SEC Filing - The Ensign Group, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q



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

For the quarterly period ended September 30, 2017.



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

For the transition period from to .

Commission file number: 001-33757

__________________________

THE ENSIGN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)



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

27101 Puerta Real, Suite 450

Mission Viejo, CA 92691

(Address of Principal Executive Offices and Zip Code)

(949) 487-9500

(Registrant’s Telephone Number, Including Area Code)

N/A

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

_____________________________

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, 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 November 6, 2017, 51,170,573 shares of the registrant’s common stock were outstanding.

THE ENSIGN GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS



	Part I. Financial Information

	Item 1. Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	1

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016	2

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	3

	Notes to Condensed Consolidated Financial Statements	5

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	69

	Item 4. Controls and Procedures	70

	Part II. Other Information

	Item 1. Legal Proceedings	71

	Item 1A. Risk Factors	73

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	108

	Item 3. Defaults Upon Senior Securities	108

	Item 4. Mine Safety Disclosures	108

	Item 5. Other Information	108

	Item 6. Exhibits	108

	Signatures	109

	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2
	Exhibit 101

PART I.

Item 1. Financial Statements

THE ENSIGN GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)



	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	40,055		$	57,706
Accounts receivable—less allowance for doubtful accounts of $43,328 and $39,791 at September 30, 2017 and December 31, 2016, respectively	255,119			244,433
Investments—current	9,108			11,550
Prepaid income taxes	14,122			302
Prepaid expenses and other current assets	21,441			19,871
Total current assets	339,845			333,862
Property and equipment, net	531,079			484,498
Insurance subsidiary deposits and investments	26,245			23,634
Escrow deposits	849			1,582
Deferred tax asset	22,499			23,073
Restricted and other assets	14,447			12,614
Intangible assets, net	33,568			35,076
Goodwill	77,663			67,100
Other indefinite-lived intangibles	24,653			19,586
Total assets	$	1,070,848		$	1,001,025
Liabilities and equity
Current liabilities:
Accounts payable	$	39,443		$	38,991
Accrued charge related to class action lawsuit (Note 18)	11,000			—
Accrued wages and related liabilities	75,970			84,686
Accrued self-insurance liabilities—current	21,639			21,359
Other accrued liabilities	66,266			58,763
Current maturities of long-term debt	8,170			8,129
Total current liabilities	222,488			211,928
Long-term debt—less current maturities	287,456			275,486
Accrued self-insurance liabilities—less current portion	50,012			43,992
Deferred rent and other long-term liabilities	11,490			9,124
Deferred gain related to sale-leaseback (Note 17)	12,239			—
Total liabilities	583,685			540,530

Commitments and contingencies (Notes 15, 17 and 18)
Equity:
Ensign Group, Inc. stockholders' equity:
Common stock; $0.001 par value; 75,000 shares authorized; 53,443 and 51,082 shares issued and outstanding at September 30, 2017, respectively, and 52,787 and 50,838 shares issued and outstanding at December 31, 2016, respectively (Note 3)	53			52
Additional paid-in capital (Note 3)	262,403			252,493
Retained earnings	255,903			235,021
Common stock in treasury, at cost, 1,932 and 1,520 shares at September 30, 2017 and December 31, 2016, respectively (Note 3)	(38,405		)	(31,117		)
Total Ensign Group, Inc. stockholders' equity	479,954			456,449
Non-controlling interest	7,209			4,046
Total equity	487,163			460,495
Total liabilities and equity	$	1,070,848		$	1,001,025

See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Revenue	$	471,594		$	428,065		$	1,361,612		$	1,221,816
Expense:
Cost of services	381,544			348,971			1,103,976			985,817
Charge related to class action lawsuit (Note 18)	—			—			11,000			—
(Gain)/losses related to divestitures (Note 7 and 17)	—			(2,505		)	2,731			5,430
Rent—cost of services (Note 17)	33,782			33,342			98,267			91,074
General and administrative expense	19,261			17,306			57,784			54,351
Depreciation and amortization	11,448			10,911			32,712			28,981
Total expenses	446,035			408,025			1,306,470			1,165,653
Income from operations	25,559			20,040			55,142			56,163
Other income (expense):
Interest expense	(3,519		)	(2,135		)	(10,017		)	(4,951		)
Interest income	395			236			973			749
Other expense, net	(3,124		)	(1,899		)	(9,044		)	(4,202		)
Income before provision for income taxes	22,435			18,141			46,098			51,961
Provision for income taxes	8,160			6,957			16,487			20,124
Net income	14,275			11,184			29,611			31,837
Less: net income attributable to noncontrolling interests	63			29			342			184
Net income attributable to The Ensign Group, Inc.	$	14,212		$	11,155		$	29,269		$	31,653
Net income per share attributable to The Ensign Group, Inc.:
Basic	$	0.28		$	0.22		$	0.58		$	0.63
Diluted	$	0.27		$	0.21		$	0.56		$	0.61
Weighted average common shares outstanding:
Basic	50,911			50,541			50,795			50,498
Diluted	52,828			52,045			52,674			52,102

