ENSIGN GROUP, INC 10-Q

Item 1. FINANCIAL STATEMENTS THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2021 December 31, 2020 (In thousands, except par values) Assets Current assets: Cash and cash equivalents $ 304,620 $ 236,562 Accounts receivable—less allowance for doubtful accounts of $ 11,267 and $ 8,718 at September 30, 2021 and December 31, 2020, respectively 313,858 305,062 Investments—current 12,844 13,449 Prepaid income taxes 4,136 1,224 Prepaid expenses and other current assets 32,660 26,659 Total current assets 668,118 582,956 Property and equipment, net 791,247 778,244 Right-of-use assets 1,175,685 1,025,510 Insurance subsidiary deposits and investments 35,180 32,105 Escrow deposits — 100 Deferred tax assets 31,966 32,424 Restricted and other assets 44,382 33,155 Intangible assets, net 2,711 2,899 Goodwill 60,469 54,469 Other indefinite-lived intangibles 3,621 3,716 Total assets $ 2,813,379 $ 2,545,578 Liabilities and equity Current liabilities: Accounts payable $ 57,206 $ 50,901 Accrued wages and related liabilities (Note 3) 246,106 236,614 Lease liabilities—current 52,050 48,187 Accrued self-insurance liabilities—current 38,730 34,396 Advance payment liabilities (Note 3) — 102,023 Other accrued liabilities 85,469 87,318 Current maturities of long-term debt 3,548 2,960 Total current liabilities 483,109 562,399 Long-term debt—less current maturities 140,680 112,544 Long-term lease liabilities—less current portion 1,093,176 950,320 Accrued self-insurance liabilities—less current portion 68,299 62,402 Other long-term liabilities (Note 3) 48,821 39,686 Total liabilities $ 1,834,085 $ 1,727,351 Commitments and contingencies (Notes 15, 17 and 18) Equity Ensign Group, Inc. stockholders' equity: Common stock: $ 0.001 par value; 100,000 shares authorized; 58,059 and 55,247 shares issued and outstanding at September 30, 2021, respectively, and 57,417 and 54,626 shares issued and outstanding at December 31, 2020, respectively 58 58 Additional paid-in capital 363,779 338,177 Retained earnings 688,287 551,055 Common stock in treasury, at cost, 2,812 and 2,791 shares at September 30, 2021 and December 31, 2020, respectively (Note 19) ( 72,924 ) ( 71,213 ) Total Ensign Group, Inc. stockholders' equity 979,200 818,077 Non-controlling interest 94 150 Total equity 979,294 818,227 Total liabilities and equity $ 2,813,379 $ 2,545,578 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands, except per share data) Revenue: Service revenue $ 664,597 $ 595,341 $ 1,922,482 $ 1,762,371 Rental revenue 3,933 3,914 11,837 11,196 Total revenue $ 668,530 $ 599,255 $ 1,934,319 $ 1,773,567 Expense: Cost of services 514,106 465,108 1,484,816 1,371,378 Rent—cost of services 35,623 32,504 103,534 97,318 General and administrative expense 38,554 32,817 109,735 96,493 Depreciation and amortization 13,929 13,757 41,383 41,082 Total expenses 602,212 544,186 1,739,468 1,606,271 Income from operations 66,318 55,069 194,851 167,296 Other income (expense): Interest expense ( 1,709 ) ( 1,740 ) ( 4,984 ) ( 7,698 ) Other income (expense), net 248 850 2,117 2,630 Other expense, net ( 1,461 ) ( 890 ) ( 2,867 ) ( 5,068 ) Income before provision for income taxes 64,857 54,179 191,984 162,228 Provision for income taxes 16,513 10,866 43,220 37,026 Net income 48,344 43,313 148,764 125,202 Less: Net income attributable to noncontrolling interests 1,063 253 2,852 1,045 Net income attributable to The Ensign Group, Inc. $ 47,281 $ 43,060 $ 145,912 $ 124,157 Net income per share attributable to The Ensign Group, Inc.: Basic $ 0.87 $ 0.81 $ 2.68 $ 2.33 Diluted $ 0.83 $ 0.77 $ 2.56 $ 2.23 Weighted average common shares outstanding: Basic 54,627 53,328 54,430 53,299 Diluted 56,971 55,713 56,954 55,585 See accompanying notes to condensed consolidated financial statements. 2 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, 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 Issuance of common stock to employees and directors resulting from the exercise of stock options 69 — 1,246 — — — — 1,246 Issuance of restricted stock, net of forfeitures 49 — — — — — — — Shares of common stock used to satisfy tax withholding obligations ( 1 ) — — — 1 ( 102 ) — ( 102 ) Dividends declared ($ 0.0525 per share) — — — ( 2,900 ) — — — ( 2,900 ) Employee stock award compensation — — 5,082 — — — — 5,082 Net income attributable to noncontrolling interest — — — — — — 1,063 1,063 Distribution to noncontrolling interest holder — — — — — — ( 1,019 ) ( 1,019 ) Net income attributable to the Ensign Group, Inc. — — — 47,281 — — — 47,281 Balance - September 30, 2021 55,247 $ 58 $ 363,779 $ 688,287 2,812 $ ( 72,924 ) $ 94 $ 979,294 3 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, 2020 53,487 $ 56 $ 307,914 $ 391,523 2,079 $ ( 45,296 ) $ 1,947 $ 656,144 Issuance of common stock to employees and directors resulting from the exercise of stock options 148 — 1,552 — — — — 1,552 Issuance of restricted stock, net of forfeitures 723 1 3,085 — — — — 3,086 Dividends declared ($ 0.0500 per share) — — — ( 2,683 ) — — — ( 2,683 ) Employee stock award compensation — — 3,235 — — — — 3,235 Repurchase of common stock (Note 19) ( 692 ) — — — 692 ( 25,000 ) — ( 25,000 ) Net income attributable to noncontrolling interest — — — — — — 352 352 Distribution to noncontrolling interest holder — — — — — — ( 720 ) ( 720 ) Net income attributable to the Ensign Group, Inc. — — — 40,849 — — — 40,849 Balance - March 31, 2020 53,666 $ 57 $ 315,786 $ 429,689 2,771 $ ( 70,296 ) $ 1,579 $ 676,815 Issuance of common stock to employees and directors resulting from the exercise of stock options 31 — 456 — — — — 456 Issuance of restricted stock, net of forfeitures 75 — — — — — — — Shares of common stock used to satisfy tax withholding obligations ( 17 ) — — — 17 ( 753 ) — ( 753 ) Dividends declared ($ 0.0500 per share) — — — ( 2,718 ) — — — ( 2,718 ) Employee stock award compensation — — 3,528 — — — — 3,528 Net income attributable to noncontrolling interest — — — — — — 440 440 Distribution to noncontrolling interest holder — — — — — — ( 240 ) ( 240 ) Net income attributable to the Ensign Group, Inc. — — — 40,248 — — — 40,248 Balance - June 30, 2020 53,755 $ 57 $ 319,770 $ 467,219 2,788 $ ( 71,049 ) $ 1,779 $ 717,776 Issuance of common stock to employees and directors resulting from the exercise of stock options 340 — 4,404 — — — — 4,404 Issuance of restricted stock, net of forfeitures 43 — — — — — — — Shares of common stock used to satisfy tax withholding obligations ( 3 ) — — — 3 ( 154 ) — ( 154 ) Dividends declared ($ 0.0500 per share) — — — ( 2,725 ) — — — ( 2,725 ) Employee stock award compensation — — 4,173 — — — — 4,173 Net income attributable to noncontrolling interest — — — — — — 253 253 Distribution to noncontrolling interest holder — — — — — — ( 1,243 ) ( 1,243 ) Net income attributable to the Ensign Group, Inc. — — — 43,060 — — — 43,060 Balance - September 30, 2020 54,135 $ 57 $ 328,347 $ 507,554 2,791 $ ( 71,203 ) $ 789 $ 765,544 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (In thousands) 2021 2020 Cash flows from operating activities: Net income $ 148,764 $ 125,202 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,383 41,082 Impairment of long-lived assets — 2,681 Amortization of deferred financing fees 637 630 Non-cash leasing arrangement 346 337 Deferred income taxes 458 1,179 Provision for doubtful accounts 2,609 4,193 Stock-based compensation 13,769 10,936 Loss on sale of asset disposals 155 282 Change in operating assets and liabilities Accounts receivable ( 16,606 ) 11,441 Prepaid income taxes ( 2,912 ) ( 12,811 ) Prepaid expenses and other assets ( 6,061 ) ( 2,090 ) Cash surrender value of life insurance policy premiums ( 9,505 ) ( 5,378 ) Operating lease obligations ( 5,668 ) ( 542 ) Deferred compensation liability 9,607 5,412 Accounts payable 6,332 7,197 Accrued wages and related liabilities 14,112 31,551 Income taxes payable 357 — Other accrued liabilities ( 2,907 ) 19,333 Accrued self-insurance liabilities 9,796 8,433 Other long-term liabilities ( 177 ) 33,093 Net cash provided by operating activities 204,489 282,161 Cash flows from investing activities: Purchase of property and equipment ( 50,133 ) ( 37,824 ) Cash payments for business acquisitions (Note 8) ( 6,000 ) — Cash payments for asset acquisitions (Note 8) ( 5,183 ) ( 23,077 ) Escrow deposits 100 ( 35 ) Escrow deposits used to fund acquisitions — 14,050 Cash from insurance proceeds 6,705 — Cash proceeds from the sale of assets and ancillary business 951 359 Purchases of investments ( 26,387 ) ( 14,648 ) Maturities of investments 23,917 13,626 Other restricted assets ( 1,839 ) ( 936 ) Net cash used in investing activities ( 57,869 ) ( 48,485 ) Cash flows from financing activities: Proceeds from debt (Note 15) 31,646 380,600 Payments on debt (Note 15) ( 2,146 ) ( 592,255 ) Issuance of common stock upon exercise of options 8,108 6,412 Repurchase of shares of common stock to satisfy tax withholding obligations ( 1,711 ) ( 907 ) Repurchase of shares of common stock (Note 19) — ( 25,000 ) Dividends paid ( 8,647 ) ( 8,106 ) Non-controlling interest distribution ( 2,908 ) ( 2,203 ) Payments of deferred financing costs ( 881 ) — Proceeds from CARES Act Provider Relief Fund and Medicare Advance Payment Program (Note 3) 11,637 235,976 Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment Program (Note 3) ( 113,660 ) ( 111,988 ) Net cash used in financing activities ( 78,562 ) ( 117,471 ) Net increase in cash and cash equivalents 68,058 116,205 Cash and cash equivalents beginning of period 236,562 59,175 Cash and cash equivalents end of period $ 304,620 $ 175,380 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) Nine Months Ended September 30, (In thousands) 2021 2020 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,265 $ 8,467 Income taxes $ 45,440 $ 48,620 Lease liabilities $ 103,067 $ 97,533 Non-cash financing and investing activity: Accrued capital expenditures $ 3,500 $ 2,900 Accrued dividends declared $ 2,900 $ 2,725 Right-of-use assets obtained in exchange for new and modified operating lease obligations $ 175,617 $ 14,669 See accompanying notes to condensed consolidated financial statements. 