SEC Filing - The Ensign Group, Inc.

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ensg-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q



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

For the quarterly period ended June 30, 2022.


☐			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.)

29222 Rancho Viejo Road, Suite 127

San Juan Capistrano, CA 92675

(Address of Principal Executive Offices and Zip Code)

(949) 487-9500

(Registrant’s Telephone Number, Including Area Code)

_____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	ENSG	NASDAQ Global Select Market

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.

Yes

☐

whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).

Yes

☐

whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a 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:

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate 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.

☐

Yes

☐

whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐

Yes

As of July 27, 2022, 55,289,903 shares of the registrant’s common stock, $0.001 par value, were outstanding.

Table of Contents

THE ENSIGN GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2022

TABLE OF CONTENTS


PART I. Financial Information			Pg.
Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021			1

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021			2

Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2022 and 2021			3

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021			5

Notes to Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34

Item 3. Quantitative and Qualitative Disclosures About Market Risk			76

Item 4. Controls and Procedures			77

P ART II. Other Information
Item 1. Legal Proceedings			78

Item 1A. Risk Factors			81

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			111







Item 6. Exhibits			112

Signatures

Table of Contents

PART I.

Item 1. FINANCIAL STATEMENTS

THE ENSIGN GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2022		December 31, 2021



	(In thousands, except par values)
ASSETS
Current assets:
Cash and cash equivalents	$	285,580	$	262,201
Accounts receivable—less allowance for doubtful accounts of $7,827 and $11,213 at June 30, 2022 and December 31, 2021, respectively	339,001		328,731

Investments—current	8,991		13,763
Prepaid income taxes	16,336		5,452
Prepaid expenses and other current assets	32,774		29,562


Total current assets	682,682		639,709
Property and equipment, net	908,228		888,434
Right-of-use assets	1,305,009		1,138,872
Insurance subsidiary deposits and investments	40,077		36,567
Escrow deposits	15,571		—
Deferred tax assets	32,883		33,147
Restricted and other assets	57,010		47,046
Intangible assets, net	2,535		2,652
Goodwill	76,869		60,469
Other indefinite-lived intangibles	3,807		3,727

TOTAL ASSETS	$	3,124,671	$	2,850,623
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	60,414	$	58,116

Accrued wages and related liabilities (Note 3)	273,276		278,770
Lease liabilities—current	58,769		52,181
Accrued self-insurance liabilities—current	49,728		40,831


Other accrued liabilities	85,793		89,410
Current maturities of long-term debt	3,944		3,760

Total current liabilities	531,924		523,068
Long-term debt—less current maturities	151,105		152,883
Long-term lease liabilities—less current portion	1,216,335		1,056,515
Accrued self-insurance liabilities—less current portion	76,793		69,308
Other long-term liabilities	27,821		27,135


TOTAL LIABILITIES	$	2,003,978	$	1,828,909

Commitments and contingencies (Notes 16, 18 and 19)

EQUITY
Ensign Group, Inc. stockholders' equity:
Common stock: $0.001 par value; 100,000 shares authorized; 58,646 and 55,278 shares issued and outstanding at June 30, 2022, respectively, and 58,134 and 55,190 shares issued and outstanding at December 31, 2021, respectively	58		58
Additional paid-in capital	398,793		369,760
Retained earnings	835,941		733,992
Common stock in treasury, at cost, 3,368 and 2,944 shares at June 30, 2022 and December 31, 2021, respectively (Note 20)	(114,626)		(83,042)
Total Ensign Group, Inc. stockholders' equity	1,120,166		1,020,768
Non-controlling interest	527		946
Total equity	$	1,120,693	$	1,021,714
TOTAL LIABILITIES AND EQUITY	$	3,124,671	$	2,850,623

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE ENSIGN GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

	(In thousands, except per share data)
REVENUE
Service revenue	$	728,347	$	634,609	$	1,437,503	$	1,257,885
Rental revenue	4,139		3,927		8,428		7,904
TOTAL REVENUE	$	732,486	$	638,536	$	1,445,931	$	1,265,789


Expense:
Cost of services	563,641		488,524		1,119,282		970,710



Rent—cost of services	37,228		34,455		72,990		67,911
General and administrative expense	38,527		36,908		76,783		71,181
Depreciation and amortization	14,858		13,795		29,534		27,454
TOTAL EXPENSES	654,254		573,682		1,298,589		1,137,256
Income from operations	78,232		64,854		147,342		128,533
Other (expense) income:
Interest expense	(2,688)		(1,634)		(4,756)		(3,275)
Other (expense) income	(2,587)		1,121		(3,403)		1,869
Other expense, net	(5,275)		(513)		(8,159)		(1,406)
Income before provision for income taxes	72,957		64,341		139,183		127,127
Provision for income taxes	15,154		13,758		31,292		26,707


NET INCOME	57,803		50,583		107,891		100,420
Less:


Net income (loss) attributable to noncontrolling interests	112		1,158		(140)		1,789
Net income attributable to The Ensign Group, Inc.	$	57,691	$	49,425	$	108,031	$	98,631





NET INCOME PER SHARE ATTRIBUTABLE TO THE ENSIGN GROUP INC.