Dividends per share	$	0.0425		$	0.0400		$	0.1275		$	0.1200

See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	29,611		$	31,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	32,712			28,981
Amortization of deferred financing fees	767			571
Amortization of deferred gain on sale-leaseback	(256		)	—
Long-lived asset impairment	111			137
Write-off of deferred financing fees	—			321
Deferred income taxes	575			(657		)
Provision for doubtful accounts	21,934			20,070
Share-based compensation	6,755			6,907
Excess tax benefit from share-based compensation (Note 2)	—			(2,250		)
Gain on disposition of property and equipment	(71		)	(21		)
Gain on sale of urgent care centers	—			(2,505		)
Change in operating assets and liabilities
Accounts receivable	(33,098		)	(43,207		)
Prepaid income taxes	(13,820		)	6,817
Prepaid expenses and other assets	(2,797		)	47
Insurance subsidiary deposits and investments	(169		)	(448		)
Charge related to class action lawsuit (Note 18)	11,000			—
Liabilities related to operational closures (Note 7 and 17)	2,620			7,381
Accounts payable	2,499			2,155
Accrued wages and related liabilities	(8,717		)	(6,849		)
Income taxes payable	(1,182		)	51
Other accrued liabilities	8,668			11,734
Accrued self-insurance liabilities	5,456			9,907
Deferred rent liability	651			205
Net cash provided by operating activities	63,249			71,184
Cash flows from investing activities:
Purchase of property and equipment	(39,775		)	(52,273		)
Cash payment for business acquisitions	(83,945		)	(63,810		)
Cash payment for asset acquisitions	(310		)	(777		)
Escrow deposits	(849		)	(1,298		)
Escrow deposits used to fund business acquisitions	1,582			400
Cash received from sale of urgent care centers and franchising businesses, net of note receivable	—			5,952
Cash proceeds from sale-leaseback	38,000			—
Cash proceeds from the sale of property and equipment and insurance proceeds	2,546			391
Restricted and other assets	(315		)	(1,009		)
Net cash used in investing activities	(83,066		)	(112,424		)
Cash flows from financing activities:
Proceeds from revolving credit facility (Note 15)	680,000			519,000
Payments on revolving credit facility and other debt (Note 15)	(668,089		)	(447,481		)
Issuance of treasury stock upon exercise of options	—			106
Issuance of common stock upon exercise of options	4,212			5,537
Repurchase of shares of common stock (Note 3)	(7,288		)	(30,000		)
Dividends paid	(6,528		)	(6,131		)
Excess tax benefit from share-based compensation (Note 2)	—			2,332
Purchase of non-controlling interest	(83		)	—
Payments of deferred financing costs	(58		)	(3,278		)
Net cash provided by financing activities	2,166			40,085
Net decrease in cash and cash equivalents	(17,651		)	(1,155		)
Cash and cash equivalents beginning of period	57,706			41,569
Cash and cash equivalents end of period	$	40,055		$	40,414

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)



	Nine Months Ended September 30,
	2017		2016
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	10,014	$	5,054
Income taxes	$	30,780	$	11,552
Non-cash financing and investing activity:
Accrued capital expenditures	$	4,780	$	4,168
Note receivable from sale of urgent care centers and franchising business	$	—	$	700

See accompanying notes to condensed consolidated financial statements.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1. DESCRIPTION OF BUSINESS

The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum, as well as other ancillary businesses. As of September 30, 2017, the Company operated 229 facilities, 43 home health, hospice and home care agencies and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Oregon, South Carolina, Texas, Utah, Washington and Wisconsin. The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted living, home health, home care, hospice and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 18,800 operational skilled nursing beds and 5,000 assisted living and independent living units. As of September 30, 2017, the Company owned 63 of its 229 affiliated facilities and leased an additional 166 facilities through long-term lease arrangements and had options to purchase 10 of those 166 facilities. As of December 31, 2016, the Company owned 50 of its 210 affiliated facilities and leased an additional 160 facilities through long-term lease arrangements, and had options to purchase nine of those 160 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 September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 (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, 2016 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 financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Interim Financial Statements relate to revenue, allowance for doubtful accounts, intangible assets and goodwill, impairment of long-lived assets, general and professional liability, workers' compensation

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.