6 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 September 30, 2021, the Company operated 242 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, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services. The Company's operating subsidiaries have a collective capacity of approximately 24,700 operational skilled nursing beds and 2,200 senior living units. As of September 30, 2021, the Company operated 177 facilities under long-term lease arrangements, and had options to purchase 11 of those 177 facilities. The Company's real estate portfolio includes 95 owned real estate properties, which included 65 facilities operated and managed by the Company, 31 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019, and the Service Center location. Of those 31 senior living operations, two are located on the same real estate properties as skilled nursing facilities 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 (the Captive) 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. 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. Segment Updates — In the fourth quarter of 2020, the Company began reporting the results of its real estate portfolio as a new segment. The Company has two reportable segments: (1) skilled services and (2) real estate. Refer to Note 7, Business Segments , for additional information. Corresponding items of segment information for prior periods have been recast to reflect the change of the Company’s segment structure. This structure reflects its current operational and financial management and provides the best structure for the Company to focus on growth and investing opportunities while maintaining financial discipline. Other Information — The accompanying condensed consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 (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, 2020 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. 7 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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 impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's relationship with variable interest entities was not material during the three and nine months ended September 30, 2021 and 2020. Reclassifications — Certain prior period results have been reclassified to be consistent with the current period presentation, including presenting the change of the deferred compensation separately on the Company's Consolidated Statements of Cash Flows. Prior period results also reflect reclassifications, for comparative purposes, related to the change in the Company's segment structure. Refer to Note 7, Business Segments , for additional information related to segments. Prior to the fourth quarter of 2020, the Company only presented total revenue for all revenue services. As a result of the change in segments, the presentation of the Company's service revenue and rental revenue are presented separately on the Company's Condensed Consolidated Statements of Income. The reclassifications had no effect on the reported condensed consolidated results of operations. Estimates and Assumptions — The preparation of Interim Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Interim Financial Statements relate to revenue, 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 performance measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan. The fair value of the pooled investment funds is derived using Level 2 inputs. 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 and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts and other currently available evidence. 8 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 September 30, 2021, 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 sheet. 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. 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 payment structure of 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 sheet. 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 nine months ended September 30, 2021. The Company recorded an impairment charge of $ 2,681 during the three and nine months ended September 30, 2020. 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. 9 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 no t identify any goodwill or intangible asset impairment during the three and nine months ended September 30, 2021 and 2020. 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 $ 750 for California affiliated operations and a separate, one-time, deductible of $ 1,000 for non-California operations. For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $ 1,000 per claim, $ 3,000 per operation, with a $ 5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits is $ 1,000 per claim and $ 3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado. The majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities 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. The Company’s policy is to accrue amounts equal to the actuarial 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. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 63,689 and $ 57,628 as of September 30, 2021 and December 31, 2020, respectively. The Company’s operating subsidiaries are self-insured for workers’ compensation liabilities 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 $ 625 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures individual claims that exceed $ 750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $ 350 per occurrence. In the state of Washington, the Company is self insured and has purchased individual specific excess insurance coverage that insures individual claims that exceed $ 500 per occurrence. For all of the self insured plans and retention, 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 $ 25,968 and $ 24,499 as of September 30, 2021 and December 31, 2020, respectively. In addition, the Company has recorded an asset and equal liability of $ 7,573 and $ 7,138 as of September 30, 2021 and December 31, 2020, 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 $ 500 for each covered person for fiscal year 2021. The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 9,799 and $ 7,533 as of September 30, 2021 and December 31, 2020, respectively. 10 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED 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 liabilities exceed its estimates of losses, 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. Net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest. Stock-Based Compensation — The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables. Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company's financial management and certain standards are under consideration. Recent Accounting Standards Adopted by the Company In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)" as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The Company adopted this standard on January 1, 2021 and determined there was no material impact on the Company's financial position, results of operations and liquidity. 11 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In May 2020, the SEC issued Final Rule Release No. 33-10786 “ Amendments to Financial Disclosures about Acquired and Disposed Businesses ” (“SEC Rule 33-10786”), which amends the disclosure requirements applicable to acquisitions and dispositions of businesses. Amendments within SEC Rule 33-10786 primarily impact (1) the tests and thresholds used to determine the significance of acquisitions and dispositions; (2) the form and content of pro forma information required to be disclosed in connection with significant acquisitions and dispositions; (3) acquiree financial statement requirements; and (4) thresholds used to determine the significance of acquisitions and dispositions of real estate operations, and related financial statement requirements, among others. The Company adopted this standard on January 1, 2021 and determined there was no material impact on the Company's condensed consolidated financial statements. Accounting Standards Recently Issued but Not Yet Adopted by the Company In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)," which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates. Adoption of the provisions of ASU 2020-04 is optional. The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 on its financial position, results of operations and liquidity. In November 2020, the SEC issued final rules 33-10890 and 34-90459 “ Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information ,” which modernizes and simplifies certain disclosure requirements of Regulation S-K. Certain key rule amendments eliminate the requirement to disclose Selected Financial Data; Selected Quarterly Financial Data, with certain exceptions; the impact of inflation and changing prices, provided the impact is not material; off-balance sheet arrangements in tabular form; and the aggregate amount of contractual obligations in tabular form. The final rules also amended various aspects of Item 303, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” among others. The final rules are effective for all registration statements and annual reports filed on or after August 9, 2021, with early adoption permitted. The Company is currently evaluating the impact of the disclosure changes in its annual reports. In July 2021, the FASB issued ASU 2021-05 “ Lessors—Certain Leases with Variable Lease Payments (Topic 842), ” which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease payments that do not depend on a reference index or a rate. This guidance is effective for annual periods beginning after December 15, 2021, which will be the Company's fiscal year 2022, with early adoption permitted. The Company has not yet determined the effect of the ASU 2021-05 on its results of operations, financial condition or cash flows. 3. COVID-19 UPDATE The Company's affiliated operations continued to be impacted by the worldwide outbreak of the 2019 coronavirus disease (COVID-19). The Company received cash distribution of relief fund payments (Provider Relief Funds) from the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and funds authorized by U.S. Department of Health and Human Services (HHS) to be used to protect residents of nursing homes and long-term care facilities from the impact of COVID-19 throughout 2020 and 2021. During the three and nine months ended September 30, 2021, the Company received and returned $ 99 and $ 11,637 , respectively, in Provider Relief Funds. During both the three and nine months ended September 30, 2020, the Company received $ 23,296 and $ 132,052 , respectively, in Provider Relief Funds, of which $ 108,756 was returned in the third quarter of 2020. The remaining amount received was subsequently returned in the fourth quarter of 2020. The Company may continue to receive additional funding in future periods. In fiscal year 2020, the Company applied for and received $ 105,255 through the Medicare Accelerated and Advance Payment Program under the CARES Act. The purpose of the program is to assist in providing needed liquidity to care delivery providers. The Company repaid $ 3,232 of the funds in 2020. In March 2021, the Company repaid the remaining funds of $ 102,023 . 