What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-02 compared with 2022-02-09 · 393 added, 541 removed, 978 unchanged (49% of the section changed)

16 unchanged sentences

We have audited the accompanying consolidated balance sheets of The Ensign Group, Inc.

and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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The Company develops information about the size of the ultimate claims based on historical experience, current industry information, and actuarial analysis.

The determination of case reserves for known general and professional liability claims, which is used in developing the actuarial estimated liability, is highly subjective.

Given the significant judgments in estimating the case reserves for known claims, we have determined the reserve for general and professional liabilities to be a critical audit matter.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management estimates of case reserves for known claims.

The determination of reserves for general and professional liability claims is highly subjective.

Given the significant judgments in estimating the general and professional liability claims, we have determined this to be a critical audit matter.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management estimates of reserves for open claims as well as for claims that are incurred but not reported (IBNR).

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures relating to management’s judgment regarding the estimation of the reserve for general and professional liability claims included the following, among others:

• We tested the effectiveness of controls over the reserve for general and professional liabilities, including those over the determination of the case reserves for known claims.

• We obtained an understanding of the factors considered and assumptions made by management and the actuaries in developing the estimate of the general and professional liability reserves, the sources of data relevant to these factors and assumptions and the procedures used to obtain the data, and the methods used to calculate the estimate.

• We performed a retrospective review in which we compared the current portion of the total liability at the end of the prior year with what was actually paid in the current year in order to assess the ability of the Company to forecast the timing of reserve payouts.

• We tested known case reserves by making selections and obtaining the associated notice of claim and settlement support (if applicable), as well as inquiring with the Company as to the nature of each case reserve selection and the judgment rationale for the established reserve amount.

Additionally, we selected external legal counsel and inquired about open cases handled by each legal firm and evaluated whether the information received from external legal counsel supported the known case reserves.

• We tested the effectiveness of controls over the reserve for general and professional liabilities, including those related to both the determination of reserves for open claims and estimation of the IBNR claims.

• We obtained an understanding of the factors considered and assumptions made by management and its external actuarial specialists in developing the estimate of the general and professional liability reserves, including the sources of data relevant to these factors and assumptions.

We tested underlying claims data, including testing the completeness and accuracy of open cases handled by legal firms.

• We involved our actuarial specialists to assist in our evaluation of the methodologies applied by management's specialist and to assess the accuracy of the Company's reserves.

We also compared the reserves recorded to an independent range developed by our actuarial specialists.

• We performed a retrospective review in which we compared the current portion of the total liability at the end of the prior year to actual paid claim emergence in the current year.

/s/ DELOITTE & TOUCHE LLP

16 unchanged sentences

Insurance subsidiary deposits and investments 67,652 54,097

Escrow deposits — 100

Deferred tax assets 39,643 33,147

11 unchanged sentences

Accrued self-insurance liabilities—current 48,187 40,831

Advance payment liabilities (Note 3)

Other accrued liabilities 97,309 89,410

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Non-controlling interest 1,468 946

1,021,714 818,227

Total equity $ 1,248,800 $ 1,021,714

TOTAL LIABILITIES AND EQUITY $ 3,452,022 $ 2,850,623

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Income from operations 296,825 260,465 223,155

Other income (expense):

Other (expense) income:

Interest expense ( 8,931 ) ( 6,849 ) ( 9,362 )

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Provision for income taxes 64,437 60,279 46,242

Net income from continuing operations 197,725 171,364 92,213

Net income from discontinued operations, net of tax (Note 22)

NET INCOME $ 224,652 $ 197,725 $ 171,364

Net income attributable to noncontrolling interests in continuing operations 3,073 886 523

Net income attributable to noncontrolling interests in discontinued operations (Note 22)

Net income attributable to noncontrolling interests 3,073 886 1,152

Net income attributable to The Ensign Group, Inc.

$ 194,652 $ 170,478 $ 110,534

Amounts attributable to The Ensign Group, Inc.:

Income from continuing operations attributable to The Ensign Group, Inc.

$ 194,652 $ 170,478 $ 91,690

Income from discontinued operations, net of income tax (Note 22)

Net (loss) income attributable to noncontrolling interests ( 29 ) 3,073 886

Net income attributable to The Ensign Group, Inc.

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NET INCOME PER SHARE ATTRIBUTABLE TO THE ENSIGN GROUP INC.

Continuing operations $ 3.57 $ 3.19 $ 1.72

Discontinued operations — — 0.35

Basic $ 4.09 $ 3.57 $ 3.19

Continuing operations $ 3.42 $ 3.06 $ 1.64

Discontinued operations — — 0.33

Diluted $ 3.95 $ 3.42 $ 3.06

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Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 979 1 12,654 — — — — 12,655

Repurchase of common stock (Note 21)

( 138 ) — — — 138 ( 6,406 ) — ( 6,406 )

Issuance of restricted stock, net of forfeitures 872 1 3,085 — — — — 3,086

Shares of common stock used to satisfy tax withholding obligations ( 20 ) — — — 20 ( 917 ) — ( 917 )

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Employee stock award compensation — — 14,524 — — — — 14,524

Distribution of net assets to Pennant (Note 22)

— — — ( 71,181 ) — — ( 13,252 ) ( 84,433 )

Dividends received from Pennant (Note 22)

— — — 11,600 — — — 11,600

Repurchase of common stock attributable to subsidiary equity plan — — — — — — ( 394 ) ( 394 )

Noncontrolling interest attributable to subsidiary equity plan — — — ( 2,991 ) — — 3,585 594

Cumulative effect of accounting change, net of tax (Note 17)

Repurchase of common stock (Note 22)

( 692 ) — — — 692 ( 25,000 ) — ( 25,000 )

Distribution to noncontrolling interest holder — — — — — — ( 549 ) ( 549 )

Net income attributable to noncontrolling interest — — — — — — 886 886

Distribution to noncontrolling interest holder — — — — — — ( 2,683 ) ( 2,683 )

Net income attributable to the Ensign Group, Inc.

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( 132 ) — — — 132 ( 10,118 ) — ( 10,118 )

Deconsolidation of an ancillary business — — — — — — ( 1,369 ) ( 1,369 )

Capital contribution from noncontrolling interest holder — — — — — — 2,000 2,000

Net income attributable to noncontrolling interest — — — — — — 3,073 3,073

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( 404 ) — — — 404 ( 29,882 ) — ( 29,882 )

Deconsolidation of an ancillary business — — — — — — ( 1,369 ) ( 1,369 )

Capital contribution from noncontrolling interest holder — — — — — — 2,000 2,000

Net income attributable to noncontrolling interest — — — — — — 3,073 3,073

Distribution to noncontrolling interest holder — — — — — — ( 2,908 ) ( 2,908 )

Acquisition of noncontrolling interest shares — — ( 1,539 ) — — — 835 ( 704 )

Issuance of noncontrolling interests through subsidiary equity plan — — 6,693 — — — — 6,693

Net loss attributable to noncontrolling interest — — — — — — ( 29 ) ( 29 )

Distribution to noncontrolling interest holder and other changes — — 9 — — — ( 284 ) ( 275 )

Net income attributable to the Ensign Group, Inc.

8 unchanged sentences

Net income $ 224,652 $ 197,725 $ 171,364

Net income from discontinued operations, net of tax — — ( 19,473 )

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

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Cash received from insurance proceeds 1,282 2,382 —

(Gain)/loss on insurance claims and disposal of assets ( 2,348 ) 625 ( 3,026 )

Gain on sale of assets ( 3,467 ) ( 1,371 ) —

Loss (gain) on insurance claims, legal finding and asset disposals 3,926 ( 977 ) 625

Change in operating assets and liabilities

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Cash surrender value of life insurance policy premiums ( 7,614 ) ( 10,953 ) ( 6,577 )

Operating lease obligations ( 5,814 ) ( 724 ) ( 7,763 )

Deferred compensation liability 7,637 11,078 6,615

Operating lease obligations 345 ( 5,814 ) ( 724 )

Accounts payable 17,870 7,117 6,627

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NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by discontinued operating activities (Note 22)

Net cash provided by operating activities 275,684 373,351 192,223

$ 272,513 $ 275,684 $ 373,351

Cash flows from investing activities:

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Cash from insurance proceeds 1,339 6,899 800

Cash proceeds from the sale of assets and ancillary business 1,854 412 7,407

Cash proceeds from the sale of assets 8,630 1,854 412

Deconsolidation of an ancillary business — ( 1,984 ) —

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NET CASH USED IN INVESTING ACTIVITIES

Net cash used in discontinued investing activities (Note 22)

$ ( 186,182 ) $ ( 173,907 ) $ ( 58,666 )

Net cash used in investing activities ( 173,907 ) ( 58,666 ) ( 247,015 )

Cash flows from financing activities:

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Dividends paid ( 12,168 ) ( 11,548 ) ( 10,830 )

Dividends received from Pennant — — 11,600

Cash retained by Pennant at spin-off — — ( 47 )

Proceeds from sale of subsidiary shares (Note 7)

Non-controlling interest distribution ( 284 ) ( 2,908 ) ( 2,683 )

Contribution from noncontrolling interest 2,000 — —

Purchase of non-controlling interest ( 704 ) 2,000 —

Payments of deferred financing costs ( 3,197 ) ( 1,172 ) —

3 unchanged sentences

— ( 113,660 ) ( 144,932 )

Net cash (used in)/provided by financing activities ( 76,138 ) ( 137,298 ) 83,278

Net cash used in discontinued financing activities — — ( 394 )

Net cash (used in)/provided by financing activities ( 76,138 ) ( 137,298 ) 82,884

NET CASH USED IN FINANCING ACTIVITIES

$ ( 32,262 ) $ ( 76,138 ) $ ( 137,298 )

Net increase in cash and cash equivalents 54,069 25,639 177,387

1 unchanged sentence

Cash and cash equivalents end of period $ 316,270 $ 262,201 $ 236,562

Year Ended December 31,

(In thousands) 2022 2021 2020

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

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Right-of-use assets obtained in exchange for new and modified operating lease obligations $ 370,753 $ 198,593 $ 24,599

Distribution of net assets to Pennant $ — $ — $ 84,433

See accompanying notes to consolidated financial statements.