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

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

Revenue from the Medicare and Medicaid programs accounted for 68.8% and 68.4% of the Company's revenue for the three and nine months ended September 30, 2017, respectively, and 68.1% and 67.6% for the three and nine months ended September 30, 2016, respectively. The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the three and nine months ended September 30, 2017 and 2016.

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

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. 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 on a per patient, daily basis or as services are performed.

Assisted and Independent Living Revenue

The Company's revenue is recorded when services are rendered on the date services are provided at amounts billable to individual residents and consists of fees for basic housing and assisted living care. 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 rate on a per resident, daily basis or as services. Revenue for certain ancillary charges is recognized as services are provided, and such fees are billed monthly in arrears.

Home Health Revenue

Medicare Revenue

Net service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.

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

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Non-Medicare Revenue

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

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

Hospice Revenue

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

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

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

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

Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. Management has evaluated its long-lived assets and recorded an impairment charge of $111 and $137 related to the closure of facilities during the nine months ended September 30, 2017 and 2016, respectively. The Company did not identify any asset impairment during the three months ended September 30, 2017 and 2016.

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.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each year. See further discussion at Note 11, Goodwill and Other Indefinite-Lived Intangible Assets.

Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. Starting on January 1, 2017, the combined self-insured retention was $500 per claim, subject to an additional one-time deductible of $750 for California affiliated facilities and a separate, one-time, deductible of $1,000 for non-California facilities. For all affiliated facilities, except those located in Colorado, the third-party coverage above these limits was $1,000 per claim, $3,000 per facility, with a $5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits was $1,000 per claim and $3,000 per facility for skilled nursing facilities, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.

The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas and Washington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider. These requirements include, but are not limited to, maintaining statutory capital. The Company’s policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis. Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $39,344 and $34,735 as of September 30, 2017 and December 31, 2016, respectively.

The Company’s operating subsidiaries are self-insured for workers’ compensation in California. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $500 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and, effective February 1, 2011, the Company has purchased individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. As of July 1, 2014, the Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $350 per occurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and pay benefits are managed through a state insurance pool. Outside of California, Texas and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $350 per accident. In all states except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $22,597 and $20,873 as of September 30, 2017 and December 31, 2016, respectively.

In addition, the Company has recorded an asset and equal liability of $4,948 and $4,104 at September 30, 2017 and December 31, 2016, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis. See Note 12, Restricted and Other Assets.

The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $300 for each covered person with an additional one-time aggregate individual stop loss deductible of $75. Beginning 2016, the Company's policy does not include the additional one-time aggregate individual stop loss deductible of $75. The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $4,762 and $5,639 as of September 30, 2017 and December 31, 2016, respectively.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

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

Recent Accounting Standards Adopted by the Company

In March 2016, the FASB issued a new standard to simplify several aspects of the accounting for employee share-based payment transactions, which includes the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard was effective for the Company in the first quarter of fiscal year 2017. Under the previous guidance, excess tax benefits and deficiencies from share-based compensation arrangements were

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recorded in equity when the awards vested or were settled. The new guidance requires prospective recognition of excess tax benefits and deficiencies in the income statement, resulting in the recognition of excess tax benefits in income tax expense, of $938 and $2,145, rather than in paid-in-capital, for the three and nine months ended September 30, 2017, respectively.

In addition, under the new guidance, excess income tax benefits from share-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. The Company has elected to apply the cash flow classification guidance prospectively, resulting in an increase to operating cash flow for the nine months ended September 30, 2017, and the prior year period has not been adjusted.

The Company has also elected to continue to estimate the expected forfeitures rather than electing to account for forfeitures as they occur. Finally, the adoption of the guidance requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding.

Accounting Standards Recently Issued But Not Yet Adopted by the Company

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 Accounting Standard Codification (ASC) 718. This guidance is effective for annual and interim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted in certain cases. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

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 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. This guidance is effective for annual and interim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted in certain cases. The new guidance is required to be applied on a prospective basis. The effect of the implementation will depend upon the nature of the Company's future acquisitions.