12 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Family First Coronavirus Response Act was signed into law in 2020 to provide a temporary 6.2% increase to the Federal Medical Assistance Percentage (FMAP) effective January 1, 2020. The law permits states to retroactively change their state's Medicaid program rates effective as of January 1, 2020. The law provides discretion to each state and specifies the funds are to be used to reimburse the recipient for healthcare related expenses that are attributable to COVID-19 and associated with providing patient care. In addition, increases in Medicaid rates can come from other areas of the state's budget outside of FMAP funding. Revenues from these additional payments are recognized in accordance with ASC 606, subject to variable consideration constraints. In certain operations where the Company received additional payments that exceeded expenses incurred related to COVID-19, the Company characterized such payments as variable revenue that required additional consideration and accordingly, the amount of state relief revenue recognized is limited to the actual COVID-19 related expenses incurred. As of September 30, 2021 and December 31, 2020, the Company had $ 4,392 and $ 6,520 in unapplied state relief funds, respectively. During the three and nine months ended September 30, 2021, the Company received an additional $ 17,829 and $ 50,250 in state relief funding and recognized $ 19,229 and $ 52,386 , respectively, as revenue. During the three and nine months ended September 30, 2020, the Company received $ 17,344 and $ 32,455 in state relief funding and recognized $ 11,691 and $ 24,825 , respectively, as revenue. The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022. The Company recorded $ 48,309 of deferred payments of social security taxes as a liability during 2020. The total short-term balance of $ 24,155 is included in accrued wages and related liabilities and the remaining $ 24,154 is included in other long-term liabilities within the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. 4. REVENUE AND ACCOUNTS RECEIVABLE Service Revenue The Company's service revenue is derived primarily from providing healthcare services to its patients. Revenue is recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care. The healthcare services in skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not capable of being distinct. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered. Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate on a per day basis, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such variances become known. Revenue from the Medicare and Medicaid programs accounted for 73.6 % for both the three and nine months ended September 30, 2021, and 75.5 % and 74.0 % for the three and nine months ended September 30, 2020, respectively. Settlements with Medicare and Medicaid payors for retroactive adjustments due to audits and reviews are considered variable consideration and are included in the determination of the estimated transaction price. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity. Consistent with healthcare industry practices, any changes to these revenue estimates are recorded in the period the change or adjustment becomes known based on the 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, 2021 and 2020. 13 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Rental Revenue The Company's rental revenues are primarily generated by leasing healthcare-related properties through triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property. Revenue is recognized on a straight-line basis over the lease term if it has been deemed probable of collection. The Company has elected the single component practical expedient, which allows a lessor, by class of underlying asset, not to allocate the total consideration to the lease and non-lease components based on their relative stand-alone selling prices where certain criteria are met. This single component practical expedient requires the Company to account for the lease component and non-lease component(s) associated with that lease as a single component if (1) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If the Company determines that the lease component is the predominant component, it accounts for the single component as an operating lease in accordance with the new lease standards. Conversely, the Company is required to account for the combined component under the revenue recognition standard if it determines that the non-lease component is the predominant component. As a result of this assessment, rental revenues from the lease of real estate assets that qualify for this expedient are accounted for as a single component under the new lease standards. The components of the Company's operating leases qualify for the single component presentation. Tenant reimbursements related to property taxes and insurance are neither considered lease nor non-lease components under the new lease standards. Lessee payments for taxes and insurance paid directly to a third party, on behalf of the Company, are excluded from variable lease payments and rental revenue in the Company’s condensed consolidated statements of income. Otherwise, tenant reimbursements for taxes and insurance that are paid by the Company directly to a third party are classified as additional rental revenue and expense and recognized by the Company on a gross basis. Disaggregation of Revenue The Company disaggregates revenue from contracts with its patients by payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenue by Payor 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 individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rate, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed. Service revenue for the three and nine months ended September 30, 2021 and 2020 is summarized in the following tables: Three Months Ended September 30, 2021 2020 Revenue % of Revenue Revenue % of Revenue Medicaid (1) $ 267,008 40.2 % $ 222,192 37.3 % Medicare 176,660 26.6 189,237 31.8 Medicaid — skilled 45,308 6.8 38,232 6.4 Total Medicaid and Medicare 488,976 73.6 449,661 75.5 Managed care 114,917 17.3 87,648 14.7 Private and other (2) 60,704 9.1 58,032 9.8 Service revenue $ 664,597 100.0 % $ 595,341 100.0 % (1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended September 30, 2021 and 2020 . (2) Private and other payors also includes revenue from all payors generated in other an cillary services for the three months ended September 30, 2021 and 2020 . 14 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Nine Months Ended September 30, 2021 2020 Revenue % of Revenue Revenue % of Revenue Medicaid (1) $ 749,821 39.0 % $ 672,506 38.2 % Medicare 536,971 27.9 519,865 29.5 Medicaid — skilled 128,041 6.7 110,626 6.3 Total Medicaid and Medicare 1,414,833 73.6 1,302,997 74.0 Managed care 336,225 17.5 271,993 15.4 Private and other (2) 171,424 8.9 187,381 10.6 Service revenue $ 1,922,482 100.0 % $ 1,762,371 100.0 % (1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the nine months ended September 30, 2021 and 2020. (2) Private and other payors also includes revenue from all payors generated in other ancillary services for the nine months ended September 30, 2021 and 2020. In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 3,933 and $ 11,837 , respectively, for the three and nine months ended September 30, 2021 and $ 3,914 and $ 11,196 , respectively, for the three and nine months ended September 30, 2020. Balance Sheet Impact Included in the Company’s condensed consolidated balance sheets are contract balances, comprised of billed accounts receivable and unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company had no material contract liabilities and contract assets as of September 30, 2021 and December 31, 2020, or activity during the three and nine months ended September 30, 2021 and 2020. Accounts receivable as of September 30, 2021 and December 31, 2020, is summarized in the following table: September 30, 2021 December 31, 2020 Medicaid $ 118,102 $ 102,077 Managed care 74,902 61,743 Medicare 56,343 80,904 Private and other payors 75,778 69,056 325,125 313,780 Less: allowance for doubtful accounts ( 11,267 ) ( 8,718 ) Accounts receivable, net $ 313,858 $ 305,062 Practical Expedients and Exemptions As the Company’s contracts with its patients have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs , and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less. 5. COMPUTATION OF NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing income from operations attributable to stockholders of The Ensign Group, Inc. 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. 15 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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, 2021 2020 2021 2020 Numerator: Net income $ 48,344 $ 43,313 $ 148,764 $ 125,202 Less: net income attributable to noncontrolling interests 1,063 253 2,852 1,045 Net income attributable to The Ensign Group, Inc. $ 47,281 $ 43,060 $ 145,912 $ 124,157 Denominator: Weighted average shares outstanding for basic net income per share 54,627 53,328 54,430 53,299 Basic net income per common share: $ 0.87 $ 0.81 $ 2.68 $ 2.33 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, 2021 2020 2021 2020 Numerator: Net income $ 48,344 $ 43,313 $ 148,764 $ 125,202 Less: net income attributable to noncontrolling interests 1,063 253 2,852 1,045 Net income attributable to The Ensign Group, Inc. $ 47,281 $ 43,060 $ 145,912 $ 124,157 Denominator: Weighted average common shares outstanding 54,627 53,328 54,430 53,299 Plus: incremental shares from assumed conversion (1) 2,344 2,385 2,524 2,286 Adjusted weighted average common shares outstanding 56,971 55,713 56,954 55,585 Diluted net income per common share: $ 0.83 $ 0.77 $ 2.56 $ 2.23 (1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 365 and 139 fo r the three and nine months ended September 30, 2021, respectively, and 1,144 and 979 for the three and nine months ended September 30, 2020, respectivel y. 6. FAIR VALUE MEASUREMENTS Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The fair value of cash and cash equivalents of $ 304,620 and $ 236,562 as of September 30, 2021 and December 31, 2020, respectively, is derived using Level 1 inputs. The Company's other financial assets include contracts insuring the lives of certain employees who are eligible to participate in non-qualified deferred compensation plans which are held in a rabbi trust. The cash surrender value of these contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan. As of September 30, 2021, and December 31, 2020, the fair value of the pooled investment funds of $ 16,082 and $ 6,577 , respectively, is derived using Level 2 inputs. The pooled investment funds are included in restricted and other assets in the Condensed Consolidated Balance Sheets. See Note 12 Restricted and Other Assets. The Company's non-financial assets, which includes goodwill, intangible assets, property and equipment and right-of-use assets, are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. 