.30% to 0.50% per annum, depending on the debt to Consolidated EBITDA ratio of the Company and its operating subsidiaries. Loans made under the Credit Facility are not subject to interim amortization. The Company is not required to repay any loans under the Credit Facility prior to maturity, other than to the extent the outstanding borrowings exceed the aggregate commitments under the Credit Facility.

On February 5, 2016, the Company amended its existing revolving credit facility to increase its aggregate principal amount available to $250,000 (the Amended Credit Facility). Under the credit facility, the Company may seek to obtain incremental revolving or term loans in an aggregate amount not to exceed $150,000. The interest rates applicable to loans under the credit facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.75% to 1.75% per annum or LIBOR plus a margin ranging from 1.75% to 2.75% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, the Company will pay a commitment fee on the unused portion of the commitments under the credit facility that will range from 0.30% to 0.50% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio of the Company and its subsidiaries. The Company is permitted to prepay all or any portion of the loans under the credit facility prior to maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders.

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

The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The credit facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. Under the Credit Facility, the Company must comply with financial maintenance covenants to be tested

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


quarterly, consisting of a maximum Consolidated Total Net Debt to consolidated EBITDA ratio (which shall be increased to 3.50:1.00 for the first fiscal quarter and the immediate following three fiscal quarters), and a minimum interest/rent coverage ratio (which cannot be below 1.50:1.00). The majority of lenders can require that the Company and its operating subsidiaries mortgage certain of its real property assets to secure the Amended Credit Facility if an event of default occurs, the Consolidated Total Net Debt to consolidated EBITDA ratio is above 2.75:1.00 for two consecutive fiscal quarters, or its liquidity is equal or less than 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) for ten consecutive business days, provided that such mortgages will no longer be required if the event of default is cured, the Consolidated Total Net Debt to consolidated EBITDA ratio is below 2.75:1.00 for two consecutive fiscal quarters, or its liquidity is above 10% of the Aggregate Revolving Commitment Amount (as defined in the agreement) or ninety consecutive days, as applicable. As of March 31, 2018, the Company's operating subsidiaries had $168,750 outstanding under the Credit Facility. The outstanding balance on the term loan was $138,750, of which $7,500 is classified as short-term and the remaining $131,250 is classified as long-term. The outstanding balance on the revolving Credit Facility was $30,000, which is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2018.

As of April 27, 2018, there was approximately $158,750 outstanding under the Credit Facility.

Mortgage Loans and Promissory Note

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

In addition to the HUD mortgage loans above, the Company had outstanding indebtedness under mortgage loans insured with HUD and a promissory note issued in connection with various acquisitions. These mortgage loans and note bear fixed interest rates between 2.6% and 5.3% per annum. Amounts borrowed under the mortgage loans may be prepaid starting after the second anniversary of the notes subject to prepayment fees of the principal balance on the date of prepayment. These prepayment fees are reduced by 1.0% per year for years three through eleven of the loan. There is no prepayment penalty after year eleven. The term of the mortgage loans and the note is between 12 and 33 years. The mortgage loans and note are secured by the real property comprising the facilities and the rents, issues and profits thereof, as well as all personal property used in the operation of the facilities.

As of March 31, 2018, the Company's operating subsidiaries had $124,847 outstanding under the mortgage loans and note, of which $2,535 is classified as short-term and the remaining $122,312 is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2018.

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

Off-Balance Sheet Arrangements

As of March 31, 2018, the Company had approximately $6,304 on the credit facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

15. 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 consolidated statements of income for the three months ended March 31, 2018 and 2017 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.

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


Stock Options
2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the 2017 Plan). The 2017 Plan provides for the issuance of 6,881 shares of common stock. The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than 3 years, on the completion of each year of service measured from the grant date. All other options generally vest over 5 years at 20% per year on the anniversary of the grant date. Options expire 10 years from the date of grant. At March 31, 2018, there were 5,994 unissued shares of common stock available for issuance under this plan.
The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. The Company granted 168 options and 57 restricted stock awards from the 2017 Plans during the three months ended March 31, 2018.