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(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 December 31, 2021, the Company operated 245 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 25,000 operational skilled nursing beds and 2,200 senior living units.

As of December 31, 2021, the Company operated 176 facilities under long-term lease arrangements, and had options to purchase 11 of those 176 facilities.

The Company's real estate portfolio includes 100 owned real estate properties, which included 69 facilities operated and managed by the Company, 32 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 32 senior living operations, two are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

The Company's independent operating subsidiaries provide 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 December 31, 2022, the Company's independent operating subsidiaries operated 271 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 independent operating subsidiaries have a collective capacity of approximately 28,100 operational skilled nursing beds and 3,000 senior living units.

As of December 31, 2022, the Company's independent operating subsidiaries operated 192 facilities under long-term lease arrangements, and had options to purchase 11 of those 192 facilities.

The Company's real estate portfolio includes 108 owned real estate properties, which included 79 facilities operated and managed by the Company's independent operating subsidiaries, 29 senior living operations leased to and operated by The Pennant Group, Inc.

(Pennant) as part of the spin-off transaction in October 2019, and the Service Center location.

Of those 29 senior living operations, one is located on the same real estate property as a skilled nursing facility that the Company owns and operates.

Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide specific accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries.

The Company also has a wholly-owned captive insurance subsidiary (the Captive Insurance) 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.

On January 1, 2022, the Company completed its plan to form a captive real estate investment trust, which owns and manages its real estate business, called Standard Bearer Healthcare REIT, Inc.

(Standard Bearer REIT).

Standard Bearer REIT intends to qualify and elect to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ending December 31, 2022.

The Company also has a wholly-owned captive insurance subsidiary that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liabilities, as well as coverage for certain workers’ compensation insurance liabilities.

In January of 2022, the Company formed a captive real estate investment trust (REIT), which owns and manages its real estate business, called Standard Bearer Healthcare REIT, Inc.

(Standard Bearer).

The Company expects the REIT structure will provide it with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties.

Refer to Note 7, Standard Bearer for additional information on Standard Bearer.

Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets.

7 unchanged sentences

and the noncontrolling interest in its consolidated statements of income.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.

Additionally, the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities are entitled to receive a majority of the entity's residual returns, or both.

The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impacts" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE.

On October 1, 2021, the Company deconsolidated its VIE as this entity no longer met the requirements for consolidation.

As of December 31, 2021, the Company has no VIEs.

The Company's relationship with the VIE prior to deconsolidation was not material during the years ended December 31, 2021, 2020, and 2019.

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The Financial Statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.

Reclassifications — Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

These reclassifications had no effect on the previously reported net income.

Prior period results reflect reclassifications, for comparative purposes, related to the change in the Company's segment structure as a result of the formation of Standard Bearer.

Refer to Note 8, Business Segments.

Reclassification adjustments have been made to reclassify investments associated with the Company's non-qualified deferred compensation plan with investments held by the Company's captive insurance subsidiary on the consolidated balance sheets.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

During the first quarter of 2019, the Company completed the sale of one of its senior living operations for a sale price of $ 1,838 .

Both the deconsolidation of the VIE and the sale transaction did not meet the criteria of discontinued operations as it did not represent a strategic shift that had, or will have, a major effect on the Company's operations and financial results.

Estimates and Assumptions — The preparation of the Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenue and expenses during the reporting periods.

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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.

See Note 6, Fair Value Measurements.

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

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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.

Cash and Cash Equivalents — Cash and cash equivalents consist of bank term deposits, money market funds and treasury bill related investments with original maturities of three months or less at time of purchase and therefore approximate fair value.

The fair values of money market funds and treasury bills are determined based on “Level 1” inputs, which consist of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

The fair value of money market funds is determined based on “Level 1” inputs, which consist of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

The Company places its cash and short-term investments with high credit quality financial institutions.

1 unchanged sentence

The majority of these deposits and investments are currently held in AA, A and BBB rated debt security investments and the remainder is held in a bank account with a high credit quality financial institution.

The Company evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

If securities are in an unrealized loss position, the Company considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.

The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

For the years ended December 31, 2021, 2020, and 2019, the Company did not recognize any OTTI for its investments.

The Company's non-qualified deferred compensation plan (the DCP)'s contracts insuring the lives of certain employees who are eligible to participate in the DCP are held in a rabbi trust.

Cash surrender value of the contracts is based on funds that shadow the investment allocations specified by participants in the deferred compensation plan.

The fair value of the investment funds is derived using Level 2 inputs.

When evaluating an investment for its current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term, market sector and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable.

Property and Equipment — Property and equipment are initially recorded at their historical cost.

2 unchanged sentences

Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

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THE ENSIGN GROUP, INC.

6 unchanged sentences

As of December 31, 2022, the Company does not have any leases that are classified as finance leases.

Rights and obligations of operating leases are included as right-of-use assets, current lease liabilities and long-term lease liabilities on the Company's consolidated balance sheet.

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 consolidated balance sheets.

As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments.

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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 consolidated balance sheet.

These leases are not recorded on the consolidated balance sheets.

Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation.

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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 year ended December 31, 2021.

The Company recorded an impairment charge of $ 2,681 and $ 3,203 during the years ended December 31, 2021 and 2020, respectively.

The Company also recorded an impairment charge of $ 443 to right-of-use assets during the year ended December 31, 2019.

Management has evaluated its long-lived assets and determined there was no impairment during the years ended December 31, 2022 and 2021.

The Company recorded an impairment charge of $ 2,681 during the year ended December 31, 2020.

Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of patient base, facility trade names and customer relationships.

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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 years ended December 31, 2021 and 2020.

During the year ended December 31, 2019, the Company recorded an impairment charge of $ 498 , to goodwill and intangible assets.

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The Company did not identify any goodwill or intangible asset impairment during the years ended December 31, 2022, 2021, and 2020.

THE ENSIGN GROUP, INC.

5 unchanged sentences

In Colorado, the third-party coverage above these limits is $ 1,000 per claim and $ 3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.

The majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities are self-insured through the Captive Insurance, the related assets and liabilities of which are included in the accompanying consolidated balance sheets.

The Captive Insurance is subject to certain statutory requirements as an insurance provider.

The majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities are self-insured through the captive insurance subsidiary, the related assets and liabilities of which are included in the accompanying consolidated balance sheets.

The captive insurance subsidiary 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.

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The Company uses actuarial valuations to estimate the liability based on historical experience and industry information.

In addition, the Company has recorded an asset and equal liability of $ 6,755 and $ 7,138 as of December 31, 2021 and 2020, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

In addition, the Company has recorded an asset and equal liability in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

See Note 13, Restricted and Other Assets.

1 unchanged sentence

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.

To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 525 , $ 500 and $ 300 for each covered person for fiscal years 2022, 2021 and 2020, respectively.

The Company believes that adequate provision has been made in the Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date.

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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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.

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.

1 unchanged sentence

Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ.

Standard Bearer intends to qualify and elect to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ended December 31, 2022.

Standard Bearer believes it has been organized, has operated and intends to continue to operate in a manner to qualify for taxation as a REIT.

In order to qualify as a REIT, Standard Bearer must meet certain organizational and operational requirements, including a requirement to distribute to its shareholders, which in this case is the Company, at least 90% of its annual taxable income.

As a REIT, Standard Bearer generally will not be subject to federal income tax to the extent it distributes as qualifying dividends all of its REIT taxable income to its shareholders.

If Standard Bearer fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions.

Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented within total equity in the Company's consolidated balance sheets.

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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.

Comprehensive Income — The Company does not have any components of other comprehensive income recorded within its consolidated Financial Statements and, therefore, does not separately present a statement of comprehensive income in its consolidated Financial Statements.

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.

1 unchanged sentence

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.

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 consolidated financial statements.

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 Company adopted the final rules as part of this Annual Report on Form 10-K.

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Recent Accounting Standards Adopted by the Company — In November 2021, the FASB issued ASU 2021-10 “ Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance, ” which created FASB ASC Topic 832, Government Assistance (ASC 832) .

ASC 832 requires business entities to disclose information about certain government assistance they receive.

The Company adopted this standard on January 1, 2022 and determined there was no material impact on the Company's Financial Statements.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

The Company early adopted this standard on October 1, 2021 and determined there was no material impact on the Company's 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.

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An entity may elect to apply the amendments prospectively through December 31, 2024.

The Company is currently evaluating the impact of ASU 2020-04 on its financial position, results of operations and liquidity.

During the year ended December 31, 2022, the Company and its subsidiaries including Standard Bearer, entered into the Second Amendment to Third Amended and Restated Credit Agreement (such agreement, the Amended Credit Agreement, and the revolving credit facility thereunder, the Revolving Credit Facility), which increased the Revolving Credit Facility by $ 250,000 to an aggregate principal amount of up to $ 600,000 .

Pursuant to the Amended Credit Agreement, the Company transitioned from LIBOR to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility and determined there was no resulting material impact on the Company's Financial Statements.