16 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Debt Security Investments - Held to Maturity As of September 30, 2021 and December 31, 2020, the Company had approximately $ 48,024 and $ 45,554 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities approximates fair value based on Level 1 inputs. The Company has the intent and ability to hold these debt securities to maturity. Further, as of September 30, 2021, the debt security investments were held in AA, A and BBB r ated de bt securities. The Company believes its debt security investments that were in an unrealized loss position as of September 30, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment. 7. BUSINESS SEGMENTS In the fourth quarter of 2020, the Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, began reviewing the results of the Company's real estate portfolio. Accordingly, the Company began reporting a new segment as it continues to expand its real estate investment strategy. The Company has two reportable segments: (1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) real estate, which is comprised of properties owned by the Company and leased to skilled nursing and assisted living operations where the properties are subject to triple-net long-term leases, including operations that are owned and operated by the Company. Prior to this new segment structure, the Company had one reportable segment, skilled services. Corresponding items of segment information for prior periods have been recast to reflect the change of the Company’s segment structure. As of September 30, 2021, the skilled services segment includes 211 skilled nursing operations and 22 campus operations that provide both skilled nursing and rehabilitative care services and senior living services. The Company's real estate segment includes 95 owned real estate properties. These properties include 65 operations the Company operated and managed, real estate properties of 31 senior living operations that are leased to and operated by Pennant and the Service Center location, which continues to lease office space to various third parties. Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates. The Company also reports an “All Other” category that includes results from its senior living operations, which includes nine stand-alone senior living operations and 22 campus operations that provide both skilled nursing and rehabilitative care services and senior living services, mobile diagnostics, medical transportation and other ancillary operations. Services included in the “All Other” category are insignificant individually, and therefore do not constitute a reportable segment. The Company’s reportable segments are significant operating segments that offer differentiated services. The Company's CODM reviews financial information for each operating segment to evaluate performance and allocate capital resources. This structure reflects its current operational and financial management and provides the best structure to maximize the quality of care and investment strategy provided, while maintaining financial discipline. The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below. Beginning in the fourth quarter of 2020, segment income and loss was changed from profit or loss from operations before interest and provision for income taxes to profit or loss from operations before provision for income taxes, excluding gain or loss from sale of real estate, insurance recoveries and impairment charges from operations. Prior period presentation has been revised to reflect the new measurement. With the exception of intercompany rental revenue, the accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies . Rental revenue from Ensign-affiliated operations are based on mutually agreed-upon base rent that are subject to change from time to time. Intercompany revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of the related healthcare facilities. Included in the real estate segment income is interest expense related to the borrowings to fund real estate acquisitions. 17 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following tables set forth financial information for the segments: Three Months Ended September 30, 2021 Skilled Services Real Estate All Other (1) Intercompany Elimination (2) Total Service revenue $ 642,075 $ — $ 22,522 $ — $ 664,597 Rental revenue — 16,271 — ( 12,338 ) 3,933 Total revenue $ 642,075 $ 16,271 $ 22,522 $ ( 12,338 ) $ 668,530 Segment income (loss) 94,429 8,910 ( 38,482 ) — 64,857 Income before provision for income taxes $ 64,857 Depreciation and amortization 7,715 4,936 1,278 — 13,929 Other expense (income), net (3) $ — $ 1,705 $ ( 244 ) $ — $ 1,461 (1) General and administrative expense are included in the "all other" category. (2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities. (3) Other expense (income), net includes interest expense, interest income and gain and loss on investments. Three Months Ended September 30, 2020 Skilled Services Real Estate All Other (1) Intercompany Elimination (2) Total Service revenue $ 570,282 $ — $ 25,059 $ — $ 595,341 Rental revenue — 15,536 — ( 11,622 ) 3,914 Total revenue $ 570,282 $ 15,536 $ 25,059 $ ( 11,622 ) $ 599,255 Segment income (loss) 84,747 8,474 ( 36,289 ) — 56,932 Loss on sale of real estate and impairment charges ( 2,753 ) Income before provision for income taxes $ 54,179 Depreciation and amortization 7,094 4,522 2,141 — 13,757 Other expense (income), net (3) $ — $ 1,731 $ ( 841 ) $ — $ 890 (1) General and administrative expense is included in the "all other" category (2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities. (3) Other expense (income), net includes interest expense and interest income. Nine Months Ended September 30, 2021 Skilled Services Real Estate All Other (1) Intercompany Elimination (2) Total Service revenue $ 1,855,993 $ — $ 66,489 $ — $ 1,922,482 Rental revenue — 48,181 — ( 36,344 ) 11,837 Total revenue $ 1,855,993 $ 48,181 $ 66,489 $ ( 36,344 ) $ 1,934,319 Segment income (loss) 273,370 26,622 ( 108,448 ) — 191,544 Gain on sale of real estate 440 Income before provision for income taxes $ 191,984 Depreciation and amortization 22,893 14,413 4,077 — 41,383 Other expense (income), net (3) $ — $ 4,980 $ ( 2,113 ) $ — $ 2,867 (1) General and administrative expense are included in the "all other" category. (2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities. (3) Other expense, net includes interest expense, interest income and gain and loss on investments. 18 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Nine Months Ended September 30, 2020 Skilled Services Real Estate All Other (1) Intercompany Elimination (2) Total Service revenue $ 1,685,263 $ — $ 77,108 $ — $ 1,762,371 Rental revenue — 45,489 — ( 34,293 ) 11,196 Total revenue $ 1,685,263 $ 45,489 $ 77,108 $ ( 34,293 ) $ 1,773,567 Segment income (loss) 243,640 22,593 ( 101,252 ) — 164,981 Loss on sale of real estate and impairment charges ( 2,753 ) Income before provision for income taxes $ 162,228 Depreciation and amortization 21,247 13,624 6,211 — 41,082 Other expense (income), net (3) $ — $ 7,689 $ ( 2,621 ) $ — $ 5,068 (1) General and administrative expense is included in the "all other" category (2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated wholly-owned healthcare facilities. Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities. (3) Other expense, net includes interest expense and interest income. Service revenue by major payor source were as follows: Three Months Ended September 30, 2021 Skilled Services All Other Total Service Revenue Revenue % Medicaid $ 263,072 $ 3,936 (1) $ 267,008 40.2 % Medicare 176,660 — 176,660 26.6 Medicaid-skilled 45,308 — 45,308 6.8 Subtotal 485,040 3,936 488,976 73.6 Managed care 114,917 — 114,917 17.3 Private and other 42,118 18,586 (2) 60,704 9.1 Total service revenue $ 642,075 $ 22,522 $ 664,597 100.0 % (1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended September 30, 2021. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the three months ended September 30, 2021. Three Months Ended September 30, 2020 Skilled Services All Other Total Service Revenue Revenue % Medicaid $ 218,840 $ 3,352 (1) $ 222,192 37.3 % Medicare 189,237 — 189,237 31.8 Medicaid-skilled 38,232 — 38,232 6.4 Subtotal 446,309 3,352 449,661 75.5 Managed care 87,648 — 87,648 14.7 Private and other 36,325 21,707 (2) 58,032 9.8 Total service revenue $ 570,282 $ 25,059 $ 595,341 100.0 % (1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended September 30, 2020. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the three months ended September 30, 2020. Nine Months Ended September 30, 2021 Skilled Services All Other Total Service Revenue Revenue % Medicaid $ 738,484 $ 11,337 (1) $ 749,821 39.0 % Medicare 536,971 — 536,971 27.9 Medicaid-skilled 128,041 — 128,041 6.7 Subtotal 1,403,496 11,337 1,414,833 73.6 Managed care 336,225 — 336,225 17.5 Private and other 116,272 55,152 (2) 171,424 8.9 Total service revenue $ 1,855,993 $ 66,489 $ 1,922,482 100.0 % (1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the nine months ended September 30, 2021. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the nine months ended September 30, 2021. 19 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Nine Months Ended September 30, 2020 Skilled Services All Other Total Service Revenue Revenue % Medicaid $ 662,733 $ 9,773 (1) $ 672,506 38.2 % Medicare 519,865 — 519,865 29.5 Medicaid-skilled 110,626 — 110,626 6.3 Subtotal 1,293,224 9,773 1,302,997 74.0 Managed care 271,993 — 271,993 15.4 Private and other 120,046 67,335 (2) 187,381 10.6 Total service revenue $ 1,685,263 $ 77,108 $ 1,762,371 100.0 % (1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the nine months ended September 30, 2020. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the nine months ended September 30, 2020. In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 3,933 and $ 11,837 , respectively, for the three and nine months ended September 30, 2021 and $ 3,914 and $ 11,196 , respectively, for the three and nine months ended September 30, 2020. 