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 Board 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 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 amendments will be effective for the Company’s fiscal year beginning January 1, 2018. 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 Company is currently evaluating the accounting and disclosure requirements of the standard. Furthermore, the actual impact of implementation will largely depend on future intra-entity asset transfers, if any.

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. This guidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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 sheet.

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, which will be the Company's fiscal year 2018. Early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new standard supersedes most current revenue recognition guidance, including industry-specific guidance, and may be applied 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). In July 2015, the FASB formally deferred for one year the effective date of the new revenue standard and decided to permit entities to early adopt the standard. In December 2016, the FASB made certain technical corrections to further clarify the core revenue recognition principles, primarily in response to feedback from several sources, including the FASB/IASB Transition Resource Group. The guidance will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The Company initiated an adoption plan in fiscal year 2015, beginning with preliminary evaluation of the standard, and will continue by performing additional analysis of revenue streams and transactions for which the accounting may change under the new standard. The Company continues to perform its analysis into the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics to determine if revenue for a given portfolio would not be materially different than if it were evaluated on a contract-by-contract basis. The adoption plan, which includes evaluation of the impact to the consolidated financial statements, is ongoing and is expected to be completed by the end of fiscal year 2017. As part of the impact assessment, the Company is evaluating any variable consideration, potential constraints on the estimate of variable consideration, and significant financing components, in particular as it relates to third party settlements. The Company anticipates that after adoption, the majority of what is currently classified as bad debt expense under operating expenses will be treated as an implicit price concession factored into net revenue, consistent with the intent of the standard. The new standard also requires enhanced disclosures related to the disaggregation of revenue, information about contract balances, and other disclosures about contracts with customers, including revenue recognition policies to identify performance obligations and significant judgments in measurement and recognition. The FASB has issued and may issue in the future, interpretive guidance, which may impact its evaluation, however the Company currently anticipates adopting the standard as of January 1, 2018, using the modified retrospective method.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. COMMON STOCK

On February 8, 2017, the Company announced that its Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $30,000 of its common stock under the program for a period of 12 months. Under this program, the Company is authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws. The stock repurchase program is scheduled to expire on February 8, 2018. During the nine months ended September 30, 2017, the Company repurchased 412 shares of its common stock for a total of $7,288. The Company did not repurchase shares during the three months ended September 30, 2017.

On November 4, 2015 and February 9, 2016, the Company announced that its Board of Directors authorized two stock repurchase programs, under which the Company could repurchase up to $15,000 of its common stock under each program for a period of 12 months. During the first quarter of 2016, the Company repurchased 1,452 shares of its common stock for a total of $30,000 and these repurchase programs expired upon the repurchase of the full authorized amount under such plans.

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.

The adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting: Topic 718 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding. A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Numerator:
Net income	$	14,275	$	11,184	$	29,611	$	31,837
Less: net income attributable to noncontrolling interests	63		29		342		184
Net income attributable to The Ensign Group, Inc.	$	14,212	$	11,155	$	29,269	$	31,653

Denominator:
Weighted average shares outstanding for basic net income per share	50,911		50,541		50,795		50,498
Basic net income per common share attributable to The Ensign Group, Inc.	$	0.28	$	0.22	$	0.58	$	0.63

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Numerator:
Net income	$	14,275	$	11,184	$	29,611	$	31,837
Less: net income attributable to noncontrolling interests	63		29		342		184
Net income attributable to The Ensign Group, Inc.	$	14,212	$	11,155	$	29,269	$	31,653

Denominator:
Weighted average common shares outstanding	50,911		50,541		50,795		50,498
Plus: incremental shares from assumed conversion⁽¹⁾	1,917		1,504		1,879		1,604
Adjusted weighted average common shares outstanding	52,828		52,045		52,674		52,102
Diluted net income per common share attributable to The Ensign Group, Inc.	$	0.27	$	0.21	$	0.56	$	0.61

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,352 and 1,326 for the three and nine months ended September 30, 2017, respectively and 944 and 808 for the three and nine months ended September 30, 2016 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 September 30, 2017 and December 31, 2016:



	September 30, 2017						December 31, 2016
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Cash and cash equivalents	$	40,055	$	—	$	—	$	57,706	$	—	$	—