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 distributions 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 years ended December 31, 2021 and 2020, the Company received and returned $ 11,637 and $ 141,700 , respectively, in Provider Relief Funds.

The Company may continue to receive additional funding in future periods.

The COVID-19 pandemic has continued to impact the Company's affiliated operations.

In prior years, as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act), the Company received cash distributions of relief fund payments (Provider Relief Funds) 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 (LTC) facilities from the impact of COVID-19 .

During the year ended December 31, 2022, the Company did not receive Provider Relief Funds.

During the year ended December 31, 2021 and 2020, the Company received and returned $ 11,637 and $ 141,700 , respectively, in Provider Relief Funds.

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 .

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 Company repaid $ 3,232 of the funds in 2020 and the remaining funds of $ 102,023 in March 2021.

The Families 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.

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As of December 31, 2022 and 2021, the Company had $ 1,001 and $ 1,781 in unapplied state relief funds, respectively.

During the year ended December 31, 2021 and 2020, the Company received an additional $ 70,484 and $ 51,927 in state relief funding and recognized $ 75,231 and $ 45,407 , 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 Company paid $ 24,154 during the year ended December 31, 2021 and the remaining short-term balance of $ 24,155 is included in accrued wages and related liabilities within the consolidated balance sheets as of December 31, 2021.

During the years ended December 31, 2022, 2021, and 2020, the Company received an additional $ 81,057 , $ 70,484 , and $ 51,927 in state relief funding and recognized $ 81,837 , $ 75,231 , and $ 45,407 , 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 approximately 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, and paid the first and second half of the payments in the fourth quarters of 2021 and 2022, respectively.

REVENUE AND ACCOUNTS RECEIVABLE

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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

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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.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

capable of being distinct.

Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price.

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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 years ended December 31, 2021, 2020, and 2019.

The Company recorded adjustments to revenue which were not material to the Company's revenue for the years ended December 31, 2022, 2021, and 2020.

Rental Revenue

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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.

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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.

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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 rates, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

THE ENSIGN GROUP, INC.

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SERVICE REVENUE $ 3,008,711 100.0 % $ 2,611,476 100.0 % $ 2,387,439 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

(2) Private and other payors also includes revenue from all payors generated in other ancillary services.

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP and other COVID-19 related state funding.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 16,757 , $ 15,985 and $ 15,157 for the years ended December 31, 2022, 2021, and 2020.

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Accounts receivable as of December 31, 2022 and 2021, is summarized in the following table:

December 31, 2021 December 31, 2020

Medicaid $ 157,878 $ 123,647

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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.

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THE ENSIGN GROUP, INC.

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Net income $ 224,652 $ 197,725 $ 171,364

net income attributable to noncontrolling interests 3,073 886 523

Net income attributable to The Ensign Group, Inc.

$ 194,652 $ 170,478 $ 91,690

Net income from discontinued operations, net of tax — — 19,473

net income attributable to noncontrolling interests in discontinued operations — — 629

Net income from discontinued operations, net of tax — — 18,844

net (loss) income attributable to noncontrolling interests ( 29 ) 3,073 886

Net income attributable to The Ensign Group, Inc.

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$ 4.09 $ 3.57 $ 3.19

Income from discontinued operations — — 0.35

Net income attributable to The Ensign Group, Inc.

$ 3.57 $ 3.19 $ 2.07

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

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Net income $ 224,652 $ 197,725 $ 171,364

net income attributable to noncontrolling interests 3,073 886 523

Net income attributable to The Ensign Group, Inc.

$ 194,652 $ 170,478 $ 91,690

Net income from discontinued operations, net of tax — — 19,473

net income attributable to noncontrolling interests in discontinued operations — — 629

Net income from discontinued operations, net of tax — — 18,844

net (loss) income attributable to noncontrolling interests ( 29 ) 3,073 886

Net income attributable to The Ensign Group, Inc.

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$ 3.95 $ 3.42 $ 3.06

Income from discontinued operations — — 0.33

Net income attributable to The Ensign Group, Inc.

$ 3.42 $ 3.06 $ 1.97

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 198 , 956 and 250 for the years ended December 31, 2021, 2020 and 2019, respectively.

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 780 , 198 and 956 for th e years ended December 31, 2022, 2021 and 2020, respectively.

FAIR VALUE MEASUREMENTS

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The fair value of cash and cash equivalents of $ 316,270 and $ 262,201 as of December 31, 2022 and 2021, 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

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The Company's other financial assets include the captive insurance subsidiary's cash and cash equivalents, deposits and investments designated to support long-term insurance subsidiary liabilities and are carried at cost basis of $ 69,290 and $ 67,734 as of December 31, 2022 and 2021, respectively.

Also included are 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 funds that shadow the investment allocations specified by participants in the deferred compensation plan.

As of December 31, 2022, and 2021, the adjusted cost basis of the investment funds is $ 25,144 and $ 17,530 , respectively.

As of December 31, 2022 and 2021, the cost basis of the Company's financial assets included in the captive insurance subsidiary's investments and the deferred compensation plan investment funds are considered to approximate the fair value of these financial assets and are derived using Level 2 inputs.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 December 31, 2021, and 2020, the fair value of the pooled investment funds of $ 17,530 and $ 6,577 , respectively, is derived using Level 2 inputs.

The pooled investment funds are included in restricted and other assets in the consolidated balance sheets.

See Note 12, Restricted and Other Assets.

The Company believes its investments that were in an unrealized loss position as of December 31, 2022 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

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.

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When impairment has occurred, such long-lived assets are written down to fair value.

Debt Security Investments - Held to Maturity

As of December 31, 2021 and 2020, the Company had approximately $ 50,330 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 December 31, 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 December 31, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

STANDARD BEARER

Standard Bearer's real estate portfolio consists of 103 of the Company's 108 owned real estate properties, of which 75 are operated and managed by the Company and 29 are leased to and operated by Pennant.

Of those 29 senior living operations, one is located on the same real estate property as a skilled nursing facility that the Company owns and operates.

Standard Bearer intends to qualify and elect to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ended December 31, 2022.

During the year ended December 31, 2022, Standard Bearer acquired the real estate of ten skilled nursing facilities for a purchase price of $ 84,656 , three of which were previously operated and managed by Ensign's affiliated operations.

Refer to Note 9, Operation Expansions for additional information.

As part of the formation of Standard Bearer, certain of the Company's operating subsidiaries, Standard Bearer and Standard Bearer's subsidiaries entered into several agreements that include leasing, management services and debt arrangements between the operations.

As these intercompany arrangements were entered into when Standard Bearer was formed in January 2022, the transactions related to these agreements are reflected in Standard Bearer's segment income during year ended December 31, 2022.

All intercompany transactions have been eliminated in consolidation.

Refer to Note 8, Business Segments , for additional information related to these intercompany eliminations as well as Standard Bearer as a reportable segment.

Intercompany master lease agreements

Certain of the Company's operating subsidiaries and the 75 Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases) in January 2022.

The lease periods range from 15 to 19 years with three five-year renewal options beyond the initial term, on the same terms and conditions.

The rent structure under the Standard Bearer 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 operating subsidiaries are required to pay the following:

(1) all impositions and taxes levied on or with respect to the leased properties;

(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 ten real estate properties acquired during year ended December 31, 2022 were added to the Standard Bearer Master Leases.

Rental revenue generated from Ensign affiliated operations was $ 57,967 , $ 44,165 and $ 40,946 for the years ended December 31, 2022, 2021, and 2020, respectively.

As of December 31, 2022, total annual rental income under the Standard Bearer Master Lease is approximately $ 62.5 million.

Intercompany management agreement

Standard Bearer has no employees.

The Service Center provides personnel and services to Standard Bearer pursuant to the management agreement between Standard Bearer and the Service Center.

The management agreement provides for a base management fee that is equal to 5 % of total rental revenue and an incentive management fee that is equal to 5 % of funds from operations (FFO) and is capped at 1 % of total rental revenue.

Management fee generated between Standard Bearer and the Service Center for the year ended December 31, 2022 was $ 4,367 , which represents 6 % of total Standard Bearer rental revenue.

No management fees were recorded in 2021 and 2020, which was prior to the formation of Standard Bearer.

Intercompany debt arrangements

Standard Bearer obtains its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans.

The intercompany debt arrangements include mortgage loans and the Revolving Credit Facility to fund acquisitions and working capital needs.

The interest rate under the Amended Credit Agreement is a base rate plus a margin ranging from 0.25 % to 1.25 % per annum or SOFR plus a margin range from 1.25 % to 2.25 % per annum.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In addition, as the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes are entered into by real estate subsidiaries of Standard Bearer, the interest expense incurred from these debts are included in Standard Bearer's segment income.

Refer to Note 16, Debt , for additional information related to these debts.

Equity Instrument Denominated in the Shares of a Subsidiary

As part of the formation of Standard Bearer in January of 2022, the Company established the Standard Bearer Healthcare REIT, Inc.

2022 Omnibus Incentive Plan (Standard Bearer Equity Plan).

The Company may grant stock options and restricted stock awards under the Standard Bearer Equity Plan to employees and management of Ensign's affiliated subsidiaries.

These awards generally vest over a period of five years or upon the occurrence of certain prescribed events.

The value of the stock options and restricted stock awards is tied to the value of the common stock of Standard Bearer, which is determined based on an independent valuation of Standard Bearer.

The awards can be put to Standard Bearer at various prescribed dates, which in no event is earlier than six months after vesting of the restricted awards or exercise of the stock options.

The Company can also call the awards, generally upon employee termination.

During the year ended December 31, 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $ 6,544 .

During the year ended December 31, 2022, the Company did not grant any stock options nor restricted shares under the Standard Bearer Equity Plan.

