ENSIGN GROUP, INC 10-Q

Item 1. FINANCIAL STATEMENTS THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2023 December 31, 2022 (In thousands, except par values) ASSETS Current assets: Cash and cash equivalents $ 326,969 $ 316,270 Accounts receivable—less allowance for doubtful accounts of $ 9,580 and $ 7,802 at March 31, 2023 and December 31, 2022, respectively 444,181 408,432 Investments—current 20,101 15,441 Prepaid income taxes — 4,643 Prepaid expenses and other current assets 39,246 36,339 Total current assets 830,497 781,125 Property and equipment, net 1,002,052 992,010 Right-of-use assets 1,790,498 1,450,995 Insurance subsidiary deposits and investments 82,052 67,652 Deferred tax assets 39,596 39,643 Restricted and other assets 34,343 37,291 Intangible assets, net 2,359 2,465 Goodwill 76,869 76,869 Other indefinite-lived intangibles 3,972 3,972 TOTAL ASSETS $ 3,862,238 $ 3,452,022 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 81,466 $ 77,087 Accrued wages and related liabilities 261,323 289,810 Lease liabilities—current 77,419 65,796 Accrued self-insurance liabilities—current 50,280 48,187 Other accrued liabilities 110,938 97,309 Current maturities of long-term debt 3,851 3,883 Total current liabilities 585,277 582,072 Long-term debt—less current maturities 148,339 149,269 Long-term lease liabilities—less current portion 1,676,987 1,355,113 Accrued self-insurance liabilities—less current portion 94,023 83,495 Other long-term liabilities 37,858 33,273 TOTAL LIABILITIES $ 2,542,484 $ 2,203,222 Commitments and contingencies (Notes 15, 17 and 19) EQUITY Ensign Group, Inc. stockholders' equity: Common stock: $ 0.001 par value; 100,000 shares authorized; 59,276 and 55,907 shares issued and outstanding at March 31, 2023, respectively, and 59,029 and 55,661 shares issued and outstanding at December 31, 2022, respectively 60 59 Additional paid-in capital 429,783 415,560 Retained earnings 1,002,976 946,339 Common stock in treasury, at cost, 3,369 and 3,368 shares at March 31, 2023 and December 31, 2022, respectively ( Note 20) ( 114,646 ) ( 114,626 ) Total Ensign Group, Inc. stockholders' equity 1,318,173 1,247,332 Non-controlling interest 1,581 1,468 Total equity $ 1,319,754 $ 1,248,800 TOTAL LIABILITIES AND EQUITY $ 3,862,238 $ 3,452,022 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2023 2022 (In thousands, except per share data) REVENUE Service revenue $ 881,918 $ 709,156 Rental revenue 4,923 4,289 TOTAL REVENUE $ 886,841 $ 713,445 Expense: Cost of services 696,326 555,641 Rent—cost of services 46,637 35,762 General and administrative expense 51,891 38,256 Depreciation and amortization 17,112 14,676 TOTAL EXPENSES 811,966 644,335 Income from operations 74,875 69,110 Other income (expense): Interest expense ( 2,036 ) ( 2,068 ) Other income (expense) 5,543 ( 816 ) Other income (expense), net 3,507 ( 2,884 ) Income before provision for income taxes 78,382 66,226 Provision for income taxes 18,413 16,138 NET INCOME 59,969 50,088 Less: Net income (loss) attributable to noncontrolling interests 117 ( 252 ) Net income attributable to The Ensign Group, Inc. $ 59,852 $ 50,340 NET INCOME PER SHARE ATTRIBUTABLE TO THE ENSIGN GROUP INC. Basic $ 1.08 $ 0.92 Diluted $ 1.05 $ 0.89 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 55,300 54,667 Diluted 57,098 56,871 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Non-Controlling Interest (In thousands) Shares Amount Shares Amount Total BALANCE - JANUARY 1, 2023 55,661 $ 59 $ 415,560 $ 946,339 3,368 $ ( 114,626 ) $ 1,468 $ 1,248,800 Issuance of common stock to employees and directors resulting from the exercise of stock options 145 1 2,653 — — — — 2,654 Issuance of restricted stock, net of forfeitures 102 — 5,068 — — — — 5,068 Shares of common stock used to satisfy tax withholding obligations ( 1 ) — — — 1 ( 20 ) — ( 20 ) Dividends declared ($ 0.0575 per share) — — — ( 3,215 ) — — — ( 3,215 ) Employee stock award compensation — — 6,573 — — — — 6,573 Acquisition of noncontrolling interest shares — — ( 77 ) — — — — ( 77 ) Net income attributable to noncontrolling interest — — — — — — 117 117 Distribution to noncontrolling interest holder and other changes — — 6 — — — ( 4 ) 2 Net income attributable to the Ensign Group, Inc. — — — 59,852 — — — 59,852 BALANCE - MARCH 31, 2023 55,907 $ 60 $ 429,783 $ 1,002,976 3,369 $ ( 114,646 ) $ 1,581 $ 1,319,754 Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Non-Controlling Interest (In thousands) Shares Amount Shares Amount Total BALANCE - JANUARY 1, 2022 55,190 $ 58 $ 369,760 $ 733,992 2,944 $ ( 83,042 ) $ 946 $ 1,021,714 Issuance of common stock to employees and directors resulting from the exercise of stock options 147 — 2,768 — — — — 2,768 Issuance of restricted stock, net of forfeitures 104 — 5,241 — — — — 5,241 Shares of common stock used to satisfy tax withholding obligations — — — — — ( 15 ) — ( 15 ) Dividends declared ($ 0.0550 per share) — — — ( 3,042 ) — — — ( 3,042 ) Employee stock award compensation — — 5,167 — — — — 5,167 Repurchase of common stock (Note 20) ( 133 ) — — — 133 ( 9,882 ) — ( 9,882 ) Acquisition of noncontrolling interest shares — — 245 — — — ( 271 ) ( 26 ) Net loss attributable to noncontrolling interest — — — — — — ( 252 ) ( 252 ) Net income attributable to the Ensign Group, Inc. — — — 50,340 — — — 50,340 BALANCE - MARCH 31, 2022 55,308 $ 58 $ 383,181 $ 781,290 3,077 $ ( 92,939 ) $ 423 $ 1,072,013 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (In thousands) 2023 2022 Cash flows from operating activities: Net income $ 59,969 $ 50,088 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,112 14,676 Amortization of deferred financing fees 269 223 Non-cash leasing arrangement 263 124 Deferred income taxes 47 264 Provision for doubtful accounts 1,887 2,142 Stock-based compensation 6,573 5,167 Loss on insurance claims, legal finding and asset disposals 62 4,054 Change in operating assets and liabilities Accounts receivable ( 37,136 ) ( 14,117 ) Prepaid income taxes 4,643 5,452 Prepaid expenses and other assets 3,444 ( 3,580 ) Cash surrender value of life insurance policy premiums ( 10,084 ) ( 7,916 ) Deferred compensation liability 9,826 7,801 Operating lease obligations ( 6,567 ) ( 162 ) Accounts payable 4,278 ( 1,467 ) Accrued wages and related liabilities ( 28,648 ) ( 28,989 ) Income taxes payable 13,850 10,416 Other accrued liabilities ( 813 ) ( 3,042 ) Accrued self-insurance liabilities 9,369 4,740 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 48,344 $ 45,874 Cash flows from investing activities: Purchase of property and equipment ( 26,651 ) ( 15,838 ) Cash payments for business acquisitions (Note 8) — ( 16,400 ) Cash payments for asset acquisitions (Note 8) — ( 17,010 ) Escrow deposits — ( 400 ) Cash proceeds from the sale of assets and insurance