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

Debt Security Investments - Held to Maturity

At September 30, 2017 and December 31, 2016, the Company had approximately $35,353 and $35,184, respectively, in debt security investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value. The Company has the intent and ability to hold these debt securities to maturity. Further, as of September 30, 2017, the debt security investments were held in AA, A and BBB+ rated debt securities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. REVENUE AND ACCOUNTS RECEIVABLE

Revenue for the three and nine months ended September 30, 2017 and 2016 is summarized in the following tables:



	Three Months Ended September 30,
	2017				2016
	Revenue		% of Revenue		Revenue		% of Revenue
Medicaid	$	169,100	35.9	%	$	146,964	34.3	%
Medicare	127,348		27.0		122,292		28.6
Medicaid — skilled	27,737		5.9		22,172		5.2
Total Medicaid and Medicare	324,185		68.8		291,428		68.1
Managed care	74,723		15.8		67,381		15.7
Private and other payors⁽¹⁾	72,686		15.4		69,256		16.2
Revenue	$	471,594	100.0	%	$	428,065	100.0	%

(1) Private and other payors also includes revenue from all payors generated in other ancillary services for both the three months ended September 30, 2017 and 2016 and urgent care centers for the three months ended September 30, 2016.



	Nine Months Ended September 30,
	2017				2016
	Revenue		% of Revenue		Revenue		% of Revenue
Medicaid	$	470,008	34.5	%	$	409,832	33.5	%
Medicare	385,419		28.3		352,013		28.8
Medicaid — skilled	75,667		5.6		64,499		5.3
Total Medicaid and Medicare	931,094		68.4		826,344		67.6
Managed care	225,210		16.5		197,102		16.1
Private and other payors⁽¹⁾	205,308		15.1		198,370		16.3
Revenue	$	1,361,612	100.0	%	$	1,221,816	100.0	%

(1) Private and other payors also includes revenue from all payors generated in other ancillary services for both the nine months ended September 30, 2017 and 2016 and urgent care centers for the nine months ended September 30, 2016.

Accounts receivable as of September 30, 2017 and December 31, 2016 is summarized in the following table:



	September 30, 2017			December 31, 2016
Medicaid	$	112,809		$	111,031
Managed care	68,387			66,346
Medicare	54,065			55,500
Private and other payors	63,186			51,347
	298,447			284,224
Less: allowance for doubtful accounts	(43,328		)	(39,791		)
Accounts receivable, net	$	255,119		$	244,433

7. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company also reports an “all other” category that includes results from its mobile diagnostics and other ancillary operations for both the three and nine months ended September 30, 2017 and 2016 and urgent care centers for the three and nine months ended September 30, 2016. The Company completed the sale of its urgent care centers in the third and fourth quarter of 2016. During the three months ended September 30, 2016, the Company recognized a pretax gain of $2,505 due to the sale of three urgent care centers in Colorado. These operations are neither significant individually nor in aggregate and therefore do not constitute a reportable segment. The reporting segments are business units that offer different services and are managed separately to provide greater visibility into those operations. The expansion of the Company's assisted and independent living services led it to separate the assisted and independent living services into a distinct reportable segment in the fourth quarter of 2016. Previously, the Company had two reportable segments: (1) transitional, skilled and assisted living services (TSA services), which includes the operation of skilled nursing facilities and assisted living facilities; and (2) home health and hospice services. The Company has presented the financial information for the three and nine months ended September 30, 2016 on a comparative basis to conform with the current year segment presentation. Certain revenues by payor source were reclassified between Medicaid and "Private and other" to conform with the current year presentation. See also Note 11, Goodwill and Other Indefinite-Lived Intangible Assets for comparative information on changes in the carrying amount of goodwill by segment.