During the year ended December 31, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $ 149 .

These preferred shares were fully vested at the time of the contributions by the shareholders.

The value of Standard Bearer common and preferred shares held by the Company are eliminated in consolidation and the value held by other shareholders are classified as noncontrolling interests on the Company's consolidated balance sheets.

Dividends on Shares of a Subsidiary

During the year ended December 31, 2022, Standard Bearer met the requirement to distribute to its shareholders at least 90% of its annual taxable income through a declaration and payment of cash dividends totaling $ 30,379 .

Of that amount, $ 30,095 was paid in the form of a distribution to the Company and $ 284 was paid in the form of a distribution to noncontrolling interests.

BUSINESS SEGMENTS

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.

In conjunction with the formation of Standard Bearer in January 2022, the Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, began reviewing the results of Standard Bearer instead of all real estate properties.

Accordingly, the Company revised its former real estate segment to include only real estate properties that are part of Standard Bearer.

This change in organizational structure demonstrates that Standard Bearer's real estate is a core part of the Company's expansion of its real estate investment strategy.

As of the first quarter of 2022, the Company has two reportable segments:

(1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) Standard Bearer, which is comprised of selected real estate properties owned by Standard Bearer and leased to skilled nursing and senior living operators.

Segment information for prior periods has been recast to reflect the change of the Company’s segment structure.

As of December 31, 2022, the skilled services segment includes 234 skilled nursing operations and 26 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

The Company's real estate segment includes 100 owned real estate properties.

These properties include 69 operations the Company operated and managed, real estate properties of 32 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 32 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.

The Company's Standard Bearer segment consists of 103 owned real estate properties.

These properties include 75 operations the Company operated and managed and 29 senior living operations that are leased to and operated by third parties.

Of the 29 real estate operations leased to third parties, one senior living operation is located on the same real estate property as a skilled nursing facility that the Company owns and operates.

The Company also reports an “All Other” category that includes results from its senior living operations, which includes eleven stand-alone senior living operations and the senior living operations at 26 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

In addition, the "All Other" category includes mobile diagnostics, medical transportation, other real estate and other ancillary operations.

Services included in the “All Other” category are insignificant individually, and therefore do not constitute a reportable segment.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company’s reportable segments are significant operating segments that offer differentiated services.

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The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below.

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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies .

Intercompany revenue is eliminated in consolidation, along with corresponding intercompany expenses.

Segment income and loss is defined as profit or loss from operations before provision for income taxes, excluding gain or loss from sale of real estate, real estate insurance recoveries and losses and impairment charges from operations.

Included in segment income for Standard Bearer is expense for intercompany services provided by the Service Center as described in Note 7, Standard Bearer , as it is part of the CODM financial information.

The following tables set forth financial information for the segments:

Year Ended December 31, 2022

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 2,906,215 $ — $ 115,214 $ ( 12,718 ) $ 3,008,711

Rental revenue (3)

— 72,937 7,396 ( 63,576 ) 16,757

TOTAL REVENUE $ 2,906,215 $ 72,937 $ 122,610 $ ( 76,294 ) $ 3,025,468

Segment income (loss) 408,732 27,871 ( 150,781 ) — 285,822

Gain on sale of real estate — — — — 440

Gain on sale of real estate assets and insurance recoveries, net 3,267

Income before provision for income taxes $ 289,089

Depreciation and amortization 33,224 21,613 7,518 — 62,355

Other expense (income), net (3)

Interest expense (4)

$ — $ 15,707 $ 1,870 $ ( 8,646 ) $ 8,931

(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.

(1) All other primarily includes all ancillary operations, stand-alone senior living operations and the Service Center.

(2) Intercompany service revenue represents service revenue generated by ancillary operations provided to the Company's affiliated wholly-owned healthcare facilities and management service revenue generated by the Service Center with Standard Bearer.

Intercompany service revenue is eliminated in consolidation along with corresponding intercompany cost of service.

(3) Intercompany rental revenue represents rental income generated by both Standard Bearer and other real estate properties with the Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation along with corresponding intercompany rent expense.

(4) Included in interest expense in Standard Bearer is interest expense incurred from intercompany debt arrangements between Standard Bearer and The Ensign Group, Inc.

The intercompany interest expense is eliminated in the "Intercompany Elimination" column.

Year Ended December 31, 2021

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 2,523,234 $ — $ 95,276 $ ( 7,034 ) $ 2,611,476

Rental revenue (3)

— 58,127 7,409 ( 49,551 ) 15,985

TOTAL REVENUE $ 2,523,234 $ 58,127 $ 102,685 $ ( 56,585 ) $ 2,627,461

Segment income (loss) 373,603 31,876 ( 147,915 ) — 257,564

Loss on sale of real estate and impairment charges — — — — ( 2,753 )

Gain on real estate insurance recoveries 440

Income before provision for income taxes $ 258,004

Depreciation and amortization 30,681 17,558 7,746 — 55,985

Other expense (income), net (3)

$ — $ 9,350 $ ( 3,801 ) $ — $ 5,549

(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.

Interest expense $ — $ 6,842 $ 7 $ — $ 6,849

(1) All other primarily includes all ancillary operations, stand-alone senior living operations and the Service Center.

(2) Intercompany service revenue represents service revenue generated by ancillary operations provided to the Company's affiliated wholly-owned healthcare facilities.

Intercompany service revenue is eliminated in consolidation along with corresponding intercompany cost of service.

(3) Intercompany rental revenue represents rental income generated by both Standard Bearer and other real estate properties with the Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation along with corresponding intercompany rent expense.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Year Ended December 31, 2020

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 2,288,182 $ — $ 105,548 $ ( 6,291 ) $ 2,387,439

Rental revenue (3)

— 54,104 7,171 ( 46,118 ) 15,157

TOTAL REVENUE $ 2,288,182 $ 54,104 $ 112,719 $ ( 52,409 ) $ 2,402,596

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Depreciation and amortization 28,585 16,134 9,852 — 54,571

Other expense (income), net (3)

$ — $ 15,612 $ ( 2,599 ) $ — $ 13,013

(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 revenue.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Interest expense $ — $ 9,350 $ 12 $ — $ 9,362

(1) All other primarily includes all ancillary operations, stand-alone senior living operations and the Service Center.

(2) Intercompany service revenue represents service revenue generated by ancillary operations provided to the Company's affiliated wholly-owned healthcare facilities.

Intercompany service revenue is eliminated in consolidation along with corresponding intercompany cost of service.

(3) Intercompany rental revenue represents rental income generated by both Standard Bearer and other real estate properties with the Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation along with corresponding intercompany rent expense.

Service revenue by major payor source were as follows:

Year Ended December 31, 2022

Skilled Services All Other Total Service Revenue Revenue %

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 1,158,309 $ 24,847 $ 1,183,156 39.3 %

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TOTAL SERVICE REVENUE $ 2,906,215 $ 102,496 $ 3,008,711 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the year ended December 31, 2021.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2021.

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

Year Ended December 31, 2021

Skilled Services All Other Total Service Revenue Revenue %

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 1,007,061 $ 15,399 $ 1,022,460 39.2 %

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TOTAL SERVICE REVENUE $ 2,523,234 $ 88,242 $ 2,611,476 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the year ended December 31, 2020.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2020.

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Year Ended December 31, 2020

Skilled Services All Other Total Service Revenue Revenue %

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 886,991 $ 13,258 $ 900,249 37.7 %

6 unchanged sentences

TOTAL SERVICE REVENUE $ 2,288,182 $ 99,257 $ 2,387,439 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2019.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2019.

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 15,985 , $ 15,157 and $ 5,258 for the years ended December 31, 2021, 2020, and 2019, respectively.

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

OPERATION EXPANSIONS

4 unchanged sentences

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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

FASB ASC Topic 805, Clarifying the Definition of a Business (ASC 805) defined the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business.

3 unchanged sentences

2022 Expansions

During the year ended December 31, 2021, the Company expanded its operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of 17 stand-alone skilled nursing operations and five real estate purchases, four of which the Company previously operated and continues to operate.

During the year ended December 31, 2022, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of 23 stand-alone skilled nursing operations and one campus operation.

Of these additions, Standard Bearer acquired the real estate of seven of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities.

In addition, the Company purchased the real estate at three skilled nursing properties that the Company was already operating, further expanding the Company's real estate portfolio.

Refer to Note 7, Standard Bearer, for additional information on the purchase of real estate properties.

In addition, the Company added five senior living operations that were transferred from Pennant, three of which are part of campuses operated by the Company's affiliated operating subsidiaries.

These new operations added a total of 3,058 operational skilled nursing beds and 674 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

The Company also invested in new ancillary services that are complementary to its existing businesses.

The aggregate purchase price for these expansions during the year ended December 31, 2022 was $ 101,136 .

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 aggregate purchase price for the transactions that were classified as asset acquisitions during the year ended December 31, 2022 was $ 84,736 , consisting of real estate properties and indefinite-lived intangible assets.

The remaining aggregate purchase price for transactions during the year ended December 31, 2022 was concentrated in goodwill of $ 16,400 and accordingly, the transactions were classified as business combinations.

Subsequent to December 31, 2022, the Company expanded its operations through a combination of long-term leases, with the addition of seventeen stand-alone skilled nursing operations.

These new operations added 1,462 operational skilled nursing beds.

The Company also invested in new ancillary services that are complementary to its existing businesses.

The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2021 Expansions

During the year ended December 31, 2021, the Company expanded its operations through a combination of long-term leases and a real estate purchase, with the addition of 17 stand-alone skilled nursing operations and five real estate purchases, four of which the Company previously operated and continues to operate.