8. OPERATION EXPANSIONS The Company's subsidiaries expansion focus is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business, or otherwise advance the Company's strategy. The results of all operating subsidiaries are included in the accompanying Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company's affiliated operations also enter into long-term leases that may include options to purchase the facilities. As a result, from time to time, a real estate affiliated subsidiary will acquire the property of facilities that have previously been operated under third-party leases. 2021 Expansions During the nine months ended September 30, 2021, the Company expanded its operations through a combination of long-term leases and a real estate purchase, with the addition of fourteen stand-alone skilled nursing operations. Of these additions, one is related to a purchase of owned property, further expanding the Company's real estate portfolio. These new operations added a total of 1,504 operational skilled nursing beds operated by the Company's affiliated operating subsidiaries. The aggregate purchase price for these acquisitions during the nine months ended September 30, 2021 was $ 11,183 . In connection with the new operations made through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction. The fair value of assets for ten of the acquisitions was concentrated in property and equipment and as such, the transaction was classified as an asset acquisition. The aggregate purchase price for the asset acquisitions during the nine months ended September 30, 2021 was $ 5,183 , which primarily consists of building and improvements of $ 4,547 . The fair value of assets for the remaining four additions was concentrated in goodwill of $ 6,000 and as such, the transaction was classified as a business combination. Subsequent to September 30, 2021, the Company expanded its operations through long-term leases with the addition of three stand-alone skilled nursing operations. These new operations added 328 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries. 2020 Expansions During the nine months ended September 30, 2020, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations, one stand-alone senior living operation and one campus operation. Of these additions, three are related to purchases of owned properties, further expanding the Company's real estate portfolio. These new operations added a total of 303 operational skilled nursing beds and 298 operational senior living units to be operated by the Company's affiliated operating subsidiaries. In connection with the new operations made through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction. 20 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The aggregate purchase price for these acquisitions during the nine months ended September 30, 2020 was $ 23,077 . The fair value of assets for the purchases of these properties was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions. The purchase price for the asset acquisitions primarily consists of building and improvements of $ 13,365 and land of $ 8,938 . During the first quarter of 2020, the Company entered into a long-term lease agreement to transfer two senior living operations to Pennant. Ensign affiliates retained ownership of the real estate for these two senior living communities. 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. The operations added by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operations, 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 assets added during the nine months ended September 30, 2021 were not material operations to the Company individually or in the aggregate. Accordingly, pro forma financial information is not presented. These additions have been included in the September 30, 2021 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 date the Company gained effective control. 9. PROPERTY AND EQUIPMENT - NET Property and equipment, net consists of the following: September 30, 2021 December 31, 2020 Land $ 101,552 $ 101,236 Buildings and improvements 568,331 555,416 Leasehold improvements 136,728 129,727 Equipment 259,102 233,453 Furniture and fixtures 4,499 4,409 Construction in progress 8,841 3,008 1,079,053 1,027,249 Less: accumulated depreciation ( 287,806 ) ( 249,005 ) Property and equipment, net $ 791,247 $ 778,244 See also Note 8, Operation Expansions for information on acquisitions during the nine months ended September 30, 2021 and 2020. 10. INTANGIBLE ASSETS - NET September 30, 2021 December 31, 2020 Weighted Average Life (Years) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Intangible Assets Net Net Assembled occupancy 0.4 $ 68 $ ( 68 ) $ — $ 39 $ ( 26 ) $ 13 Facility trade name 30.0 733 ( 384 ) 349 733 ( 366 ) 367 Customer relationships 18.4 4,582 ( 2,220 ) 2,362 4,640 ( 2,121 ) 2,519 Total $ 5,383 $ ( 2,672 ) $ 2,711 $ 5,412 $ ( 2,513 ) $ 2,899 During the three and nine months ended September 30, 2021, amortization expense was $ 363 and $ 1,087 , respectively, of which $ 289 and $ 869 was related to the amortization of right-of-use assets, respectively. During the three and nine months ended September 30, 2020, amortization expense was $ 354 and $ 1,445 , respectively, of which $ 289 and $ 933 was related to the amortization of right-of-use assets, respectively. Additionally, the Company identified intangible assets which became fully amortized during the prior year and removed these fully amortized balances from the gross asset and accumulated amortization amounts. 21 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Estimated amortization expense for each of the years ending December 31 is as follows: Year Amount 2021 (remainder) $ 59 2022 234 2023 234 2024 234 2025 234 2026 234 Thereafter 1,482 $ 2,711 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 FASB ASC 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 a goodwill impairment test by comparing the carrying value of each reporting unit to its respective fair value. The Company determines the estimated fair value of each reporting unit using a discounted cash flow analysis. The fair value of the reporting unit is the implied fair value of goodwill. In the event a reporting unit's carrying value exceeds its fair value, an impairment loss will be recognized. An impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value. The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of September 30, 2021. Provided that goodwill corresponds to the acquisition of a business and not merely the acquisition of real estate property, the Company's real estate segment appropriately does not carry a goodwill balance. The following table represents the goodwill value by skilled service segment and "all other" category, which includes other ancillary services, as of and for the nine months ended September 30, 2021: Goodwill Skilled Services All Other Total January 1, 2021 $ 45,486 $ 8,983 $ 54,469 Additions 6,000 — 6,000 September 30, 2021 $ 51,486 $ 8,983 $ 60,469 Other indefinite-lived intangible assets consist of the following: September 30, 2021 December 31, 2020 Trade name $ 889 $ 889 Medicare and Medicaid licenses 2,732 2,827 $ 3,621 $ 3,716 22 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. RESTRICTED AND OTHER ASSETS Restricted and other assets consist of the following: September 30, 2021 December 31, 2020 Debt issuance costs, net $ 2,131 $ 2,664 Long-term insurance losses recoverable asset 7,573 7,138 Deposits with landlords 12,268 12,400 Capital improvement reserves with landlords and lenders 6,328 4,376 Cash surrender value of life insurance related to deferred compensation plan 16,082 6,577 Restricted and other assets $ 44,382 $ 33,155 Included in restricted and other assets as of September 30, 2021 and December 31, 2020 are anticipated insurance recoveries related to the Company's workers' compensation liabilities and general and professional liability claims that are recorded on a gross rather than net basis in accordance with ASU issued by the FASB. The Company implemented a non-qualified deferred compensation plan (the DCP) that was effective in 2019 for certain employees and was expanded to other highly compensated employees on January 1, 2020. The plan allows for the employee deferrals to be deposited into a rabbi trust and the funds are generally invested in individual variable life insurance contracts owned by the Company that are specifically designed to informally fund savings plans of this nature. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan. For the three months ended September 30, 2021, the Company recorded loss on the investment acquired in connection with our deferred compensation plan that was not material. For the nine months ended September 30, 2021, the Company recorded net income on the investment acquired in connection with our deferred compensation plan of $ 940 , which is included in other income (expense), net, and an offsetting expense of $ 1,046 between cost of services and general and administrative expenses. For the three and nine months ended September 30, 2020, the Company recorded income on the investment acquired in connection with our deferred compensation plan of $ 252 and $ 710 , respectively. During the same periods, the Company recorded an offsetting expense of $ 268 and $ 657 , respectively, between cost of services and general and administrative expenses. 13. OTHER ACCRUED LIABILITIES Other accrued liabilities consists of the following: September 30, 2021 December 31, 2020 Quality assurance fee $ 6,470 $ 6,631 Refunds payable 36,702 36,323 Resident advances 4,129 8,558 Unapplied state relief funds 4,392 6,520 Cash held in trust for patients 6,883 6,052 Dividends payable 2,900 2,868 Property taxes 11,462 9,222 Other 12,531 11,144 Other accrued liabilities $ 85,469 $ 87,318 Quality assurance fee represents the aggregate of amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds. Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Resident advances occur when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to patients. Cash held in trust for patients reflects monies received from or on behalf of patients. Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the accompanying condensed consolidated balance sheets. 