As of September 30, 2017, transitional and skilled services included 159 wholly-owned affiliated skilled nursing facilities and 21 campuses that provide skilled nursing and rehabilitative care services. The Company provided room and board and social services through 49 wholly-owned affiliated assisted and independent living facilities and 21 campuses. Home health, home care and hospice services were provided to patients through 43 affiliated agencies. As of September 30, 2017, 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 September 30, 2017
	Transitional and Skilled Services		Assisted and Independent Living Services		Home Health and Hospice Services		All Other			Total Revenue		Revenue %
Medicaid	$	158,099	$	8,083	$	2,918	$	—		$	169,100	35.9	%
Medicare	102,449		—		24,899		—			127,348		27.0
Medicaid-skilled	27,737		—		—		—			27,737		5.9
Subtotal	288,285		8,083		27,817		—			324,185		68.8
Managed care	69,335		—		5,388		—			74,723		15.8
Private and other	36,501		27,372		2,760		6,053		(1)	72,686		15.4
Total revenue	$	394,121	$	35,455	$	35,965	$	6,053		$	471,594	100.0	%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended September 30, 2017.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Three Months Ended September 30, 2016
	Transitional and Skilled Services		Assisted and Independent Living Services		Home Health and Hospice Services		All Other			Total Revenue		Revenue %
Medicaid	$	137,728	$	6,678	$	2,558	$	—		$	146,964	34.3	%
Medicare	101,655		—		20,637		—			122,292		28.6
Medicaid-skilled	22,172		—		—		—			22,172		5.2
Subtotal	261,555		6,678		23,195		—			291,428		68.1
Managed care	62,806		—		4,575		—			67,381		15.7
Private and other	32,954		24,570		1,750		9,982		(1)	69,256		16.2
Total revenue	$	357,315	$	31,248	$	29,520	$	9,982		$	428,065	100.0	%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services and urgent care centers for the three months ended September 30, 2016.



	Nine Months Ended September 30, 2017
	Transitional and Skilled Services		Assisted and Independent Living Services		Home Health and Hospice Services		All Other			Total Revenue		Revenue %
Medicaid	$	439,757	$	22,322	$	7,929	$	—		$	470,008	34.5	%
Medicare	314,827		—		70,592		—			385,419		28.3
Medicaid-skilled	75,667		—		—		—			75,667		5.6
Subtotal	830,251		22,322		78,521		—			931,094		68.4
Managed care	208,957		—		16,253		—			225,210		16.5
Private and other	102,469		78,488		7,945		16,406		(1)	205,308		15.1
Total revenue	$	1,141,677	$	100,810	$	102,719	$	16,406		$	1,361,612	100.0	%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the nine months ended September 30, 2017.



	Nine Months Ended September 30, 2016
	Transitional and Skilled Services		Assisted and Independent Living Services		Home Health and Hospice Services		All Other			Total Revenue		Revenue %
Medicaid	$	382,410	$	19,578	$	7,844	$	—		$	409,832	33.5	%
Medicare	292,483		—		59,530		—			352,013		28.8
Medicaid-skilled	64,499		—		—		—			64,499		5.3
Subtotal	739,392		19,578		67,374		—			826,344		67.6
Managed care	184,466		—		12,636		—			197,102		16.1
Private and other	89,088		72,546		4,669		32,067		(1)	198,370		16.3
Total revenue	$	1,012,946	$	92,124	$	84,679	$	32,067		$	1,221,816	100.0	%
(1) Private and other payors also includes revenue from all payors generated in other ancillary services and urgent care centers for the nine months ended September 30, 2016.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Three Months Ended September 30, 2017
	Transitional and Skilled Services(3)		Assisted and Independent Living Services(3)		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	394,121	$	35,455	$	35,965	$	6,053		$	—		$	471,594
Intersegment revenue (1)	739		—		—		583			(1,322		)	—
Total revenue	$	394,860	$	35,455	$	35,965	$	6,636		$	(1,322	)	$	471,594
Segment income (loss) (2)	$	36,868	$	4,342	$	4,695	$	(20,346	)	$	—		$	25,559
Interest expense, net of interest income													$	(3,124	)
Income before provision for income taxes													$	22,435
Depreciation and amortization	$	7,881	$	1,572	$	235	$	1,760		$	—		$	11,448

(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 businesses. General and administrative expense is included in "All Other" category.

(3) The Company's campuses represents facilities that offer both 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.



	Three Months Ended September 30, 2016
	Transitional and Skilled Services(3)		Assisted and Independent Living Services(3)		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	357,315	$	31,248	$	29,520	$	9,982		$	—		$	428,065
Intersegment revenue (1)	694		—		—		574			(1,268		)	—
Total revenue	$	358,009	$	31,248	$	29,520	$	10,556		$	(1,268	)	$	428,065
Segment income (loss) (2)	$	29,214	$	2,593	$	4,499	$	(16,266	)	$	—		$	20,040
Interest expense, net of interest income													$	(1,899	)
Income before provision for income taxes													$	18,141
Depreciation and amortization	$	7,606	$	1,074	$	215	$	2,016		$	—		$	10,911

(1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Nine Months Ended September 30, 2017
	Transitional and Skilled Services(3)		Assisted and Independent Living Services(3)		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	1,141,677	$	100,810	$	102,719	$	16,406		$	—		$	1,361,612
Intersegment revenue (1)	2,114		—		—		2,196			(4,310		)	—
Total revenue	$	1,143,791	$	100,810	$	102,719	$	18,602		$	(4,310	)	$	1,361,612
Segment income (loss) (2)	$	100,362	$	12,438	$	13,912	$	(71,570	)	$	—		$	55,142
Interest expense, net of interest income													$	(9,044	)
Income before provision for income taxes													$	46,098
Depreciation and amortization	$	22,038	$	4,687	$	700	$	5,287		$	—		$	32,712

(1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.