proceeds 13 431 Purchases of investments ( 9,767 ) ( 2,340 ) Maturities of investments 791 2,553 Other restricted assets ( 357 ) 764 NET CASH USED IN INVESTING ACTIVITIES $ ( 35,971 ) $ ( 48,240 ) Cash flows from financing activities: Payments on debt (Note 15) ( 1,007 ) ( 979 ) Issuance of common stock upon exercise of options 2,654 2,768 Repurchase of shares of common stock to satisfy tax withholding obligations ( 20 ) ( 15 ) Repurchase of shares of common stock (Note 20) — ( 9,882 ) Dividends paid ( 3,201 ) ( 3,035 ) Non-controlling interest distribution ( 4 ) — Purchase of non-controlling interest ( 77 ) ( 26 ) Payments of deferred financing costs ( 19 ) ( 120 ) NET CASH USED IN FINANCING ACTIVITIES $ ( 1,674 ) $ ( 11,289 ) Net increase (decrease) in cash and cash equivalents 10,699 ( 13,655 ) Cash and cash equivalents beginning of period 316,270 262,201 Cash and cash equivalents end of period $ 326,969 $ 248,546 4 Table of Contents Three Months Ended March 31, (In thousands) 2023 2022 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 1,769 $ 2,107 Lease liabilities $ 46,420 $ 35,972 Non-cash financing and investing activity Accrued capital expenditures $ 4,900 $ 3,900 Accrued dividends declared $ 3,215 $ 3,042 Right-of-use assets obtained in exchange for new and modified operating lease obligations $ 351,100 $ 170,007 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars, shares and options in thousands, except per share data) 1. DESCRIPTION OF BUSINESS The Company — The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company's independent operating subsidiaries provide health care services across the post-acute care continuum and engage in the ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare-related properties and other ancillary businesses. As of March 31, 2023, the Company's independent operating subsidiaries operated 290 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 29,900 operational skilled nursing beds and 3,000 senior living units. As of March 31, 2023, the Company's independent operating subsidiaries operated 211 facilities under long-term lease arrangements, and had options to purchase 11 of those 211 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 that occurred 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 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 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 6, Standard Bearer for additional information on Standard Bearer. Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this Quarterly Report is not meant to imply, nor should it be construed as meaning that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc. Other Information — The accompanying condensed consolidated financial statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 (collectively, the Interim Financial Statements) are unaudited. Certain information and note disclosures normally included in the annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations. Readers of the Interim Financial Statements should refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2022 which are included in the Company’s Annual Report on Form 10-K, File No. 001-33757 (the Annual Report) filed with the Securities and Exchange Commission (SEC). Management believes that the Interim Financial Statements reflect all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position and results of operations in all material respects. The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or stockholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing operations, senior living operations and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interests within the equity section of its condensed consolidated balance sheets and the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its condensed consolidated statements of income. The Interim Financial Statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. 6 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Estimates and Assumptions — The preparation of the Interim Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Company’s Interim Financial Statements relate to revenue, acquired property and equipment, intangible assets and goodwill, right-of-use assets, impairment of long-lived assets, lease liabilities, general and professional liabilities, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates. Fair Value of Financial Instruments — The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, deferred compensation investment funds, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations. See Note 5, Fair Value Measurements. Service Revenue Recognition — The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606). See Note 3, Revenue and Accounts Receivable. Rental Revenue Recognition — The Company recognizes rental revenue for operating leases on a straight-line basis over the lease term when collectability of all minimum lease payments is probable in accordance with FASB ASC Topic 842, Leases (ASC 842). See Note 3, Revenue and Accounts Receivable. Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration. Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term. Leases and Leasehold Improvements — The Company leases skilled nursing facilities, senior living facilities and commercial office space. The Company determines if an arrangement is a lease at the inception of each lease. Leases commencing prior to the ASC 842 adoption date were classified as operating leases under historical guidance. As the Company has elected the package of practical expedients allowing it to not reassess lease classification, these leases are classified as operating leases under ASC 842 as well. For leases commencing subsequent to the ASC 842 adoption date, the Company performs an evaluation to determine whether the lease should be classified as an operating or finance lease at the inception of the lease. As of March 31, 2023, the Company has one financing lease which is not material to the condensed consolidated balance sheets. Rights and obligations of these leases are included as right-of-use assets, current lease liabilities and long-term lease liabilities on the Company's condensed consolidated balance sheets. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments. The Company utilized a third-party valuation specialist to assist in estimating the incremental borrowing rate. The Company records rent expense for operating leases on a straight-line basis over the term of the lease. The lease term used for straight-line rent expense is calculated from the date the Company is given control of the leased premises through the end of the lease term. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements. The Company's real estate leases generally have initial lease terms of ten years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional ten to 15 years. Exercise of the renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term. The Company reassesses the renewal option using a "reasonably certain" threshold, which is understood to be a high threshold. For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the right-of-use asset and lease liability. The Company's leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices. The Company recognizes lease expense for leases with an initial term of 12 months or less on a straight-line basis over the lease term. These leases are not recorded on the condensed consolidated balance sheets. Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. 7 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company subleases skilled nursing facilities to third-party operators and considers the subleases to be separate contracts under ASC 842 because the Company is not relieved of its primary obligation under its operating lease. The rental income from third-parties related to these subleases is presented on a gross basis from the rent expense associated with the Company's lease obligations and is not material to the condensed consolidated statements of income. Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset. Management has evaluated its long-lived assets and determined there was no impairment during the three months ended March 31, 2023 and 2022. Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of patient base, facility trade names and customer relationships. Patient base is amortized over a period of four to eight months , depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years. The Company's indefinite-lived intangible assets consist of trade names, Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances indicate that its carrying value may not be recoverable. The Company performs its annual test for impairment during the fourth quarter of each year. Management has evaluated its long-lived assets and determined there was no impairment during the three months ended March 31, 2023 and 2022. Self-Insurance — The Company is partially self-insured for general and professional liability claims up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. The combined self-insured retention is $ 500 per claim, subject to an additional one-time deductible of $ 1,250 for California affiliated operations and a separate, one-time, deductible of $ 1,250 for non-California operations. For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $ 1,000 per claim, $ 3,000 per operation, with a $ 5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits is $ 1,000 per claim and $ 3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado. The majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities are self-insured through the captive insurance subsidiary, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets. The captive insurance subsidiary is subject to certain statutory requirements as an insurance provider. The Company’s policy is to accrue amounts equal to the actuarial estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 88,843 and $ 79,781 as of March 31, 2023 and December 31, 2022, respectively. 8 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company’s operating subsidiaries are self-insured for workers’ compensation liabilities in California. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $ 625 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures individual claims that exceed $ 750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $ 350 per occurrence. In the state of Washington, the Company is self-insured and has purchased individual specific excess insurance coverage that insures individual claims that exceed $ 500 per occurrence. For all of the self-insured plans and retention, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 27,607 and $ 27,301 as of March 31, 2023 and December 31, 2022, respectively. In addition, the Company has recorded an asset and equal liability of $ 13,765 and $ 10,512 as of March 31, 2023 and December 31, 2022, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis. See Note 12, Restricted and Other Assets. The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 525 for each covered person for fiscal years 2023. As of March 31, 2023 and December 31, 2022, the Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 14,088 for both periods. The Company believes that adequate provision has been made in the Interim Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If the Company’s actual liabilities exceed its estimates of losses, its future earnings, cash flows and financial condition would be adversely affected. Income Taxes — Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ. 9 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its condensed consolidated statements of income. Net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest. Stock-Based Compensation — The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables. Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company's financial management and certain standards are under consideration. 3. REVENUE AND ACCOUNTS RECEIVABLE Service Revenue The Company's service revenue is derived primarily from providing healthcare services to its patients. Revenue is recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care. The healthcare services in skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not capable of being distinct. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered. Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate on a per day basis, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such variances become known. 10 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Revenue from the Medicare and Medicaid programs accounted for 73.3 % and 73.4 % of all service revenue for the three months ended March 31, 2023 and 2022, respectively. Settlements with Medicare and Medicaid payors for retroactive adjustments due to audits and reviews are considered variable consideration and are included in the determination of the estimated transaction price. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity. Consistent with healthcare industry practices, any changes to these revenue estimates are recorded in the period the change or adjustment becomes known based on the final settlement. The Company recorded adjustments to revenue which were not material to the Company's revenue for the three months ended March 31, 2023 and 2022. Rental Revenue The Company's rental revenues are primarily generated by leasing healthcare-related properties through triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property. Revenue is recognized on a straight-line basis over the lease term if it has been deemed probable of collection. The Company has elected the single component practical expedient, which allows a lessor, by class of underlying asset, not to allocate the total consideration to the lease and non-lease components based on their relative stand-alone selling prices where certain criteria are met. Tenant reimbursements related to property taxes and insurance are neither considered lease nor non-lease components under the new lease standards. Lessee payments for taxes and insurance paid directly to a third party, on behalf of the Company, are excluded from variable lease payments and rental revenue in the Company’s condensed consolidated statements of income. Otherwise, tenant reimbursements for taxes and insurance that are paid by the Company directly to a third party are classified as additional rental revenue and expense and recognized by the Company on a gross basis. State relief funding The Company receives state relief funding through Medicaid programs from various states, including healthcare relief funding under the American Rescue Plan Act (ARPA), increases in the Federal Medical Assistance Percentage (FMAP) under the Families First Coronavirus Response Act (FFCRA) and other state specific relief programs. The funding generally incorporates specific use requirements primarily for direct patient care including labor related expenses that are attributable to the COVID-19 pandemic or are associated with providing patient care. Revenues from these additional payments are recognized in accordance with ASC 606, subject to variable consideration constraints. In certain operations where the Company received additional payments that exceeded expenses incurred related to the specific qualifiers, the Company characterized such payments as variable revenue that required additional consideration and accordingly, the amount of state relief revenue recognized is limited to the actual related expenses incurred. As of March 31, 2023 and December 31, 2022, the Company had $ 1,907 and $ 1,001 in unapplied state relief funds, respectively. During the three months ended March 31, 2023 and 2022, the Company received an additional $ 27,264 and $ 17,317 , respectively, in state relief funding and recognized $ 26,358 and $ 17,599 , respectively, as revenue. Disaggregation of Revenue The Company disaggregates revenue from contracts with its patients by payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenue by Payor The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rates, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed. 11 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Service revenue for the three months ended March 31, 2023 and 2022 is summarized in the following tables: Three Months Ended March 31, 2023 2022 Revenue % of Revenue Revenue % of Revenue Medicaid (1) $ 340,264 38.6 % $ 266,348 37.6 % Medicare 247,723 28.1 208,411 29.4 Medicaid — skilled 57,927 6.6 45,949 6.4 Total Medicaid and Medicare 645,914 73.3 520,708 73.4 Managed care 156,663 17.8 127,786 18.0 Private and other (2) 79,341 8.9 60,662 8.6 SERVICE REVENUE $ 881,918 100.0 % $ 709,156 100.0 % (1) Medicaid payor includes revenue for senior living operations and revenue related to state relief 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 was $ 4,923 and $ 4,289 , respectively, for the three months ended March 31, 2023 and 2022. Balance Sheet Impact Included in the Company’s condensed consolidated balance sheets are contract balances, comprised of billed accounts receivable and unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company had no material contract liabilities and contract assets as of March 31, 2023 and December 31, 2022, or activity during the three months ended March 31, 2023 and 2022. Accounts receivable as of March 31, 2023 and December 31, 2022, is summarized in the following table: March 31, 2023 December 31, 2022 Medicaid $ 161,863 $ 157,878 Managed care 108,571 95,940 Medicare 86,448 76,526 Private and other payors 96,879 85,890 453,761 416,234 Less: allowance for doubtful accounts ( 9,580 ) ( 7,802 ) ACCOUNTS RECEIVABLE, NET $ 444,181 $ 408,432 4. COMPUTATION OF NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing income from operations attributable to stockholders of The Ensign Group, Inc. by the weighted average number of outstanding common shares for the period. The computation of diluted net income per share is similar to the computation of basic net income per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. 12 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows: Three Months Ended March 31, 2023 2022 NUMERATOR: Net income $ 59,969 $ 50,088 Less: net income (loss) attributable to noncontrolling interests 117 ( 252 ) Net income attributable to The Ensign Group, Inc. $ 59,852 $ 50,340 DENOMINATOR: Weighted average shares outstanding for basic net income per share 55,300 54,667 Basic net income per common share: $ 1.08 $ 0.92 A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows: Three Months Ended March 31, 2023 2022 NUMERATOR: Net income $ 59,969 $ 50,088 Less: net income (loss) attributable to noncontrolling interests 117 ( 252 ) Net income attributable to The Ensign Group, Inc. $ 59,852 $ 50,340 DENOMINATOR: Weighted average common shares outstanding 55,300 54,667 Plus: incremental shares from assumed conversion (1) 1,798 2,204 Adjusted weighted average common shares outstanding 57,098 56,871 Diluted net income per common share: $ 1.05 $ 0.89 (1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,178 and 647 for the three months ended March 31, 2023 and 2022, respectivel y. 5. FAIR VALUE MEASUREMENTS Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company's other financial assets include the captive insurance subsidiary's deposits and investments designated to support long-term insurance subsidiary liabilities and are carried at cost basis of $ 58,870 and $ 53,924 as of March 31, 2023 and December 31, 2022, 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 March 31, 2023, and December 31, 2022, the adjusted cost basis of the investment funds was $ 35,228 and $ 25,144 , respectively. As of March 31, 2023 and December 31, 2022, the cost basis of the Company's financial assets included in the captive insurance subsidiary's investments, deferred compensation plan investment funds and other cost method investments are considered to approximate the fair value of these financial assets and are derived using Level 2 and 3 inputs. The Company believes its investments that were in an unrealized loss position as of March 31, 2023 and December 31, 2022 do not require an allowance for expected credit losses, nor has any event occurred through the filing date of this report that would indicate differently. 