The remaining real estate purchase is operated by Pennant.

3 unchanged sentences

The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

The fair value of assets for 18 of the acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The aggregate purchase price for the asset acquisitions during the year ended December 31, 2021 was $ 98,224 .

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 December 31, 2021, the Company expanded its operations and real estate portfolio through a combination of two long-term leases and one real estate purchase, which added three stand-alone skilled nursing operations.

These new operations added 379 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for these acquisitions was approximately $ 27,400 .

2020 Expansions

The aggregate purchase price for the asset acquisitions during the year ended December 31, 2021 was $ 98,224 , consisting of real estate properties.

The fair value of assets for the remaining additions was concentrated in goodwill of $ 6,000 and as such, the transaction was classified as a business combination.

2020 Acquisitions

During the year ended December 31, 2020, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of five stand-alone skilled nursing operations, one stand-alone senior living operation and one campus operation.

Of these additions, four are related to purchases of owned properties, further expanding the Company's real estate portfolio.

These new operations added a total of 507 operational skilled nursing beds and 298 operational senior living units to be operated by the Company's affiliated operating subsidiaries.The aggregate purchase price for these acquisitions during the year ended December 31, 2020 was $ 24,997 .

These new operations added a total of 507 operational skilled nursing beds and 298 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for these acquisitions during the year ended December 31, 2020 was $ 24,997 .

2 unchanged sentences

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.

2019 Expansions

During the year ended December 31, 2019, the Company expanded its operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of 22 stand-alone skilled nursing operations, one stand-alone senior living operations and four campus operations.

Of these acquisitions, 15 relate to purchases of owned properties, further expanding our real estate portfolio.

The addition of these operations added 3,142 operational skilled nursing beds and 407 senior living units to be operated by the Company's affiliated operating subsidiaries.

The Company also invested in new ancillary services that are complementary to its existing businesses.

In addition, the Company invested in real estate and Medicare and Medicaid licenses during the year.

The aggregate purchase price for these acquisitions during the year ended December 31, 2019 was $ 148,974 .

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company did not acquire any material assets or assume any liabilities other than 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 30 of the acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The purchase price for the asset acquisitions was $ 141,595 .

The fair value of assets for the remaining one acquisition was concentrated in goodwill and as such, the transaction was classified as a business combination.

The purchase price for the business combination was $ 7,379 .

The Company also entered into a note payable with the seller of $ 924 , which was subsequently paid off in the second quarter of 2019 and was included as payments of debt in the consolidated statement of cash flows.

In connection with the Spin-Off, the Company transferred the assets of two stand-alone senior living operations, two home health agencies, five hospice agencies and two home care agencies that were purchased for an aggregate price of $ 18,780 .

The Company retained the real estate for one stand-alone senior living operation.

The table below presents the allocation of the purchase price for the operations acquired during the years ended December 31, 2021, 2020, and 2019 , excluding assets that were contributed to Pennant that occurred during the Spin-Off.

Ensign affiliates retained ownership of the real estate for these two senior living communities, which was subsequently sold in 2022.

The table below presents the allocation of the purchase price for the operations acquired during the years ended December 31, 2022, 2021, and 2020 , excluding assets that were contributed to Pennant that occurred during the spin-off transaction in 2019.

Year Ended December 31,

4 unchanged sentences

Assembled occupancy 367 29 107

Definite-lived intangible assets — — 440

Goodwill 16,400 6,000 —

Favorable leases — — 294

Leased asset 1,909 — —

Other indefinite-lived intangible assets 245 75 648

TOTAL ACQUISITIONS $ 101,136 $ 104,224 $ 24,997

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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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 year ended December 31, 2021 were not material operations to the Company individually or in the aggregate.

The assets added during the year ended December 31, 2022 and through the issuance of the Financial Statements were not material operations to the Company individually or in the aggregate.

Accordingly, pro forma financial information is not presented.

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PROPERTY AND EQUIPMENT, NET $ 992,010 $ 888,434

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company completed the sale of real estate for $ 7,138 during the year ended December 31, 2019, of which a gain of $ 2,861 was recognized during the year ended December 31, 2019 related to the transaction.

In addition, the Company evaluated its long-lived assets and did not record an impairment charge for the fiscal year ended 2021.

The Company recorded impairment charges of $ 2,681 and $ 3,203 for the fiscal years ended 2020 and 2019, respectively.

See also Note 8, Operation Expansions for information on acquisitions during the years ended December 31, 2021 and 2020.

The Company completed the sale of assets for a sale price of $ 8,607 and recorded a gain of $ 3,467 within the Company's consolidated statement of income as cost of services during the year ended December 31, 2022.

In addition, the Company evaluated its long-lived assets and did not record an impairment charge for the fiscal years ended 2022 and 2021.

The Company recorded impairment charges of $ 2,681 for the fiscal year ended 2020.

See also Note 7, Standard Bearer and Note 9, Operation Expansions for information on acquisitions during the year ended December 31, 2022.

INTANGIBLE ASSETS - NET

7 unchanged sentences

During the years ended December 31, 2022, 2021, and 2020, amortization expense was $ 1,714 , $ 1,435 and $ 1,813 , respectively, of which $ 1,160 , $ 1,158 , and $ 1,223 was related to the amortization of right-of-use assets, respectively.

In addition, 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.

The Company did no t record any impairment charge to intangible assets during the years ended December 31, 2021, 2020 and 2019.

The Company did not record any impairment charge to intangible assets during the years ended December 31, 2022, 2021, and 2020.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

9 unchanged sentences

An impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company performs its goodwill impairment test annually and evaluates goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable.

The Company performs the annual impairment testing of goodwill using October 1 as the measurement date.

The Company completed its goodwill impairment test as of October 1, 2021 and did no t record any impairment charge to goodwill or other intangible assets for the fiscal year 2021 or 2020.

For fiscal year 2019, management determined that the improvements in operations and related forecasted cash flows were slower than anticipated at the time of acquisition, resulting in the impairment to goodwill for the year ended December 31, 2019 for other ancillary services.

Since 1999, the Company has recognized cumulative goodwill impairment losses of $ 7,410 .

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of December 31, 2021.

The Company completed its goodwill impairment test as of October 1, 2022 and did no t record any impairment charge to goodwill or other intangible assets for the fiscal years 2022, 2021 or 2020.

The Company has recognized cumulative goodwill impairment losses of $ 7,410 .

The Company anticipates that the majority of goodwill recognized will be fully deductible for tax purposes as of December 31, 2022.

All of the Company's acquisitions during the year ended December 31, 2020 were classified as asset acquisitions and accordingly, no goodwill was recognized for these acquisitions.

There were no other activities in goodwill during the year ended December 31, 2020.

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 years ended December 31, 2021, 2020 and 2019:

Provided that goodwill corresponds to the acquisition of a business and not merely the acquisition of real estate property, the Company's Standard Bearer segment appropriately does not carry a goodwill balance.

The following table represents activity in goodwill by skilled service segment and "all other" category as of and for the year ended December 31, 2022, 2021 and 2020:

Skilled Services All Other Total

January 1, 2020 $ 45,486 $ 8,983 $ 54,469

Additions — 5,382 5,382

Impairments — ( 498 ) ( 498 )

December 31, 2020 $ 45,486 $ 8,983 $ 54,469

Additions 6,000 — 6,000

December 31, 2021 $ 51,486 $ 8,983 $ 60,469

2 unchanged sentences

During the year ended December 31, 2022, the Company acquired $ 245 in Medicare and Medicaid licenses compared to $ 181 and $ 648 in the fiscal years 2021 and 2020, respectively.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Other indefinite-lived intangible assets consist of the following:

1 unchanged sentence

Medicare and Medicaid licenses 3,083 2,838

$ 3,727 $ 3,716

TOTAL $ 3,972 $ 3,727

RESTRICTED AND OTHER ASSETS

2 unchanged sentences

Long-term insurance losses recoverable asset 10,512 6,755

Deposits with landlords 13,705 12,400

Capital improvement reserves with landlords and lenders 6,446 7,103

Deferred compensation plan investments 17,530 6,577

Deposits with landlords 2,527 2,606

Other 14,053 11,099

RESTRICTED AND OTHER ASSETS $ 37,291 $ 29,516

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Included in restricted and other assets as of December 31, 2021 and 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.

Included in restricted and other assets as of December 31, 2022 and 2021 are anticipated insurance recoveries related to the Company's workers' compensation, general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Update issued by the FASB.

OTHER ACCRUED LIABILITIES

7 unchanged sentences

Property taxes 10,926 9,124

Legal finding accrued 4,553 —

Other 13,046 18,415

3 unchanged sentences

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.

1 unchanged sentence

The cash balance related to this liability is included in other current assets in the consolidated balance sheets.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The provision for income taxes on continuing operations for the years ended December 31, 2022, 2021 and 2020 is summarized as follows:

9 unchanged sentences

A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years ended December 31, 2022, 2021 and 2020, respectively, is comprised as follows:

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2022 2021 2020

6 unchanged sentences

The Company's effective tax rate was 22.3 % for the year ended December 31, 2022, compared to 23.4 % for the same period in 2021 and 21.3 % in 2020.

The higher effective tax rate is due to lower tax benefits from stock compensation, offset by higher tax expense from non-deductible expenses.

The lower effective tax rate is due to higher tax benefits from stock compensation and lower tax expense from non-deductible expenses.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company's deferred tax assets and liabilities as of December 31, 2022 and 2021 are summarized below.