	Nine Months Ended September 30, 2016
	Transitional and Skilled Services(3)		Assisted and Independent Living Services(3)		Home Health and Hospice Services		All Other			Elimination			Total
Revenue from external customers	$	1,012,946	$	92,124	$	84,679	$	32,067		$	—		$	1,221,816
Intersegment revenue (1)	2,185		—		—		1,539			(3,724		)	—
Total revenue	$	1,015,131	$	92,124	$	84,679	$	33,606		$	(3,724	)	$	1,221,816
Segment income (loss) (2)	$	89,645	$	9,116	$	12,024	$	(54,622	)	$	—		$	56,163
Interest expense, net of interest income													$	(4,202	)
Income before provision for income taxes													$	51,961
Depreciation and amortization	$	19,637	$	3,120	$	711	$	5,513		$	—		$	28,981

(1) Intersegment revenue represents services provided at the Company's operating subsidiaries to the Company's other business lines.

The Company's transitional and skilled services segment income for the nine months ended September 30, 2017 and 2016 included continued obligations under the lease related to closed operations, lease termination costs and related closing expenses of $4,017 and $7,935, respectively. These amounts included the value of the present value of future rental payments of approximately $2,715 and $6,512 and long-lived assets impairment of $111 and $137 for the nine months ended September 30, 2017 and 2016, respectively. See Note 17, Leases for further detail. Included in the nine months ended September 30, 2017 is the loss recovery of $1,286 related to a facility that was closed in the prior year. The Company did not incur these costs for the three months ended September 30, 2017 and 2016.

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. ACQUISITIONS

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

During the nine months ended September 30, 2017, the Company expanded its operations with the addition of eight stand-alone skilled nursing operations, nine stand-alone assisted and independent living operations, one campus operation, two home health agencies and two hospice agencies through a combination of long-term leases and purchases. The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term leases. The Company has also invested in ancillary services that are complementary to its existing transitional and skilled services, assisted and independent living services, and home health and hospice businesses. The aggregate purchase price for these acquisitions for the nine months ended September 30, 2017 was $84,063. The addition of these operations added 905 operational skilled nursing beds and 594 assisted living units operated by the Company's operating subsidiaries. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

The Company's operating subsidiaries also opened three newly constructed stand-alone skilled nursing operations under long-term lease agreements, which added 385 operational skilled nursing beds.

The table below presents the allocation of the purchase price for the operations acquired in business combinations during the nine months ended September 30, 2017 and 2016. As of the date of this filing, the preliminary allocation of the purchase price for the acquisitions in the third quarter was not completed as necessary valuation information was not yet available.



	Nine Months Ended September 30,
	2017		2016
Land	$	9,732	$	1,054
Building and improvements	52,805		21,063
Equipment, furniture, and fixtures	4,091		8,265
Assembled occupancy	772		1,299
Definite-lived intangible assets	—		363
Goodwill	10,563		30,343
Favorable leases	—		393
Other indefinite-lived intangible assets	5,808		1,241
Other assets acquired, net of liabilities assumed	292		—
Total acquisitions	$	84,063	$	64,021

In addition to the business combinations above, the Company acquired Medicare and Medicaid licenses for additional hospice and skilled nursing beds to add to existing operations for an aggregate purchase price of $310.

Subsequent to September 30, 2017, the Company acquired one home health, hospice and home care agency and also invested in an ancillary service that is complementary to its existing businesses for an aggregate purchase price of $5,818. The Company's operating subsidiaries also opened one newly constructed stand-alone skilled nursing operation under a long-term lease agreement, which added 70 operational skilled nursing beds.

The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities for return on invested capital. The operating subsidiaries acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior operating results are not a meaningful, representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries. The businesses acquired during the three and nine months

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ended September 30, 2017 were not material acquisitions to the Company individually or in the aggregate. Accordingly, pro forma financial information is not presented. These acquisitions have been included in the September 30, 2017 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the dates the Company gained effective control.