13 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company's non-financial assets, which includes goodwill, intangible assets, property and equipment and right-of-use assets, are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. 6. 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 three months ended March 31, 2022, Standard Bearer acquired the real estate of two skilled nursing facilities for a purchase price of $ 17,010 . Standard Bearer did not have any real estate acquisitions during the three months ended March 31, 2023. Refer to Note 8, 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 . All intercompany transactions have been eliminated in consolidation. Refer to Note 7, 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. During the three months ended March 31, 2023, no acquisitions or amendments were made to the Standard Bearer Master Leases. During the three months ended March 31, 2022, two real estate properties were acquired and added to the Standard Bearer Master Leases. Rental revenue generated from Ensign affiliated operations for the three months ended March 31, 2023 and 2022 was $ 15,931 and $ 13,425 , respectively. 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 three months ended March 31, 2023 and 2022 was $ 1,182 and $ 1,022 , respectively, both representing 6 % of total Standard Bearer rental revenue. 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. In addition, as the Department of Housing and Urban Development (HUD) mortgage loans and promissory note 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 15, Debt , for additional information related to these debts. 14 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. In the second quarter of 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $ 6,544 . During the three months ended March 31, 2023 and 2022, the Company did not grant any stock options nor restricted shares under the Standard Bearer Equity Plan. Also in the second quarter of 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. 7. 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) 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 March 31, 2023, the skilled services segment includes 253 skilled nursing operations and 26 campus operations that provide both skilled nursing and rehabilitative care services and senior living services. 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 Company’s reportable segments are significant operating segments that offer differentiated services. The Company's CODM reviews financial information for each operating segment to evaluate performance and allocate capital resources. This structure reflects its current operational and financial management and provides the best structure to maximize the quality of care and investment strategy provided, while maintaining financial discipline. The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below. 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 6, Standard Bearer , as it is part of the CODM financial information. 15 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following tables set forth financial information for the segments: Three Months Ended March 31, 2023 Skilled Services Standard Bearer All Other (1) Intercompany Elimination Total Service revenue (2) $ 850,923 $ — $ 34,533 $ ( 3,538 ) $ 881,918 Rental revenue (3) — 19,717 2,563 ( 17,357 ) 4,923 TOTAL REVENUE $ 850,923 $ 19,717 $ 37,096 $ ( 20,895 ) $ 886,841 Segment income (loss) 113,345 7,219 ( 42,182 ) — 78,382 Depreciation and amortization 9,064 5,966 2,082 — 17,112 Interest expense (4) $ — $ 4,569 $ 311 $ ( 2,844 ) $ 2,036 (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) All Other rental revenue includes rental revenue associated with the Company's subleases to third parties of $ 708 for the three months ended March 31, 2023. 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. Three Months Ended March 31, 2022 Skilled Services Standard Bearer All Other (1) Intercompany Elimination Total Service revenue (2) $ 686,771 $ — $ 25,467 $ ( 3,082 ) $ 709,156 Rental revenue (3) — 17,193 1,863 ( 14,767 ) 4,289 TOTAL REVENUE $ 686,771 $ 17,193 $ 27,330 $ ( 17,849 ) $ 713,445 Segment income (loss) 98,256 6,900 ( 38,930 ) — 66,226 Depreciation and amortization 7,901 5,021 1,754 — 14,676 Interest expense (4) $ — $ 3,562 $ 358 $ ( 1,852 ) $ 2,068 (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. Service revenue by major payor source were as follows: Three Months Ended March 31, 2023 Skilled Services All Other Total Service Revenue Revenue % Medicaid (1) $ 333,445 $ 6,819 $ 340,264 38.6 % Medicare 247,723 — 247,723 28.1 Medicaid-skilled 57,927 — 57,927 6.6 Subtotal 639,095 6,819 645,914 73.3 Managed care 156,663 — 156,663 17.8 Private and other (2) 55,165 24,176 79,341 8.9 TOTAL SERVICE REVENUE $ 850,923 $ 30,995 $ 881,918 100.0 % (1) Medicaid payor includes revenue generated from senior living operations and revenue related to state relief funding. (2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services. 16 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Three Months Ended March 31, 2022 Skilled Services All Other Total Service Revenue Revenue % Medicaid (1) $ 261,587 $ 4,761 $ 266,348 37.6 % Medicare 208,411 — 208,411 29.4 Medicaid-skilled 45,949 — 45,949 6.4 Subtotal 515,947 4,761 520,708 73.4 Managed care 127,786 — 127,786 18.0 Private and other (2) 43,038 17,624 60,662 8.6 TOTAL SERVICE REVENUE $ 686,771 $ 22,385 $ 709,156 100.0 % (1) Medicaid payor includes revenue generated from senior living operations and revenue related to state relief 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 was $ 4,923 and $ 4,289 , respectively, for the three months ended March 31, 2023 and 2022. This revenue is included in both Standard Bearer and the all other category. 8. OPERATION EXPANSIONS The Company's subsidiaries expansion focus is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business, or otherwise advance the Company's strategy. The results of all operating subsidiaries are included in the Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company's affiliated operations also enter into long-term leases that may include options to purchase the facilities. As a result, from time to time, a real estate affiliated subsidiary will acquire the property of facilities that have previously been operated under third-party leases. 2023 Expansions During the three months ended March 31, 2023, the Company expanded its operations through long-term leases, with the addition of 19 stand-alone skilled nursing operations. These new operations added a total of 1,764 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries. In connection with the new operations obtained 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. 