Basic	$	1.05	$	0.91	$	1.97	$	1.82



Diluted	$	1.01	$	0.87	$	1.90	$	1.73
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	54,906		54,468		54,788		54,331
Diluted	56,853		56,997		56,862		56,945

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE ENSIGN GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Non-Controlling Interest
(In thousands)	Shares	Amount						Shares	Amount				Total
BALANCE - JANUARY 1, 2022	55,190	$	58	$	369,760	$	733,992	2,944	$	(83,042)	$	946	$	1,021,714
Issuance of common stock to employees and directors resulting from the exercise of stock options	147	—		2,768		—		—	—		—		2,768
Issuance of restricted stock, net of forfeitures	104	—		5,241		—		—	—		—		5,241
Shares of common stock used to satisfy tax withholding obligations	—	—		—		—		—	(15)		—		(15)
Dividends declared ($0.0550 per share)	—	—		—		(3,042)		—	—		—		(3,042)
Employee stock award compensation	—	—		5,167		—		—	—		—		5,167
Repurchase of common stock (Note 20)	(133)	—		—		—		133	(9,882)		—		(9,882)
Acquisition of noncontrolling interest shares	—	—		245		—		—	—		(271)		(26)
Net loss attributable to noncontrolling interest	—	—		—		—		—	—		(252)		(252)

Net income attributable to the Ensign Group, Inc.	—	—		—		50,340		—	—		—		50,340
BALANCE - MARCH 31, 2022	55,308	$	58	$	383,181	$	781,290	3,077	$	(92,939)	$	423	$	1,072,013
Issuance of common stock to employees and directors resulting from the exercise of stock options	223	—		3,303		—		—	—		—		3,303
Issuance of restricted stock, net of forfeitures	38	—		—		—		—	—		—		—
Shares of common stock used to satisfy tax withholding obligations	(20)	—		—		—		20	(1,687)		—		(1,687)
Dividends declared ($0.0550 per share)	—	—		—		(3,040)		—	—		—		(3,040)
Employee stock award compensation	—	—		5,616		—		—	—		—		5,616
Repurchase of common stock (Note 19)	(271)	—		—		—		271	(20,000)		—		(20,000)
Issuance of noncontrolling interests through subsidiary equity plan	—	—		6,693		—		—	—		—		6,693
Net income attributable to noncontrolling interest	—	—		—		—		—	—		112		112
Distribution to noncontrolling interest holder	—	—		—		—		—	—		(8)		(8)
Net income attributable to the Ensign Group, Inc.	—	—		—		57,691		—	—		—		57,691
BALANCE - JUNE 30, 2022	55,278	$	58	$	398,793	$	835,941	3,368	$	(114,626)	$	527	$	1,120,693

Table of Contents


	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Non-Controlling Interest
(In thousands)	Shares	Amount						Shares	Amount				Total
BALANCE - JANUARY 1, 2021	54,626	$	58	$	338,177	$	551,055	2,791	$	(71,213)	$	150	$	818,227
Issuance of common stock to employees and directors resulting from the exercise of stock options	246	—		3,880		—		—	—		—		3,880
Issuance of restricted stock, net of forfeitures	81	—		3,725		—		—	—		—		3,725
Shares of common stock used to satisfy tax withholding obligations	—	—		—		—		—	(9)		—		(9)
Dividends declared ($0.0525 per share)	—	—		—		(2,886)		—	—		—		(2,886)
Employee stock award compensation	—	—		4,054		—		—	—		—		4,054