23 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. INCOME TAXES The Company recorded income tax expense of $ 43,220 and $ 37,026 during the nine months ended September 30, 2021 and 2020, respectively, or 22.5 % of earnings before income taxes for the nine months ended September 30, 2021, compared to 22.8 % for the nine months ended September 30, 2020. The effective tax rate for both periods is driven by the impact of higher excess tax benefits from stock-based compensation, partially offset by non-deductible expenses, compared to prior year. During the current quarter, the state of Wisconsin initiated an examination of the Company's income tax returns for fiscal years 2017, 2018 and 2019. Th e Company is not currently under examination by any other major income tax jurisdiction. During 2021, the statutes of limitations will lapse on the Company's 2017 Federal tax year and certain 2016 and 2017 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the nine months ended September 30, 2021 and 2020. 15. DEBT Debt consists of the following: September 30, 2021 December 31, 2020 Mortgage loans and promissory notes $ 147,306 $ 117,806 Less: current maturities ( 3,548 ) ( 2,960 ) Less: debt issuance costs, net ( 3,078 ) ( 2,302 ) Long-term debt less current maturities $ 140,680 $ 112,544 Mortgage Loans and Promissory Notes As of September 30, 2021, the Company's operating subsidiaries had $ 147,306 outstanding under the mortgage loans and notes, of which $ 3,548 is classified as short-term and the remaining $ 143,758 is classified as long-term. The Company was in compliance with all loan covenants as of September 30, 2021. During nine months ended September 30, 2021, three of the Company's subsidiaries entered into the Department of Housing and Urban Development (HUD) mortgage loans in the aggregate amount of $ 31,420 . As a result, 22 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 143,776 , as of September 30, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear effective interest rates range of 3.1 % to 4.2 %, including fixed interest rates range of 2.4 % to 3.3 % per annum. In addition to the interest rate, we incur other fees for HUD placement, including but not limited to audit fees. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees based on the principal balance on the date of prepayment. For the majority of the loans, during the first three years, the prepayment fee is 10.0 % and is reduced by 3.0 % in the fourth year of the loan, and reduced by 1.0 % per year for years five through ten of the loan. There is no prepayment penalty after year ten . The terms for all the mortgage loans are 25 to 35 years. In addition to the HUD mortgage loans above, the Company has two promissory notes. The notes bear fixed interest rates of 5.0 % and 5.3 % per annum and the term of the notes are ten months and 12 years, respectively. The 12 year note which was used for an acquisition is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility. Based on Level 2, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt. 24 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Credit Facility with a Lending Consortium Arranged by Truist The Company maintains a revolving credit facility under the Third Amended and Restated Credit Agreements, dated as of October 1, 2019, between the Company and Truist Financial Corporation (Truist) (formerly known as SunTrust Bank, Inc.) (the Credit Facility). The Credit Facility includes a revolving line of credit of up to $ 350,000 in aggregate principal amount. The maturity date of the Credit Facility is October 1, 2024. Borrowings are supported by a lending consortium arranged by Truist. The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50 % to 1.50 % per annum or LIBOR plus a margin range from 1.50 % to 2.50 % per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, the Company pays a commitment fee on the unused portion of the commitments that ranges from 0.25 % to 0.45 % per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio. The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The Credit Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. Under the Credit Facility, the Company must comply with financial maintenance covenants to be tested quarterly, consisting of (i) a maximum consolidated total net debt to consolidated EBITDA ratio (which shall not be greater than 3.00 :1.00; provided that if the aggregate consideration for approved acquisitions in a six month period is greater than $ 50,000 , then the ratio can be increased at the election of the Company with notice to the administrative agent to 3.50 :1.00 for the first fiscal quarter and the immediately following three fiscal quarters), and (ii) a minimum interest/rent coverage ratio (which cannot be less than 1.50 :1.00). As of September 30, 2021, and October 22, 2021, there was no outstanding debt under the Credit Facility. The Company was in compliance with all loan covenants as of September 30, 2021. Off-Balance Sheet Arrangements As of September 30, 2021, the Company had approximately $ 6,544 o n the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $ 1,036 from the second quarter. 16. OPTIONS AND AWARDS Stock-based compensation expense consists of stock-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ. 2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the 2017 Plan). The 2017 Plan provided for the issuance of 6,881 shares of common stock which are to be proportionally adjusted in the event of any Equity Restructuring. The number of shares available to be issued under the 2017 Plan were adjusted to 8,118 shares of common stock in order to reflect the proportional adjustments as part of the spin-off transaction that occurred in October 2019. The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than three years , on the completion of each year of service measured from the grant date. All other options generally vest over five years at 20 % per year on the anniversary of the grant date. Options expire ten years from the date of grant. As of September 30, 2021, there were approximately 2,270 unissued shares of common stock available for issuance under this plan. The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for stock option awards. Determining the appropriate fair-value model and calculating the fair value of stock option awards at the grant date requires judgment, including estimating stock price volatility, expected option life, and forfeiture rates. The fair-value of the restricted stock awards at the grant date is based on the market price on the grant date, adjusted for forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. Stock Options The Company granted 151 and 496 stock options during the three and nine months ended September 30, 2021, respectively. 25 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company used the following assumptions for stock options granted during the three months ended September 30, 2021 and 2020: Grant Year Options Granted Weighted Average Risk-Free Rate Expected Life Weighted Average Volatility Weighted Average Dividend Yield 2021 151 1.0 % 6.1 years 42.5 % 0.3 % 2020 160 0.4 % 6.3 years 41.8 % 0.3 % The Company used the following assumptions for stock options granted during the nine months ended September 30, 2021 and 2020: Grant Year Options Granted Weighted Average Risk-Free Rate Expected Life Weighted Average Volatility Weighted Average Dividend Yield 2021 496 0.9 % 6.2 years 42.3 % 0.3 % 2020 540 0.7 % 6.2 years 38.8 % 0.4 % For the nine months ended September 30, 2021 and 2020, the following represents the exercise price and fair value displayed at grant date for stock option grants: Grant Year Granted Weighted Average Exercise Price Weighted Average Fair Value of Options 2021 496 $ 81.89 $ 33.45 2020 540 $ 50.46 $ 18.62 The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended September 30, 2021 and 2020 and therefore, the intrinsic value was $ 0 at the date of grant. The following table represents the employee stock option activity during the nine months ended September 30, 2021: Number of Options Outstanding Weighted Average Exercise Price Number of Options Vested Weighted Average Exercise Price of Options Vested January 1, 2021 4,038 $ 27.71 2,148 $ 16.66 Granted 496 81.89 Forfeited ( 77 ) 41.69 Exercised ( 463 ) 17.51 September 30, 2021 3,994 $ 35.35 2,129 $ 20.25 26 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following summary information reflects stock options outstanding, vested and related details as of September 30, 2021: Stock Options Outstanding Stock Options Vested Number Outstanding Black-Scholes Fair Value Remaining Contractual Life (Years) Vested and Exercisable Year of Grant Exercise Price 2011 $ 5.00 - $ 6.77 3 $ 3 0 3 2012 5.56 - 6.75 73 220 1 73 2013 6.76 - 9.74 140 539 2 140 2014 8.94 - 16.05 625 3,002 3 625 2015 18.20 - 21.39 279 2,164 4 279 2016 15.93 - 16.86 257 1,514 5 245 2017 15.80 - 19.41 315 1,851 6 208 2018 22.49 - 32.71 532 5,146 7 250 2019 41.07 - 45.76 662 10,394 8 216 2020 44.84 - 59.49 616 12,104 9 90 2021 $ 79.88 - $ 83.64 492 16,465 10 — Total 3,994 $ 53,402 2,129 The aggregate intrinsic value of options outstanding, vested and expected to vest as of September 30, 2021 and December 31, 2020 is as follows: Options September 30, 2021 December 31, 2020 Outstanding $ 161,371 $ 182,552 Vested 116,340 120,867 Expected to vest 40,548 53,366 The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options . The aggregate intrinsic value of options that vested during the nine months ended September 30, 2021 and 2020 was $ 18,500 and $ 13,681 , respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2021 and 2020 was $ 31,167 and $ 21,044 , respectively. Restricted Stock Awards The Company granted 51 and 195 restricted stock awards during the three and nine months ended September 30, 2021, respectively. The Company granted 48 and 242 restricted stock awards during the three and nine months ended September 30, 2020, respectively. All awards were granted at an issue price of $ 0 and generally vest over five years . The fair value per share of restricted awards granted during the nine months ended September 30, 2021 and 2020 ranged from $ 82.20 to $ 93.31 and $ 35.47 to $ 58.06 , respectively. The fair value per share includes quarterly stock awards to non-employee directors. A summary of the status of the Company's non-vested restricted stock awards as of September 30, 2021 and changes during the nine months ended September 30, 2021 is presented below: Non-Vested Restricted Awards Weighted Average Grant Date Fair Value Nonvested at January 1, 2021 591 $ 38.90 Granted 195 82.81 Vested ( 213 ) 48.45 Forfeited ( 16 ) 45.65 Nonvested at September 30, 2021 557 $ 50.43 During the three and nine months ended September 30, 2021, the Company granted six and 17 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors. The fair value per share of these stock awards was $ 84.70 to $ 93.31 based on the market price on the grant date. 27 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Long-Term Incentive Plan On August 27, 2019, the Board approved the Long-Term Incentive Plan (the 2019 LTI Plan). The 2019 LTI Plan provides that certain employees of the Company who assisted in the consummation of the spin-off transaction that occurred in October 2019 are granted shares of restricted stock upon the successful completion of the spin-off. The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock. The shares are vested over five years at 20 % per year on the anniversary of the grant date. If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or not yet vested shall be entirely forfeited. The total stock-based compensation related to the 2019 LTI Plan was approximately $ 248 and $ 651 for the three and nine months ended September 30, 2021, respectively, compared to $ 286 and $ 675 for the three and nine months ended September 30, 2020, respectively. Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three and nine months ended September 30, 2021 and 2020 was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Stock-based compensation expense related to stock options $ 2,371 $ 1,692 $ 6,130 $ 4,656 Stock-based compensation expense related to restricted stock awards 2,217 2,221 6,131 5,596 Stock-based compensation expense related to stock options and restricted stock awards to non-employee directors 494 260 1,508 684 Total $ 5,082 $ 4,173 $ 13,769 $ 10,936 In future periods, the Company expects to recognize approximately $ 34,086 and $ 29,021 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of September 30, 2021. Future stock-based compensation expense will be recognized over 3.9 and 3.6 weighted average years for unvested options and restricted stock awards, respectively. There were 1,865 unvested and outstanding options as of September 30, 2021, of which 1,754 shares are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest as of September 30, 2021 was 6.1 years. 17. LEASES The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 95 affiliated skilled nursing and senior living facilities used in the Company’s operations, 94 of which are under nine “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 13 to 20 years. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the then current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases. If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all, of the leased property then subject to the Master Lease. Additionally, four of the 95 facilities leased from CareTrust include an option to purchase that the Company can exercise starting on December 1, 2024. In the second quarter of 2021, the Company added four operations and extended the term for one of the Master Leases for an additional 15 years. In the third quarter of 2021, the Company added two operations and extended the term for one of the Master Leases for an additional 17 years. As a result, the total lease liabilities and right-of-use assets increased by $ 54,716 and $ 63,374 , respectively, to reflect the new lease obligations. The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property. 28 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5 %. In addition to rent, the Company is required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. The terms and conditions of the one stand-alone lease are substantially the same as those for the master leases described above. Total rent expense under the Master Leases was approximately $ 15,445 and $ 43,944 for the three and nine months ended September 30, 2021, respectively, and $ 13,139 and $ 39,394 for the three and nine months ended September 30, 2020, respectively. Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. The Company is in compliance with requirements of the Master Leases as of September 30, 2021. In connection with the spin-off transaction that occurred in October 2019, the Company guaranteed certain leases of Pennant based on the underlying terms of the leases. The Company does not consider these guarantees to be probable and the likelihood of Pennant defaulting is remote, and therefore no liabilities have been accrued. The Company also leases certain affiliated operations and certain administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years. The Company has entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts. The term of each lease is 15 years with two five-year renewal options and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years . Most of these leases contain renewal options, certain of which involve rent increases. Total rent expense inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 35,646 and $ 103,598 for the three and nine months ended September 30, 2021, respectively, and $ 32,520 and $ 97,366 for the three and nine months ended September 30, 2020, respectively. Forty-three of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under eight separate master lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The components of operating lease expense are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Rent - cost of services (1) $ 35,623 $ 32,504 $ 103,534 $ 97,318 General and administrative expense 23 16 64 48 Depreciation and amortization (2) 289 289 869 933 Variable lease costs (3) 3,582 3,229 10,719 9,692 $ 39,517 $ 36,038 $ 115,186 $ 107,991 (1) Rent - cost of services includes deferred rent expense adju stments of $ 125 and $ 346 for the three and nine months ended September 30, 2021, respectively, and $ 101 and $ 337 for the three and nine months ended September 30, 2020, respectively. Additionally, rent - cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 1,127 and $ 2,543 for the three and nine months ended September 30, 2021, respectively, and $ 567 and $ 1,781 for the three and nine months ended September 30, 2020, respectively. (2) Depreciation and amortization is related to the amortization of favorable and direct lease costs. (3) Variable lease costs, including property taxes and insurance, are classified in cost of services in the Company's condensed consolidated statements of income. 29 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Future minimum lease payments for all leases as of September 30, 2021 are as follows: Year Amount 2021 (remainder) $ 34,660 2022 138,592 2023 136,845 2024 135,889 2025 135,813 2026 135,708 Thereafter 1,201,777 Total lease payments 1,919,284 Less: present value adjustment ( 774,058 ) Present value of total lease liabilities 1,145,226 Less: current lease liabilities ( 52,050 ) Long-term operating lease liabilities $ 1,093,176 Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of September 30, 2021, the weighted average remaining lease term is 14.9 years and the weighted average discount rate used to determine the operating lease liabilities is 7.7 %. Subsequent to September 30, 2021, the Company expanded its operations through a long-term lease arrangement with the addition of three stand-alone skilled nursing facilities under a new triple-net master lease, adding a total of 328 operational skilled nursing beds operated by the Company’s affiliated operating subsidiaries. The aggregate impact to the fair value of lease liabilities and right-of-use assets related to new master lease is estimated to be approximately $ 22,828 . Lessor Activities In connection with the spin-off transaction that occurred in October 2019, Ensign affiliates retained ownership of the real estate at 29 senior living operations that were contributed to Pennant. During the first quarter of 2020, the Company transferred the operations of an additional two senior living operations to Pennant. Ensign affiliates retained ownership of the real estate for these 31 senior living communities. All of these properties are leased to Pennant on a triple-net basis, whereas the respective Pennant affiliates are responsible for all costs at the properties including: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. The initial terms range between 14 to 16 years. Total rental income from all third-party sources for the three and nine months ended September 30, 2021 and 2020 is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Pennant (1) $ 3,468 $ 3,443 $ 10,396 $ 9,675 Other third-party 465 471 1,441 1,521 $ 3,933 $ 3,914 $ 11,837 $ 11,196 (1) Pennant rental income includes variable rent such as property taxes of $ 301 and $ 881 during the three and nine months ended September 30, 2021 and $ 312 and $ 909 for the three and nine months ended September 30, 2020. 30 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Future annual rental income for all leases as of September 30, 2021 were as follows: Year Amount (1) 2021 (remainder) $ 3,900 2022 15,238 2023 14,937 2024 14,249 2025 13,911 2026 13,700 Thereafter 84,838 Total $ 160,773 (1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of September 30, 2021 . 18. COMMITMENTS AND CONTINGENCIES Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to review and interpretation. Compliance with such laws and regulations is evaluated regularly, the results of which can be subject to future governmental review and interpretation, and can include significant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is monitoring performed by the Office of Civil Rights which covers the Health Insurance Portability and Accountability Act of 1996, the terms of which require healthcare providers (among other things) to safeguard the privacy and security of certain patient protected health information. Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company. Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and others, under which the Company may be required to indemnify such persons for liabilities arising out of the nature of their relationship to the Company. The terms of such obligations vary by contract and, in most instances, do not expressly state or include a specific or maximum dollar amount. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s condensed consolidated balance sheets for any of the periods presented. In connection with the spin-off transaction that occurred in October 2019, certain landlords required, in exchange for their consent to the transaction, that the Company's lease guarantees remain in place for a certain period of time following the spin-off. These guarantees could result in significant additional liabilities and obligations for the Company if Pennant were to default on their obligations under their leases with respect to these properties. U.S. Department of Justice Civil Investigative Demand — On May 31, 2018, the Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it was investigating whether there had been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to relationships between certain of the Company’s independently operated skilled nursing facilities and persons who serve or have served as medical directors, advisory board participants or other potential referral sources. The CID covered the period from October 3, 2013 through 2018, and was limited in scope to ten of the Company’s Southern California independent operating entities. In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 through 2018, relating to the same topic. As a general matter, the Company’s independent operating entities have established and maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. The Company fully cooperated with the U.S. Department of Justice and promptly responded to its requests for information; in April 2020, the Company was advised that the U.S. Department of Justice declined to intervene in any subsequent action filed by a relator in connection with the subject matter of this investigation. 31 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) U.S. House of Representatives Select Subcommittee Request — In 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis launched a nation-wide investigation into the COVID-19 pandemic, which included the impact of the coronavirus on residents and employees in nursing homes. In June 2020, the Company received a document and information request from the House Select Subcommittee in connection with its investigation. The Company has cooperated in responding to this inquiry. However, it is not possible to predict the ultimate outcome of any such investigation or whether and what other investigations or regulatory responses may result from the investigation, which could have a material adverse effect on our reputation, business, financial condition, and results of operations. Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents served by the Company's independent operating subsidiaries. The Company, its independent operating subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. In addition, the Company, its independent operating subsidiaries, and others in the industry are subject to claims and lawsuits in connection with COVID-19 and a facility's preparation for and/or response to COVID-19. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. In addition to the potential lawsuits and claims described above, the Company and its independent operating subsidiaries are also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare or Medicaid) or other payor. A violation may provide the basis for exclusion from Federally-funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial performance. Under the qui tam or "whistleblower" provisions of the False Claims Act, a private individual with knowledge of fraud or potential fraud may bring a claim on behalf of the Federal Government and receive a percentage of the Federal Government's recovery. Due to these whistleblower incentives, qui tam lawsuits have become more frequent. For example, and despite the decision of the U.S. Department of Justice to decline to participate in litigation based on the subject matter of its previously issued Civil Investigative Demand, the involved qui tam relator has continued on with the lawsuit and is pursuing claims that the Company and certain of its independent operating subsidiaries have allegedly violated the False Claims Act and/or the Anti-Kickback Statute. In addition to the Federal False Claims Act, some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. Further, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company and its independent operating subsidiaries could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which its independent operating subsidiaries do business. In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) which made significant changes to the Federal False Claims Act and expanded the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any government overpayment. The government can argue, therefore, that a Federal False Claims Act violation can occur without any affirmative fraudulent action or statement, as long as the action or statement is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents. Thus, an employment relationship is generally not required in order to qualify for protection against retaliation for whistleblowing. Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company's independent operating subsidiaries are routinely subjected to varying types of claims, including class action "staffing" suits where the allegation is understaffing at the facility level. These class-action “staffing” suits have the potential to result in large jury verdicts and settlements, and may result in significant legal costs. The Company expects the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims. While the Company has been able to settle these claims without an ongoing material adverse effect on its business, future claims could be brought that may materially affect its business, financial condition and results of operations. 32 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Other claims and suits, including class actions, continue to be filed against the Company and other companies in its industry. The Company and its independent operating subsidiaries have been subjected to, and are currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour laws as related to the alleged failure to pay wages, to timely provide and au thorize meal and rest breaks, and related causes of action. The Company does not believe that the ultimate resolution of these actions will have an ongoing material adverse effect on the Company’s business, cash flows, financial condition or results of operations. The Company and its independent operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims filed by residents and responsible parties related to patient care and treatment (professional negligence claims), as well as employment related claims filed by current or former employees. A significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be successful in their prosecution of these claims, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows. The Company and its independent subsidiaries are also subject to requests for information and investigations by other State and Federal governmental entities (e.g., offices of the attorney general and offices of the inspector general). The Company cannot predict or provide any assurance as to the possible outcome of any inquiry, investigation or litigation. If any such inquiry, investigation or litigation were to proceed, and the Company and its independent operating subsidiaries are subjected to, alleged to be liable for, or agree to a settlement of, claims or obligations under Federal Medicare statutes, the Federal False Claims Act, or similar state and federal statutes and related regulations, or if the Company or its independent operating subsidiaries are alleged or found to be liable on theories of general or professional negligence or wage and hour violations, the Company's business, financial condition and results of operations and cash flows could be materially and adversely affected and its stock price could be adversely impacted. Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged violations, and may also include the assumption of specific procedural and financial obligations by the Company or its operating subsidiaries under a corporate integrity agreement and/or other such arrangement. Medicare Revenue Recoupments — The Company's independent operating entities are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors (RAC), Program Safeguard Contractors, and Medicaid Integrity Contractors programs (collectively referred to as Reviews). For several months during the COVID-19 pandemic, the Centers for Medicare and Medicaid Services (CMS) suspended its Targeted Probe and Educate Program. Beginning in August 2020, CMS resumed Targeted Probe and Educate Program activity. If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an extrapolation of the identified error rate to billings in the same time period. The Company anticipates that these Reviews could increase in frequency in the future. As of September 30, 2021 and subsequently, seven of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process. Concentrations Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s receivables from Medicare and Medicaid payor programs accounted for 53.7 % and 58.3 % of its total accounts receivable as of September 30, 2021 and December 31, 2020, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.6 % of the Company's service revenue for both the three and nine months ended September 30, 2021, and 75.5 % and 74.0 % for the three and nine months ended September 30, 2020, respectively. Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250. In addition, the Company has uninsured bank deposits with a financial institution outside the U.S. As of October 22, 2021, the Company had approximately $ 677 in uninsured cash deposits. All uninsured bank deposits are held at high quality credit institutions. 33 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. COMMON STOCK REPURCHASE PROGRAM As approved by the Board of Directors on March 4, 2020 and March 13, 2020, the Company entered into two stock repurchase programs pursuant to which the Company was authorized to repurchase up to $ 20,000 and $ 5,000 , respectively, of its common stock under the programs for a period of approximately 12 months. Under these programs, the Company was 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. During the first quarter of 2020, the Company repurchased 503 and 189 shares of its common stock for $ 20,000 and $ 5,000 , respectively. These repurchase programs expired upon the repurchase of the full authorized amount under the two plans. As approved by the Board of Directors on August 26, 2019, the Company entered into a stock repurchase program pursuant to which the Company may repurchase up to $ 20,000 of its common stock under the program for a period of approximately 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 Company repurchased 138 shares of its common stock for a total of $ 6,406 in fiscal year 2019 before the repurchase program was cancelled in the first quarter of 2020. On October 21, 2021, the Board of Directors approved the Company to enter into a stock repurchase program pursuant to which the Company may repurchase up to $ 20,000 of its common stock under the program for a period of approximately 12 months that starts on October 29, 2021. 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.