2022 Expansions During the three months ended March 31, 2022 , the Company expanded its operations and real estate portfolio through a combination of long-term leases and real estate purchases , with the addition of four stand-alone skilled nursing operations. Of these additions, two are related to purchases of real estate properties. In addition, the Company added two senior living operations that were transferred from Pennant, one of which is part of a campus operated by the Company's affiliated operating subsidiaries. These new operations added a total of 453 operational skilled nursing beds and 403 operational senior living units to be operated by the Company's affiliated operating subsidiaries. The aggregate purchase price for these expansions during the three months ended March 31, 2022 was $ 33,410 . In connection with the new operations obtained 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 two real estate properties acquired during the three months ended March 31, 2022 was $ 17,010 and was classified as asset acquisitions. The remaining aggregate purchase price during the three months ended March 31, 2022 of $ 16,400 is concentrated in goodwill and accordingly, the transactions were classified as business combinations. 17 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED 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. The operations added by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operations, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior operating results are not a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries. The assets added during the three months ended March 31, 2023 were not material operations to the Company individually or in the aggregate. Accordingly, pro forma financial information is not presented. These additions have been included in the March 31, 2023 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the date the Company gained effective control. 9. PROPERTY AND EQUIPMENT - NET Property and equipment, net consists of the following: March 31, 2023 December 31, 2022 Land $ 134,864 $ 134,864 Buildings and improvements 733,119 728,231 Leasehold improvements 155,657 150,903 Equipment 311,250 295,739 Furniture and fixtures 4,641 4,544 Construction in progress 18,993 17,521 1,358,524 1,331,802 Less: accumulated depreciation ( 356,472 ) ( 339,792 ) PROPERTY AND EQUIPMENT, NET $ 1,002,052 $ 992,010 See also Note 6, Standard Bearer and Note 8, Operation Expansions for information on acquisitions during the three months ended March 31, 2023. 10. INTANGIBLE ASSETS - NET Weighted Average Life (Years) March 31, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Intangible Assets Net Net Assembled occupancy 0.3 $ 435 $ ( 435 ) $ — $ 435 $ ( 388 ) $ 47 Facility trade name 30.0 733 ( 421 ) 312 733 ( 415 ) 318 Customer relationships 18.4 4,582 ( 2,535 ) 2,047 4,582 ( 2,482 ) 2,100 TOTAL $ 5,750 $ ( 3,391 ) $ 2,359 $ 5,750 $ ( 3,285 ) $ 2,465 During the three months ended March 31, 2023 and 2022, amortization expense was $ 404 in both periods, of which $ 298 and $ 289 was related to the amortization of right-of-use assets, respectively. Estimated amortization expense for each of the years ending December 31 is as follows: Year Amount 2023 (remainder) $ 176 2024 234 2025 234 2026 234 2027 234 2028 234 Thereafter 1,013 $ 2,359 18 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. The Company performs its analysis for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment, in accordance with the provisions of FASB ASC Topic 350, Intangibles—Goodwill and Other (ASC 350). This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a goodwill impairment test by comparing the carrying value of each reporting unit to its respective fair value. The Company determines the estimated fair value of each reporting unit using a discounted cash flow analysis. The fair value of the reporting unit is the implied fair value of goodwill. In the event a reporting unit's carrying value exceeds its fair value, an impairment loss will be recognized. An impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value. The Company anticipates that the majority of goodwill recognized will be fully deductible for tax purposes as of March 31, 2023. There were no activities in goodwill during the three months ended March 31, 2023. 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 March 31, 2023 and December 31, 2022: Skilled Services All Other Total Goodwill $ 67,886 $ 8,983 $ 76,869 Other indefinite-lived intangible assets consist of the following: March 31, 2023 December 31, 2022 Trade name $ 889 $ 889 Medicare and Medicaid licenses 3,083 3,083 TOTAL $ 3,972 $ 3,972 12. RESTRICTED AND OTHER ASSETS Restricted and other assets consist of the following: March 31, 2023 December 31, 2022 Debt issuance costs, net $ 3,548 $ 3,753 Long-term insurance losses recoverable asset 13,765 10,512 Capital improvement reserves with landlords and lenders 6,441 6,446 Deposits with landlords 2,538 2,527 Other 8,051 14,053 RESTRICTED AND OTHER ASSETS $ 34,343 $ 37,291 Included in restricted and other assets as of March 31, 2023 and December 31, 2022 are anticipated insurance recoveries related to the Company's workers' compensation and general and professional liability claims that are recorded on a gross, rather than net, basis. 19 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. OTHER ACCRUED LIABILITIES Other accrued liabilities consists of the following: March 31, 2023 December 31, 2022 Quality assurance fee $ 8,486 $ 7,701 Refunds payable 41,617 40,783 Resident advances 8,142 9,698 Unapplied state relief funds 1,907 1,001 Cash held in trust for patients 6,683 6,400 Dividends payable 3,215 3,201 Property taxes 8,075 10,926 Income tax payable 13,850 — Legal finding accrued 4,620 4,553 Other 14,343 13,046 OTHER ACCRUED LIABILITIES $ 110,938 $ 97,309 Quality assurance fee represents the aggregate of amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds. Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Resident advances occur when the Company receives payments in advance of services provided. Cash held in trust for patients reflects monies received from or on behalf of patients. Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the condensed consolidated balance sheets. 14. INCOME TAXES The Company recorded income tax expense of $ 18,413 and $ 16,138 during the three months ended March 31, 2023 and 2022, respectively, or 23.5 % of earnings before income taxes for the three months ended March 31, 2023, compared to 24.4 % for the three months ended March 31, 2022. The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, offset by non-deductible expenses including non-deductible compensation. The Company is not currently under examination by any major income tax jurisdiction. During 2023, the statutes of limitations will lapse on the Company's 2019 Federal tax year and certain 2018 and 2019 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three months ended March 31, 2023 and 2022. 