9. PROPERTY AND EQUIPMENT— Net

Property and equipment, net consist of the following:



	September 30, 2017			December 31, 2016
Land	$	49,081		$	47,565
Buildings and improvements	339,475			304,263
Equipment	176,646			153,170
Furniture and fixtures	5,498			6,931
Leasehold improvements	93,085			80,164
Construction in progress	4,458			2,441
	668,243			594,534
Less: accumulated depreciation	(137,164		)	(110,036		)
Property and equipment, net	$	531,079		$	484,498

The Company disposed of $24,847 of land, building and equipment as part of the sale-leaseback transaction during the nine months ended September 30, 2017. See Note 17, Leases for information on the sale-leaseback transaction. See also Note 8, Acquisitions for information on acquisitions during the nine months ended September 30, 2017.

10. INTANGIBLE ASSETS — Net



	Weighted Average Life (Years)	September 30, 2017							December 31, 2016
		Gross Carrying Amount		Accumulated Amortization					Gross Carrying Amount		Accumulated Amortization
Intangible Assets		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Lease acquisition costs	24.8	$	483	$	(93	)	$	390	$	483	$	(78	)	$	405
Favorable leases	32.8	35,116		(6,074		)	29,042		35,116		(4,589		)	30,527
Assembled occupancy	0.5	2,669		(2,452		)	217		1,897		(1,897		)	—
Facility trade name	30.0	733		(287		)	446		733		(269		)	464
Customer relationships	18.6	4,933		(1,460		)	3,473		4,933		(1,253		)	3,680
Total		$	43,934	$	(10,366	)	$	33,568	$	43,162	$	(8,086	)	$	35,076

Amortization expense was $979 and $2,280 for the three and nine months ended September 30, 2017, respectively, and $1,429 and $3,926 for the three and nine months ended September 30, 2016, respectively. Of the $2,280 in amortization expense incurred during the nine months ended September 30, 2017, approximately $555 related to the amortization of patient base intangible assets at recently acquired facilities, which is typically amortized over a period of four to eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date.

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

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Year	Amount
2017 (remainder)	$	756
2018	2,338
2019	2,301
2020	1,593
2021	1,497
2022	1,471
Thereafter	23,612
	$	33,568

11. 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 cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the difference between the goodwill carrying value and the implied fair value.

The following table represents activity in goodwill by segment as of and for the nine months ended September 30, 2017:



	Goodwill
	Transitional and Skilled Services		Assisted and Independent Living Services		Home Health and Hospice Services		All Other		Total
January 1, 2017	$	40,636	$	3,538	$	17,901	$	5,025	$	67,100
Additions	5,730		420		3,928		485		10,563
September 30, 2017	$	46,366	$	3,958	$	21,829	$	5,510	$	77,663

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of September 30, 2017. See further discussion of goodwill acquired at Note 8, Acquisitions.

During the nine months ended September 30, 2017, the Company recorded $6,083 in Medicare and Medicaid licenses and $35 in trade name indefinite-lived intangible assets as part of its acquisitions.

Other indefinite-lived intangible assets consists of the following:



	September 30, 2017		December 31, 2016
Trade name	$	1,181	$	1,146
Medicare and Medicaid licenses	23,472		18,440
	$	24,653	$	19,586

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THE ENSIGN GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:



	September 30, 2017		December 31, 2016
Debt issuance costs, net	$	3,002	$	3,611
Long-term insurance losses recoverable asset	4,948		4,104
Deposits with landlords	5,762		3,526
Capital improvement reserves with landlords and lenders	735		673
Note receivable from sale of urgent care centers	—		700
Restricted and other assets	$	14,447	$	12,614

Included in restricted and other assets as of September 30, 2017 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. Note receivable from sale of urgent centers was reclassed to current assets as the Company is anticipating to collect the receivable within the next 12 months.

13. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:



	September 30, 2017		December 31, 2016
Quality assurance fee	$	6,665	$	4,604
Refunds payable	20,619		18,368
Deferred revenue	7,819		6,994
Cash held in trust for patients	2,393		2,373
Resident deposits	6,527		6,099
Dividends payable	2,193		2,186
Property taxes	11,328		9,130
Income tax payable	—		1,182
Operational closure liability	952		1,972
Other	7,770		5,855
Other accrued liabilities	$	66,266