Net income attributable to noncontrolling interest	—	—		—		—		—	—		631		631
Distribution to noncontrolling interest holder	—	—		—		—		—	—		(1,248)		(1,248)
Net income attributable to the Ensign Group, Inc.	—	—		—		49,206		—	—		—		49,206
BALANCE - MARCH 31, 2021	54,953	$	58	$	349,836	$	597,375	2,791	$	(71,222)	$	(467)	$	875,580
Issuance of common stock to employees and directors resulting from the exercise of stock options	148	—		2,982		—		—	—		—		2,982
Issuance of restricted stock, net of forfeitures	49	—		—		—		—	—		—		—
Shares of common stock used to satisfy tax withholding obligations	(20)	—		—		—		20	(1,600)		—		(1,600)
Dividends declared ($0.0525 per share)	—	—		—		(2,894)		—	—		—		(2,894)
Employee stock award compensation	—	—		4,633		—		—	—		—		4,633

Net income attributable to noncontrolling interest	—	—		—		—		—	—		1,158		1,158
Distribution to noncontrolling interest holder	—	—		—		—		—	—		(641)		(641)
Net income attributable to the Ensign Group, Inc.	—	—		—		49,425		—	—		—		49,425
BALANCE - JUNE 30, 2021	55,130	$	58	$	357,451	$	643,906	2,811	$	(72,822)	$	50	$	928,643

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE ENSIGN GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
(In thousands)	2022		2021
Cash flows from operating activities:
Net income	$	107,891	$	100,420

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,534		27,454

Amortization of deferred financing fees	505		420

Non-cash leasing arrangement	240		221

Write-off of deferred financing fees	566		—
Deferred income taxes	264		27
Provision for doubtful accounts	2,169		1,899
Stock-based compensation	10,783		8,687

Gain on sale of assets	(2,567)		(540)
Loss on insurance claims, legal finding and asset disposals	4,474		745

Change in operating assets and liabilities
Accounts receivable	(12,852)		(15,928)
Prepaid income taxes	(10,884)		(7,590)
Prepaid expenses and other assets	(3,996)		(9,476)

Cash surrender value of life insurance policy premiums	(5,621)		(8,861)

Deferred compensation liability	5,617		8,930
Operating lease obligations	(547)		(131)
Accounts payable	2,197		7,725
Accrued wages and related liabilities	(5,162)		(9,063)
Income taxes payable	—		(136)
Other accrued liabilities	(7,471)		(1,966)
Accrued self-insurance liabilities	14,696		5,717
Other long-term liabilities	(23)		(157)
NET CASH PROVIDED BY OPERATING ACTIVITIES	129,813		108,397


Cash flows from investing activities:
Purchase of property and equipment	(37,082)		(33,795)
Cash payments for business acquisitions (Note 9)	(16,400)		(6,000)
Cash payments for asset acquisitions (Note 9)	(17,492)		(5,183)
Escrow deposits	(15,571)		—

Cash from insurance proceeds	653		6,705
Cash proceeds from the sale of assets	7,665		877


Purchases of investments	(3,518)		(23,706)
Maturities of investments	4,780		20,399
Other restricted assets	369		(159)
NET CASH USED IN INVESTING ACTIVITIES	(76,596)		(40,862)



Cash flows from financing activities:
Proceeds from debt (Note 16)	211		224
Payments on debt (Note 16)	(1,921)		(1,497)


Issuance of common stock upon exercise of options	6,071		6,862
Repurchase of shares of common stock to satisfy tax withholding obligations	(1,702)		(1,609)

Repurchase of shares of common stock (Note 20)	(29,882)		—
Dividends paid	(6,077)		(5,754)


Proceeds from sale of subsidiary shares (Note 7)	6,693		—
Non-controlling interest distribution	(8)		(1,889)
Purchase of non-controlling interest	(26)		—
Payments of deferred financing costs	(3,197)		—
Proceeds from CARES Act Provider Relief Fund and Medicare Advance Payment Program (Note 3)	—		11,538
Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment Program (Note 3)	—		(113,561)

NET CASH USED IN FINANCING ACTIVITIES	(29,838)		(105,686)


Net increase (decrease) in cash and cash equivalents	23,379		(38,151)
Cash and cash equivalents beginning of period	262,201		236,562
Cash and cash equivalents end of period	$	285,580	$	198,411


	Six Months Ended June 30,
(In thousands)	2022		2021
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest	$	3,950	$	2,836
Income taxes	$	41,905	$	34,540
Lease liabilities	$	72,919	$	67,539
Non-cash financing and investing activity
Accrued capital expenditures	$	3,800	$	3,600
Accrued dividends declared	$	3,040	$	2,894


Right-of-use assets obtained in exchange for new and modified operating lease obligations	$	194,342	$	112,192

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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, engaged in the ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare-related properties and other ancillary businesses. As of June 30, 2022, the Company operated 251 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. The Company's operating subsidiaries have a collective capacity of approximately 25,500 operational skilled nursing beds and 3,000 senior living units. As of June 30, 2022, the Company operated 180 facilities under long-term lease arrangements, and had options to purchase 11 of those 180 facilities. The Company's real estate portfolio includes 100 owned real estate properties, which included 71 facilities operated and managed by the Company, 29 senior living operations leased to and operated by The Pennant Group, Inc. (Pennant) as part of the spin-off transaction that occurred in October 2019 (Spin-Off), and the Service Center location. Of those 29 senior living operations, one is located on the same real estate property as a skilled nursing facility that the Company owns and operates.

Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide specific 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 that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liabilities, as well as coverage for certain workers’ compensation insurance liabilities.

In January of 2022, the Company formed a captive real estate investment trust (REIT), which owns and manages its real estate business, called Standard Bearer Healthcare REIT, Inc. (Standard Bearer). The Company expects the REIT structure will provide it with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties. Refer to Note 7, Standard Bearer for additional information on Standard Bearer.

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

Other Information — The accompanying condensed consolidated financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 (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, 2021 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 stockholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing operations, senior living operations and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interests within the equity section of its condensed consolidated balance sheets and 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.


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

The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. Additionally, the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities are entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impacts" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. On October 1, 2021, the Company deconsolidated its VIE, which was not material, as this entity no longer met the requirements for consolidation. As of June 30, 2022 and December 31, 2021, the Company had no VIEs.

Reclassifications — Prior period results reflect reclassifications, for comparative purposes, related to the change in the Company's segment structure as a result of the formation of Standard Bearer. Refer to Note 8, Business Segments, for additional information related to segments.

Estimates and Assumptions — The preparation of the 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, acquired property and equipment, intangible assets and goodwill, right-of-use assets, impairment of long-lived assets, lease liabilities, general and professional liabilities, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations. Contracts insuring the lives of certain employees who are eligible to participate in non-qualified deferred compensation plans are held in a rabbi trust. Cash surrender value of the contracts is based on funds that shadow the investment allocations specified by participants in the deferred compensation plan. The fair value of the investment funds is derived using Level 2 inputs. See Note 6, Fair Value Measurements.

Service Revenue Recognition — The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606). See Note 4, Revenue and Accounts Receivable.

Rental Revenue Recognition — The Company recognizes rental revenue for operating leases on a straight-line basis over the lease term when collectability of all minimum lease payments is probable in accordance with FASB ASC Topic 842, Leases (ASC 842). See Note 4, Revenue and Accounts Receivable.

Accounts Receivable — 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.

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.

Leases and Leasehold Improvements — The Company leases skilled nursing facilities, senior living facilities and commercial office space. The Company determines if an arrangement is a lease at the inception of each lease. Leases commencing prior to the ASC 842 adoption date were classified as operating lease under historical guidance. As the Company has elected the package of practical expedients allowing it to not reassess lease classification, these leases are classified as operating leases under ASC 842 as well. For leases commencing subsequent to the ASC 842 adoption date, the Company performs an evaluation to determine whether the lease should be classified as an operating or finance lease at the inception of the lease. As of June 30, 2022, the Company does not have any leases that are classified as finance leases. Rights and obligations of operating leases are included as right-of-use assets, current lease liabilities and long-term lease liabilities on the Company's condensed consolidated balance sheets. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments. The Company utilized a third-party valuation specialist to assist in estimating the incremental borrowing rate.


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

The Company records rent expense for operating leases 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. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements.

The Company's real estate leases generally have initial lease terms of ten years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional ten to 15 years. Exercise of the renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term. The Company reassesses the renewal option using a "reasonably certain" threshold, which is understood to be a high threshold. For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the right-of-use asset and lease liability. The Company's leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices. The Company recognizes lease expense for leases with an initial term of 12 months or less on a straight-line basis over the lease term. These leases are not recorded on the condensed consolidated balance sheets. Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have material subleases.

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 determined there was no impairment during the three and six months ended June 30, 2022 and 2021.

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

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

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances indicate that its carrying value may not be recoverable. The Company performs its annual test for impairment during the fourth quarter of each year. The Company did not identify any goodwill or intangible asset impairment during the three and six months ended June 30, 2022 and 2021.

Self-Insurance — The Company is partially self-insured for general and professional liability claims 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 $1,000 for California affiliated operations and a separate, one-time, deductible of $1,250 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 majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities are self-insured through the captive insurance subsidiary, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets. The captive insurance subsidiary is subject to certain statutory requirements as an insurance provider.