15. DEBT Debt consists of the following: March 31, 2023 December 31, 2022 Mortgage loans and promissory note $ 155,264 $ 156,271 Less: current maturities ( 3,851 ) ( 3,883 ) Less: debt issuance costs, net ( 3,074 ) ( 3,119 ) LONG-TERM DEBT LESS CURRENT MATURITIES $ 148,339 $ 149,269 20 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Credit Facility with a Lending Consortium Arranged by Truist The Company maintains a revolving credit facility 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. 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 month period is greater than $ 50,000 , then the ratio can be increased at the election of the Company with notice to the administrative agent to 3.50 :1.00 for the first fiscal quarter and the immediately following three fiscal quarters), and (ii) a minimum interest/rent coverage ratio (which cannot be less than 1.50 :1.00). As of March 31, 2023, there was no outstanding debt under the Revolving Credit Facility. The Company was in compliance with all loan covenants as of March 31, 2023. Mortgage Loans and Promissory Note As of March 31, 2023, the Company's operating subsidiaries had $ 155,264 outstanding under the mortgage loans and notes, of which $ 3,851 is classified as short-term and the remaining $ 151,413 is classified as long-term. The Company was in compliance with all loan covenants as of March 31, 2023. As of March 31, 2023, 23 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 152,686 , 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. In addition to the interest rate, the Company incurs other fees for HUD placement, including but not limited to audit fees. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees based on the principal balance on the date of prepayment. For the majority of the loans, during the first three years , the prepayment fee is 10.0 % and is reduced by 3.0 % in the fourth year of the loan, and reduced by 1.0 % per year for years five through ten of the loan. There is no prepayment penalty after year ten . The terms for all the mortgage loans are 25 to 35 years. In addition to the HUD mortgage loans above, the Company has a promissory note that bears a fixed interest rate of 5.3 % per annum and has a term of 12 years. The note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility. Based on Level 2 inputs, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt. Off-Balance Sheet Arrangements As of March 31, 2023, the Company had approximately $ 6,710 of borrowing capacity under the Revolving Credit Facility pledged as collateral to secure outstanding letters of credit. 21 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. OPTIONS AND AWARDS Stock-based compensation expense consists of stock-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ. 2022 Omnibus Incentive Plan (2022 Plan) — The Company has one active stock incentive plan, the 2022 Omnibus Incentive Plan (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 March 31, 2023, the total number of shares available for issuance under the 2022 Plan was 2,429 . The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for stock option awards. Determining the appropriate fair-value model and calculating the fair value of stock option awards at the grant date requires judgment, including estimating stock price volatility, expected option life, and forfeiture rates. The fair-value of the restricted stock awards at the grant date is based on the market price on the grant date, adjusted for forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. Stock Options The Company granted 222 stock options during the three months ended March 31, 2023. The Company used the following assumptions for stock options granted during the three months ended March 31, 2023 and 2022: Grant Year Options Granted Weighted Average Risk-Free Rate Expected Life Weighted Average Volatility Weighted Average Dividend Yield 2023 222 4.1 % 6.3 years 41.6 % 0.2 % 2022 164 1.8 % 6.1 years 42.3 % 0.3 % For the three months ended March 31, 2023 and 2022, the following represents the exercise price and fair value displayed at grant date for stock option grants: Grant Year Granted Weighted Average Exercise Price Weighted Average Fair Value of Options 2023 222 $ 89.84 $ 41.60 2022 164 $ 79.79 $ 33.56 The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the three months ended March 31, 2023 and 2022 and therefore, the intrinsic value was $ 0 at the date of grant. The following table represents the employee stock option activity during the three months ended March 31, 2023: Number of Options Outstanding Weighted Average Exercise Price Number of Options Vested Weighted Average Exercise Price of Options Vested January 1, 2023 3,833 $ 46.72 2,069 $ 28.87 Granted 222 89.84 — — Forfeited ( 19 ) 61.44 — — Exercised ( 145 ) 18.26 — — March 31, 2023 3,891 $ 50.17 2,058 $ 31.41 22 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following summary information reflects stock options outstanding, vested and related details as of March 31, 2023: Stock Options Outstanding Stock Options Vested Number Outstanding Black-Scholes Fair Value Remaining Contractual Life (Years) Vested and Exercisable Year of Grant Exercise Price 2013 $ 6.76 - $ 9.74 43 $ 193 0 43 2014 8.94 - 16.05 335 1,617 1 335 2015 18.20 - 21.39 200 1,556 2 200 2016 15.93 - 16.86 184 1,082 3 184 2017 15.80 - 19.41 227 1,331 4 227 2018 22.49 - 32.71 439 4,241 5 351 2019 41.07 - 45.76 581 9,126 6 344 2020 44.84 - 59.49 532 10,498 7 214 2021 73.47 - 83.64 558 18,307 8 129 2022 79.79 - 94.88 570 21,580 9 31 2023 $ 89.83 - $ 89.86 222 9,779 10 — TOTAL 3,891 $ 79,310 2,058 The aggregate intrinsic value of options outstanding, vested and expected to vest as of March 31, 2023 and December 31, 2022 is as follows: Options March 31, 2023 December 31, 2022 Outstanding $ 176,518 $ 183,593 Vested 131,960 136,000 Expected to vest 40,631 43,232 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 three months ended March 31, 2023 and 2022 was $ 5,337 and $ 6,351 , respectively. The total intrinsic value of options exercised during the three months ended March 31, 2023 and 2022 was $ 10,950 and $ 9,502 , respectively. Restricted Stock Awards The Company granted 105 and 112 restricted stock awards during the three months ended March 31, 2023 and 2022 , respectively. All awards were granted at an issue price of $ 0 and generally vest over five years . The fair value per share of restricted awards granted during the three months ended March 31, 2023 and 2022 ranged from $ 89.83 to $ 94.63 and $ 73.17 to $ 79.79 , respectively. The fair value per share includes quarterly stock awards to non-employee directors. A