1 unchanged sentence

Accrued expenses $ 61,685 $ 58,640

Allowance for doubtful accounts 13,171 11,598

Revenue related reserves 18,046 13,171

Tax credits 1,742 2,138

13 unchanged sentences

Unless the Company uses the Enterprise Zone credits beforehand, the carryforward will begin to expire in 2023.

As of December 31, 2021 and 2020, the valuation allowance of $ 789 and $ 879 , respectively, was primarily recorded against the Enterprise Zone credits as the Company believes it is more likely than not that some of the benefit of the credits will not be realized.

As of December 31, 2022 and 2021, the valuation allowance of $ 789 , for both years, was primarily recorded against the Enterprise Zone credits as the Company believes it is more likely than not that some of the benefit of the credits will not be realized.

The Company's operating loss carry forwards for states were not material during the years ended December 31, 2022 and 2021.

7 unchanged sentences

The Company is not under examination by any major income tax jurisdiction.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Debt consists of the following:

3 unchanged sentences

LONG-TERM DEBT LESS CURRENT MATURITIES $ 149,269 $ 152,883

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Credit Facility with a Lending Consortium Arranged by Truist

The Company maintains a revolving credit facility between the Company and its subsidiaries, including Standard Bearer as co-borrowers, and Truist Securities (Truist) (the Revolving Credit Facility).

Borrowings are supported by a lending consortium arranged by Truist.

On April 8, 2022, the Company and its subsidiaries, including Standard Bearer, entered into the Amended Credit Agreement, which amended the Revolving Credit Facility to increase the revolving line of credit from $ 350,000 to $ 600,000 in aggregate principal amount.

The Amended Credit Agreement also extended the maturity date of the Revolving Credit Facility to April 8, 2027 and modified the reference rate from LIBOR to SOFR.

The interest rates applicable to loans under the Amended Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.25 % to 1.25 % per annum or SOFR plus a margin range from 1.25 % to 2.25 % per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

In addition, the Company and its subsidiaries, including Standard Bearer, will pay a commitment fee on the unused portion of the commitments that will range from 0.20 % to 0.40 % per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

Except as set forth in the Amended Credit Facility, all other terms and conditions of the Credit Facility remained in full force and effect as described below.

As part of the entry into the Amended Credit Agreement, deferred financing costs of $ 566 were written off and additional deferred financing costs of $ 3,197 were capitalized during the year ended December 31, 2022.

Borrowings made under the Revolving Credit Facility are guaranteed, jointly and severally, by certain of the Company’s wholly-owned subsidiaries, and are secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of their personal property.

The Amended Credit Agreement 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 Amended Credit Agreement, 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 months 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 December 31, 2022, and January 30, 2023, there was no outstanding debt under the Revolving Credit Facility.

The Company was in compliance with all loan covenants as of December 31, 2022.

Mortgage Loans and Promissory Notes

1 unchanged sentence

The Company was in compliance with all loan covenants as of December 31, 2022.

During year ended December 31, 2021, four of the Company's subsidiaries entered into the Department of Housing and Urban Development (HUD) mortgage loans in the aggregate amount of $ 44,990 .

As a result, 23 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 156,636 , as of December 31, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of December 31, 2022, 23 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 153,488 , which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates in a range of 3.1 % to 4.2 %, including fixed interest rates in a range of 2.4 % to 3.3 % per annum.

5 unchanged sentences

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 notes bear fixed interest rates of 6.3 % and 5.3 % per annum and the term of the notes are 10 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.

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).

Subsequent to December 31, 2021, we amended our Credit Facility to include Standard Bearer REIT as a co-borrower.

All existing terms and conditions remained the same.

As of December 31,

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2021, and February 4, 2022, there was no outstanding debt under the Credit Facility.

The Company was in compliance with all loan covenants as of December 31, 2021.

Future principal payments due under the long-term debt arrangements discussed above are as follows:

3 unchanged sentences

Off-Balance Sheet Arrangements

As of December 31, 2021, the Company had approximately $ 6,710 on the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $ 870 from 2020.

As of December 31, 2022, the Company had approximately $ 6,710 of borrowing capacity under the Revolving Credit Facility pledged as collateral to secure outstanding letters of credit, which remained consistent from 2021.

OPTIONS AND AWARDS

2 unchanged sentences

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 Company has one active stock incentive plan, the 2022 Omnibus Incentive Plan (the 2022 Plan), which was approved by the Company's stockholders on May 26, 2022, and replaced the Company's prior option plan, the 2017 Omnibus Incentive Plan (the 2017 Plan).

2022 Omnibus Incentive Plan (2022 Plan) — During the second quarter of 2022, the Company's shareholders approved the 2022 Plan.

Including the shares rolled over from the 2017 Plan, the 2022 Plan provides for the issuance of 3,452 shares of common stock.

The number of shares available to be issued under the 2022 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) two shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award).

Non-employee director options, to the extent granted, will 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.

At December 31, 2022, the total number of shares available for issuance under the 2022 Plan was 2,861 .

2017 Omnibus Incentive Plan (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.

3 unchanged sentences

Options expire ten years from the date of grant.

As of December 31, 2021, there were approximately 2,114 unissued shares of common stock available for issuance under this plan.

The Company granted 165 stock options and 116 restricted stock awards from the 2017 Plan in the first half of 2022 prior to the retirement of the 2017 plan.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for stock option awards.

9 unchanged sentences

Treasury notes as of the grant date with a remaining term approximately equal to the expected term.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

• Estimated forfeiture rate of approximately 7.84 % per year is based on the Company's historical forfeiture activity of unvested stock options.

Modifications of Equity Awards

Effective at the time of the consummation of the Spin-Off, all holders of the Company's restricted stock awards on the date of record for the Spin-Off, received Pennant restricted stock awards consistent with the distribution ratio, with terms and conditions substantially similar to the terms and conditions applicable to the Company's restricted stock awards.

For purposes of the vesting of these equity awards, continued employment or service with Ensign or with Pennant is treated as continued employment for purposes of both Ensign's and Pennant's equity awards and the vesting terms of each converted grant remained unchanged.

Also, effective with the Spin-Off, the holders of the Company's stock options on the date of record received stock options consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options.

The stock options terms and conditions are based on the preexisting terms in the 2017 Plan, including nondiscretionary antidilution provisions.

In order to preserve the aggregate intrinsic value of the Company's stock options held by such persons, the exercise prices of such awards were adjusted by using the proportion of the Pennant closing stock price to the total Company closing stock prices on the distribution date.

All of these adjustments were designed to equalize the fair value of each award before and after Spin-Off.

These adjustments were accounted for as modifications to the original awards.

Due to the modification of the equity options as a result of the Spin-Off, the Company compared the fair value of the original equity awards immediately before and after the Spin-Off and no incremental fair value was recognized as a result of the above adjustments due to immateriality.

Accordingly, the Company did not record any incremental compensation expense as a result of the modifications to the awards on the date of the Spin-Off.

Stock Options

The Company granted 621 stock options during the year ended December 31, 2021.

The Company granted 581 , 621 and 669 stock options from the available plans during the year ended December 31, 2022, 2021 and 2020, respectively.

The Company used the following assumptions for stock options granted during the years ended December 31, 2022, 2021 and 2020 :

4 unchanged sentences

For the years ended December 31, 2022, 2021 and 2020, the following represents the exercise price and fair value displayed at grant date for stock option grants:

Grant Year Granted (1)

Weighted Average Exercise Price (2)

Weighted Average Fair Value of Options (3)

Grant Year Granted Weighted Average Exercise Price Weighted Average Fair Value of Options

2022 581 $ 85.74 $ 37.83

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2020 669 $ 52.20 $ 19.52

(1) Options granted from January 1, 2019 through September 30, 2019 represent historical grant values prior to the impact of the Spin-Off.

Options granted subsequent to October 1, 2019 represent grant values reflective of the Spin-Off.

(2) Weighted average exercise price was calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented.

(3) Weighted average fair value of options was calculated using the fair values reflective of the Spin-Off Conversion for all periods presented.

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 December 31, 2022, 2021 and 2020 and therefore, the intrinsic value was $ 0 at the date of grant.

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THE ENSIGN GROUP, INC.

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The following table represents the employee stock option activity during the year ended December 31, 2022, 2021 and 2020:

Number of Options Outstanding (1)

Weighted Average

Exercise Price (3)

Options Vested (1)

Weighted Average Exercise Price of Options Vested (3)

Number of Options Outstanding Weighted Average

Exercise Price Number of

Options Vested Weighted Average Exercise Price of Options Vested

January 1, 2020 4,428 $ 20.85 2,557 $ 12.82

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Exercised ( 979 ) 12.93

Equitable adjustment (2)

December 31, 2020 4,038 $ 27.71 2,148 $ 16.66

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December 31, 2022 3,833 $ 46.72 2,069 $ 28.87

(1) Options activity from January 1, 2019 through September 30, 2019 represents historical grant values prior to the impact of the Spin-Off as discussed above.

Options activity subsequent to October 1, 2019 represent values reflective of the Spin-Off.

(2) The equitable adjustment represents equity awards modifications upon the Spin-Off Conversion related to fiscal years prior to October 1, 2019.

(3) Weighted average exercise prices were calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented.

The following summary information reflects stock options outstanding, vested and related details as of December 31, 2022:

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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 years ended December 31, 2021,

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The aggregate intrinsic value of options that vested during the year ended December 31, 2022, 2021 and 2020 was $ 27,955 , $ 27,731 , and $ 26,030 , respectively.

The total intrinsic value of options exercised during the year ended December 31, 2022, 2021 and 2020 was $ 47,441 , $ 34,278 , and $ 45,081 , respectively.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2020, and 2019 was $ 27,731 , $ 26,030 and $ 21,952 , respectively.