The Company used the following assumptions for stock options granted during the three months ended March 31, 2018 and 2017:
Grant Year
 
Options Granted
 
Weighted Average Risk-Free Rate
 
Expected Life
 
Weighted Average Volatility
 
Weighted Average Dividend Yield
2018
 
168

 
2.7%
 
6.2 years
 
32.0%
 
0.7%
2017
 
156

 
2.0%
 
6.3 years
 
36.0%
 
0.8%

For the three months ended March 31, 2018 and 2017, the following represents the exercise price and fair value displayed at grant date for stock option grants:
Grant Year
 
Granted
 
Weighted Average Exercise Price
 
Weighted Average Fair Value of Options
2018
 
168

 
$
26.53

 
$
9.01

2017
 
156

 
$
20.28

 
$
7.15


The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended March 31, 2018 and 2017 and therefore, the intrinsic value was $0 at date of grant.

The following table represents the employee stock option activity during the three months ended March 31, 2018 and 2017:
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise Price
 
Number of
Options Vested
 
Weighted
Average
Exercise Price
of Options
Vested
January 1, 2018
4,739

 
$
13.08

 
2,776

 
$
10.07

Granted
168

 
26.53

 
 
 
 
Forfeited
(26
)
 
16.13

 
 
 
 
Exercised
(355
)
 
7.70

 
 
 
 
March 31, 2018
4,526

 
$
13.98

 
2,638

 
$
10.69


The following summary information reflects stock options outstanding, vested and related details as of March 31, 2018:

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


 
 
 
 
 
 
 
 
 
 
 
 
Stock Options Vested
 
 
Stock Options Outstanding
 
 
 
 
 
Number Outstanding
 
Black-Scholes Fair Value
 
Remaining Contractual Life (Years)
 
Vested and Exercisable
Year of Grant
 
Exercise Price
 
 
 
 
2008
 
2.56
-
4.06
 
65

 
107

 
0
 
65

2009
 
4.06
-
4.56
 
398

 
858

 
1
 
398

2010
 
4.77
-
4.96
 
88

 
215

 
2
 
88

2011
 
5.90
-
7.99
 
107

 
366

 
3
 
107

2012
 
6.56
-
7.96
 
378

 
1,391

 
4
 
378

2013
 
7.98
-
11.49
 
504

 
2,448

 
5
 
429

2014
 
10.55
-
18.94
 
1,383

 
7,848

 
6
 
807

2015
 
21.47
-
25.24
 
530

 
4,829

 
7
 
231

2016
 
18.79
-
19.89
 
438

 
3,053

 
8
 
109

2017
 
18.64
-
22.90
 
467

 
3,263

 
9
 
26

2018
 
26.53
 
168

 
1,509

 
10
 

Total
 
 
 
 
 
4,526

 
25,887

 
 

2,638

Restricted Stock Awards
The Company granted 57 and 53 restricted stock awards during the three months ended March 31, 2018 and 2017, respectively. All awards were granted at an exercise price of $0 and generally vest over five years. The fair value per share of restricted awards granted during the three months ended March 31, 2018 and 2017 ranged from $23.61 to $27.70 and $18.56 to $20.68, respectively. The fair value per share includes quarterly stock awards to non-employee directors.
A summary of the status of the Company's non-vested restricted stock awards as of March 31, 2018 and changes during the three months ended March 31, 2018 is presented below:
 
Non-Vested Restricted Awards
 
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2018
383

 
$
20.65

Granted
57

 
26.28

Vested
(48
)
 
20.59

Forfeited
(5
)
 
22.04

Nonvested at March 31, 2018
387

 
$
21.47


During the three months ended March 31, 2018, the Company granted 8 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors. The fair value per share of these stock awards was $23.61 based on the market price on the grant date.

Share-based compensation expense recognized for the Company's equity incentive plans for the three months ended March 31, 2018 and 2017 was as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Share-based compensation expense related to stock options
$
1,216

 
$
1,207

Share-based compensation expense related to restricted stock awards
578

 
552

Share-based compensation expense related to stock options and restricted stock awards to non-employee directors
177

 
132

Total
$
1,971


$
1,891



25

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


In future periods, the Company expects to recognize approximately $11,210 and $7,363 in share-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2018. Future share-based compensation expense will be recognized over