The total intrinsic value of options exercised during the years ended December 31, 2021, 2020, and 2019 was $ 34,278 , $ 45,081 and $ 29,032 , respectively.

Restricted Stock Awards

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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 December 31, 2021 and changes during the year ended December 31, 2021, 2020 and 2019 is presented below:

A summary of the status of the Company's non-vested restricted stock awards as of December 31, 2022 and changes during the years ended December 31, 2022, 2021 and 2020 is presented below :

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

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Nonvested at December 31, 2022 487 $ 64.92

(1) Weighted average grant date fair value was calculated using the fair values reflective of the Spin-Off Conversion.

During the year ended December 31, 2021, the Company granted 21 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 $ 72.84 to $ 93.31 based on the market price on the grant date.

During the year ended December 31, 2022, the Company granted 18 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors from the 2017 and 2022 Plan.

The fair value per share of these stock awards ranged from $ 75.33 to $ 86.34 based on the market price on the grant date.

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 that certain employees of the Company who assisted in the consummation of the spin-off transaction in 2019 are granted shares of restricted stock upon successful completion.

The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock.

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TOTAL $ 22,720 $ 18,678 $ 14,524

(1) The amount of stock-based compensation expense that was classified as discontinued operations was $ 424 for the year ended December 31, 2019.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In future periods, the Company expects to recognize approximately $ 43,388 and $ 29,149 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of December 31, 2022.

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The weighted average contractual life for options outstanding, vested and expected to vest as of December 31, 2022 was 6.0 years.

Equity Instrument Denominated in the Shares of a Subsidiary

On May 26, 2016, the Company granted stock options and restricted stock awards under the Subsidiary Equity Plan to employees and management of the subsidiary.

During 2019, the Company contributed the net assets of the subsidiary to Pennant prior to the consummation of the Spin-Off on October 1, 2019.

Effective upon the Spin-Off, all shares under the Subsidiary Equity Plan were converted to Pennant shares and Pennant's Board of Directors hold full administrative authority of the Subsidiary Equity Plan.

No additional shares will be granted under this plan.

The Company did no t grant any new restricted shares during the year ended December 31, 2019.

The awards granted generally vested over a period of three to five years , or upon the occurrence of certain prescribed events.

During the year ended December 31, 2019, there were 976 restricted stock awards that vested.

The Company did no t grant any options during the fiscal year 2019.

The value of the stock options and restricted stock awards had been tied to the value of the common stock of the subsidiary.

Prior to the Spin-Off, the awards could be put to the Company at various prescribed dates, which in no event was earlier than six months after vesting of the restricted awards or exercise of the stock options.

The Company had the ability to call the awards, generally upon employee termination.

Prior to the Spin-Off, the grant-date fair value of the awards was recognized as compensation expense over the relevant vesting periods, with a corresponding adjustment to noncontrolling interests.

As a result of the conversion of the Subsidiary Equity Plan, the Company's noncontrolling interest in the subsidiary was eliminated.

The grant values were determined based on an independent valuation of the subsidiary shares.

For the year ended December 31, 2019, the Company expensed $ 594 in stock-based compensation related to the Subsidiary Equity Plan.

During the year ended December 31, 2019, the Company repurchased 534 shares of common stock under the Subsidiary Equity Plan for $ 2,687 .

The Company subsequently sold the shares and received net proceeds of $ 2,293 during the year ended December 31, 2019.

Stock-based compensation expense related to the Subsidiary Equity Plan, payments from the repurchase of shares and the proceeds from the sale of the repurchased shares related to the Subsidiary Equity Plan are all included within the Company's consolidated financial statements as discontinued operations.

The Company leases from CareTrust REIT, Inc.

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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.

The term of the Master Leases is subject to termination prior to the expiration of the 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 97 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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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The Company is in compliance with requirements of the Master Leases as of December 31, 2022.

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.

In connection with the spin-off transaction in 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.

The Company 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.

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 for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 139,458 , $ 129,990 and $ 125,167 for the years ended December 31, 2021, 2020 and 2019, 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.

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 153,174 , $ 139,458 and $ 129,990 for the year ended December 31, 2022, 2021 and 2020, respectively.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Fifty-eight of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under ten separate master lease arrangements.

During 2022, the Company amended two of its separate master leases to add operations and extend the initial terms, which increased the lease liabilities and right-of-use assets by $ 207,638 to reflect the new lease obligations.

Additionally, during 2022, the Company added six new operations to two new master leases, which increased the lease liabilities and right-of-use assets by $ 54,755 to reflect the new lease obligations.

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.

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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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

During 2022, Standard Bearer acquired the real estate of three skilled nursing operations, which were previously under separate long-term lease arrangements.

The aggregate reduction in the carrying value of the Company's lease liabilities and right-of-use assets related to this acquisition is $ 10,080 .

The components of operating lease expense are as follows:

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(1) Rent- cost of services includes deferred rent expense adju stments of $ 493 , $ 485 and $ 451 for the years ended December 31, 2022, 2021 and 2020, respectively.

Additionally, rent - cost of services includes other variable lease costs such as consumer price index increases and short-term leases of $ 3,702 , $ 2,394 and $ 1,486 for the years ended December 31, 2021, 2020 and 2019, respectively.

Additionally, rent- cost of services includes other variable lease costs such as consumer price index increases and short-term leases of $ 5,878 , $ 3,702 , $ 2,394 for the years ended December 31, 2022, 2021, and 2020 respectively.

(2) Depreciation and amortization is related to the amortization of favorable and direct lease costs.

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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 December 31, 2021, the weighted average remaining lease term is 14.8 years and the weighted average discount rate used to determine the operating lease liabilities is 7.6 %.

Subsequent to December 31, 2021, the Company expanded its operations through long-term leases with the addition of two stand-alone skilled nursing operations.

The Company added one of these additions to an existing master lease agreement and amended the terms of the master lease for an additional five years .

The aggregate impact to the fair value of lease liabilities and right-of-use assets related to the new long-term lease and amended master lease arrangement is estimated to be approximately $ 101,955 .

As of December 31, 2022 and 2021, the weighted average remaining lease term is 15.0 and 14.8 , respectively, and the weighted average discount rate used to determine the operating lease liabilities is 6.7 % and 7.6 %, respectively.

Subsequent to December 31, 2022, the Company expanded its operations through two separate master lease arrangements for 20 stand-alone skilled nursing operations, of which 17 will be operated by the Company's affiliated operating subsidiaries and the remaining three will be subleased to a third-party operator.

The aggregate impact to the carrying value of lease liabilities and right-of-use assets related to the two separate master lease agreements is estimated to be approximately $ 315,337 .

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 year ended December 31, 2021, the Company acquired and transferred the operations of one senior living operation to Pennant.

During the year ended December 31, 2020, the Company transferred the operations of two senior living operations to Pennant, respectively.

Ensign affiliates retained ownership of the real estate for these 32 senior living communities.

In connection with the spin-off transaction in 2019, Ensign affiliates retained ownership of the real estate at 29 senior living operations that were contributed to Pennant.

As of December 31, 2022, Ensign affiliates retained ownership of the real estate for these 29 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:

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The initial terms range between 14 to 16 years.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Total rental income from all third-party sources for the years ended December 31, 2022, 2021, and 2020 is as follows:

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$ 16,757 $ 15,985 $ 15,157

(1) Pennant rental income includes variable rent such as property taxes of $ 1,199 and $ 1,224 for the years ended December 31, 2021 and 2020, respectively.

Variable rent was immaterial for the year ended December 31, 2019.

(1) Pennant rental income includes variable rent such as property taxes of $ 1,318 , $ 1,199 , and $ 1,224 during the year ended December 31, 2022, 2021, and 2020.

Future annual rental income for all leases as of December 31, 2022 were as follows:

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The following table represents activity in our insurance liabilities as of and for the years ended December 31, 2022 and 2021:

General and Professional Liability Workers' Compensation Health Total

Balance January 1, 2021

$ 50,068 $ 30,334 $ 6,964 $ 87,366

Current year provisions 114,907

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Balance December 31, 2021

$ 60,894 $ 28,371 $ 7,533 $ 96,798

Current year provisions 115,793

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Balance December 31, 2022

$ 69,748 $ 30,500 $ 9,891 $ 110,139

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Included in the table above are accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, of $ 87,000 and $ 69,748 as of December 31, 2022 and 2021, respectively.

Included in long-term insurance losses recoverable as of December 31, 2022 and 2021 are anticipated insurance recoveries related to the Company's general and professional liability claims that are recorded on a gross rather than net basis in accordance with GAAP.

DEFINED CONTRIBUTION PLANS

The Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to 15 % of their annual basic earnings.

The Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to 90 % of their annual basic earnings, subject to applicable annual Internal Revenue Code limits.

Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined in the 401(k) Plan) by the Company.

The Company expensed matching contributions to the 401(k) Plan of $ 2,418 , $ 2,121 , and $ 1,889 during the years ended December 31, 2022, 2021 and 2020, respectively.

The 401(k) Plan allowed eligible employees to contribute up to 90 % of their eligible compensation, subject to applicable annual Internal Revenue Code limits.

During the year ended December 31, 2019, the Company implemented non-qualified deferred compensation plan (the DCP) that was effective in 2019 for certain executives.

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These individuals are otherwise ineligible for participation in the Company's 401(k) plan.

The DCP allows participating employees to defer the receipt of a portion of their base compensation and certain

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

employees up to 100% of their eligible bonuses.

The DCP allows participating employees to defer the receipt of a portion of their base compensation and certain employees up to 100 % of their eligible bonuses.

Additionally, 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.

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As of the years ended December 31, 2022, 2021, and 2020, the Company accrued $ 33,017 , $ 26,832 and $ 14,232 , respectively, as long term deferred compensation in other long term liabilities on the consolidated balance sheet.

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 years ended December 31, 2021 and 2020, the Company recorded net income on the investment acquired in connection with our deferred compensation plan of $ 1,612 and $ 1,396 , respectively, which is included in other income (expense), net, and an offsetting expense of $ 1,758 and $ 1,355 , respectively, which is split between cost of services and general and administrative expenses.

No such gain no r offsetting expense occurred for the year ended December 31, 2019.

Cash surrender value of the contracts is based on investment funds that shadow the investment allocations specified by participants in the deferred compensation plan.

Refer to Note 6, Fair Value Measurements for more information on the funds.

For the year ended December 31, 2022, the Company recorded a loss on the investment acquired in connection with our deferred compensation plan of $ 4,188 , which is included in other income (expense), net.

During the same period, the Company recorded an offsetting reduction in expense of $ 4,051 , which is allocated between cost of services and general and administrative expenses.

During the same periods, the Company recorded an offsetting expense of $ 1,758 , and $ 1,355 , respectively, which is allocated between cost of services and general and administrative expenses.

COMMITMENTS AND CONTINGENCIES

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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.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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 obligations 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.

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Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s 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.

In connection with the spin-off transaction in 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 transaction.

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.

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Department of Justice declined to intervene in any subsequent action filed by a relator in connection with the subject matter of this investigation.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

House of Representatives Select Subcommittee Request — In 2020, the U.S.

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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.

In July 2022 and thereafter, the Company received follow up requests for additional documents and information.

The Company has responded to these requests, and continued to cooperate with the House Select Subcommittee in connection with its investigation.

On December 9, 2022, the House Select Subcommittee issued its final report summarizing its investigation and related recommendations designed "to strengthen the nation's ability to prevent and respond to public health and economic emergencies." According to the information provided by the House Select Subcommittee, the issuance of this report was the House Select Subcommittee's final official act.

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.

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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.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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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.

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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 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 authorize 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.

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The Company and its independent operating subsidiaries have been, and continue to be, subject to claims, findings and legal actions that arise in the ordinary course of the various businesses, including healthcare and non-healthcare services.

These claims include, but are not limited to, potential claims filed by residents, customers, patients and responsible parties related to patient care and treatment (professional negligence claims);

to non-care based activities of certain of the subsidiaries;

and to 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.

In addition, these claims could impact the Company's ability to procure insurance to cover its exposure related to the various services provided by its independent operating subsidiaries to their residents, customers and patients.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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).

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The Company anticipates that these Reviews could increase in frequency in the future.

As of December 31, 2021 and subsequently, thirteen of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

As of December 31, 2022 and since, 34 of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

Concentrations

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In addition, the Company has uninsured bank deposits with a financial institution outside the U.S.

As of February 4, 2022, the Company had approximately $ 2,042 in uninsured cash deposits.

As of January 30, 2023, the Company's uninsured cash deposits are not material.

All uninsured bank deposits are held at high quality credit institutions.

COMMON STOCK REPURCHASE PROGRAM

As approved by the Board of Directors on October 21, 2021, 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 that started on October 29, 2021.

On July 28, 2022, the Board of Directors approved 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 from August 2, 2022.

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.

During the year ended December 31, 2021, the Company repurchased 132 shares of its common stock for $ 10,118 .

Subsequent to December 31, 2021, the Company repurchased 133 shares of its common stock for $ 9,882 .

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

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The Company did not purchase any shares pursuant to this stock repurchase program in the year ended December 31, 2022.

The share repurchase program does not obligate the Company to acquire any specific number of shares.

On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which the Company could repurchase up to $ 20,000 of its common stock under the program for a period of approximately 12 months from February 10, 2022.

Under this program, 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 three months ended June 30, 2022, the Company repurchased 271 shares of its common stock for $ 20,000 .

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On February 9, 2022, 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 February 10, 2022.

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.

On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which the Company could repurchase up to $ 20,000 of its common stock under the program for a period of approximately 12 months that started on October 29, 2021.

The Company repurchased 133 and 132 shares of its common stock for $ 9,882 and $ 10,118 during the years ended December 31, 2022 and 2021, respectively.

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

On March 4, 2020 and March 13, 2020, the Board of Directors approved 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.

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.

SPIN-OFF OF SUBSIDIARIES

On October 1, 2019, the Company completed the separation of its transitional and skilled nursing services, ancillary businesses, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies:

• Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and other rehabilitative and healthcare services at 245 healthcare facilities and campuses, post-acute-related ancillary operations and real estate investments;

• The Pennant Group, Inc.

(Pennant), which is a holding company of operating subsidiaries that provide home health, hospice and senior living services.

The Company completed the separation through a tax-free distribution of substantially all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis.

Ensign stockholders received one share of Pennant common stock for every two shares of Ensign common stock held at the close of business on September 20, 2019, the record date for the Spin-Off.

The number of shares of Ensign common stock each stockholder owns and the related proportionate interest in Ensign did not change as a result of the Spin-Off.

Each Ensign stockholder received only whole shares of Pennant common stock in the distribution, as well as cash in lieu of any fractional shares.

The Spin-Off was effective October 1, 2019, with shares of Pennant common stock distributed on October 1, 2019.

Pennant is listed on the NASDAQ Global Select Market (NASDAQ) and trades under the ticker symbol “PNTG”.

In connection with the Spin-Off, Pennant's operations consist of 63 home health, hospice and home care agencies and 52 senior living communities.

Ensign affiliates retained ownership of all the real estate, which includes the real estate of 29 of the 52 senior living operations that were contributed to Pennant.

These assets are leased to Pennant on a triple-net basis.

Pennant affiliates are responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs.

The initial terms range between 14 to 16 years.

Pennant's remaining 23 senior living operations are leasing the underlying real estate from unrelated third parties.

Subsequent to the Spin-Off, Ensign affiliates acquired the real estate of an additional three senior living operations operated by Pennant.

The Company received $ 11,600 from Pennant as a dividend payment in connection with the distribution of assets to Pennant.

The Company used the funds to repay certain outstanding third-party bank debt.

The assets and liabilities were contributed to Pennant based on their historical carrying values, which were as follows:

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Cash and cash equivalents $ 47

Accounts receivable, net 30,064

Prepaid expenses and other current assets 4,483

Property and equipment, net 13,728

Right-of-use assets 150,385

Goodwill and intangibles, net 74,747

Accounts payable ( 4,725 )

Accrued wages and related liabilities ( 14,544 )

Other accrued liabilities - current ( 17,531 )

Lease liabilities, net ( 152,221 )

Net contribution $ 84,433

In accordance with FASB ASC Subtopic 505-60, Spinoffs and Reverse Spinoffs, the accounting for the separation of the Company follows its legal form, with Ensign as the legal and accounting spinnor and Pennant as the legal and accounting spinnee, due to the relative significance of Ensign’s healthcare business, the relative fair values of the respective companies, the retention of all senior management and other relevant indicators.

As a result of the Spin-Off, the Company recorded a $ 71,181 reduction in retained earnings, which included net assets of $ 84,433 as of October 1, 2019.

The Company transferred cash of $ 47 to Pennant, with the remainder considered a non-cash activity in the consolidated statements of cash flows.

The Spin-Off also resulted in a reduction of noncontrolling interest of $ 13,252 .

Ensign and Pennant entered into several agreements in connection with the Spin-Off, including a transition services agreement (TSA), separation and distribution agreement, tax matters agreement and an employee matters agreement.

Pursuant to the TSA, Ensign, Pennant and their respective subsidiaries are providing various services to each other on an interim, transitional basis.

Services being provided by Ensign include, among others, certain finance, information technology, human resources, employee benefits and other administrative services.

The TSA is no longer in place as of December 31, 2021.

Billings by Ensign under the TSA were not material during the years ended December 31, 2021, 2020 and 2019.

Prior to the consummation of the Spin-Off, Pennant granted awards to certain employees and directors of Ensign under the 2019 LTI Plan, in recognition of their performance in assisting with the Spin-Off.

These awards were exchanged for Pennant common stock prior to the distribution.

Immediately after the Spin-Off, Ensign ceased to consolidate the results of Pennant operations into its financial results.

Pennant's operating results and cash flows for the year ended December 31, 2019 presented have been classified as discontinued operations within the Consolidated Financial Statements.

The following table presents the financial results of Pennant for the indicated period and does not include overhead allocations:

Year Ended December 31, 2019

(In thousands)

Service revenue $ 249,039

Cost of services 187,560

Rent—cost of services 17,295

General and administrative expense 16,672

Depreciation and amortization 2,402

Total expenses 223,929

Income from discontinued operations 25,110

Interest income 26

Provision for income taxes 5,663

Income from discontinued operations, net of tax 19,473

Net income attributable to discontinued noncontrolling interests 629

Net income attributable to The Ensign Group, Inc.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company incurred transaction costs of $ 9,119 related to the Spin-Off since commencing in 2018, of which $ 7,909 are reflected in the Company's consolidated statement of operations as discontinued operations for the year ended December 31, 2019.

Transaction costs primarily consist of third-party advisory, consulting, legal and professional services, as well as other items that are incremental and one-time in nature that are related to the separation.

Transaction costs for 2019 incurred prior to October 1, 2019 are reflected in discontinued operations.

These repurchase programs expired upon the repurchase of the full authorized amount under the two plans and are no longer in effect.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data