summary of the status of the Company's non-vested restricted stock awards as of March 31, 2023 and changes during the three months ended March 31, 2023 is presented below: Non-Vested Restricted Awards Weighted Average Grant Date Fair Value Nonvested at January 1, 2023 487 $ 64.92 Granted 105 90.08 Vested ( 95 ) 78.78 Forfeited ( 3 ) 62.92 Nonvested at March 31, 2023 494 $ 67.68 23 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) During the three months ended March 31, 2023, the Company granted 4 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 $ 94.63 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 in 2019 were granted shares of restricted stock upon successful completion of the spin-off transaction. The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock. The shares are vested over five years at 20 % per year on the anniversary of the grant date. If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or not yet vested shall be entirely forfeited. The total stock-based compensation related to the 2019 LTI Plan was approximately $ 191 and $ 195 for the three months ended March 31, 2023 and 2022, respectively. Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three months ended March 31, 2023 and 2022 was as follows: Three Months Ended March 31, 2023 2022 Stock-based compensation expense related to stock options $ 3,425 $ 2,520 Stock-based compensation expense related to restricted stock awards 2,728 2,302 Stock-based compensation expense related to stock options and restricted stock awards to non-employee directors 420 345 TOTAL $ 6,573 $ 5,167 In future periods, the Company expects to recognize approximately $ 48,755 and $ 30,109 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2023. Future stock-based compensation expense will be recognized over 3.7 and 3.4 weighted average years for unvested options and restricted stock awards, respectively. There were 1,833 unvested and outstanding options as of March 31, 2023, of which 1,729 shares are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest as of March 31, 2023 was 6.1 years. 17. LEASES The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 97 affiliated skilled nursing and senior living facilities used in the Company’s operations, 96 of which are under nine “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 13 to 20 years. At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the 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. The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property. 24 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero ) or (2) 2.5 %. In addition to rent, the Company is required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. The terms and conditions of the one stand-alone lease are substantially the same as those for the master leases described above. Total rent expense under the Master Leases was approximately $ 16,283 and $ 15,645 for the three months ended March 31, 2023 and 2022, respectively. Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include certain reporting, legal and authorization requirements. The Company is in compliance with requirements of the Master Leases as of March 31, 2023. In connection with the spin-off transaction that occurred 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 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, inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 46,761 and $ 35,785 for the three months ended March 31, 2023 and 2022, respectively. Seventy-eight of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under 12 separate master lease arrangements. During the three months ended March 31, 2023, the Company expanded its operations through two separate master lease arrangements for 20 stand-alone skilled nursing operations, of which 17 are operated by the Company's affiliated operating subsidiaries and the remaining three are subleased to a third-party operator. These two master leases increased the lease liabilities and right-of-use assets by $ 325,369 to reflect the new lease obligations and have initial lease terms of 18 and 20 years. Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The components of operating lease expense are as follows: Three Months Ended March 31, 2023 2022 Rent - cost of services (1) $ 46,637 $ 35,762 General and administrative expense 124 23 Depreciation and amortization (2) 298 289 Variable lease costs (3) 4,832 5,363 $ 51,891 $ 41,437 (1) Rent- cost of services includes deferred rent expense adjustments of $ 263 and $ 124 for the three months ended March 31, 2023 and 2022, respectively. Additionally, rent - cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 2,060 and $ 937 for the three months ended March 31, 2023 and 2022, respectively. (2) Depreciation and amortization is related to the amortization of favorable and direct lease costs. (3) Variable lease costs, including property taxes and insurance, are classified in cost of services in the Company's condensed consolidated statements of income. 25 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Future minimum lease payments for all leases as of March 31, 2023 are as follows: Year Amount 2023 (remainder) $ 141,572 2024 188,863 2025 188,825 2026 188,735 2027 188,219 2028 186,975 Thereafter 1,693,094 TOTAL LEASE PAYMENTS 2,776,283 Less: present value adjustment ( 1,021,877 ) PRESENT VALUE OF TOTAL LEASE LIABILITIES 1,754,406 Less: current lease liabilities ( 77,419 ) LONG-TERM OPERATING LEASE LIABILITIES $ 1,676,987 Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of March 31, 2023, the weighted average remaining lease term is 15.5 years and the weighted average discount rate used to determine the operating lease liabilities is 6.5 %. Lessor Activities In 2019, Ensign affiliates retained ownership of the real estate at 29 senior living operations that were contributed to Pennant in the spin-off transaction. As of March 31, 2023, 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: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties. The initial terms range between 14 to 16 years. During the three months ended March 31, 2023, the Company entered into a sublease agreement for three stand-alone skilled nursing operations with a third-party operator with an initial lease term of 18 years. Total rental income from all third-party sources for the three months ended March 31, 2023 and 2022 is as follows: Three Months Ended March 31, 2023 2022 Pennant (1) $ 3,742 $ 3,815 Other third-party 1,181 474 TOTAL $ 4,923 $ 4,289 (1) Pennant rental income includes variable rent such as property taxes of $ 325 and $ 330 during the three months ended March 31, 2023 and 2022, respectively. In addition, the number of senior living operations leased to and operated by Pennant during the three months ended March 31, 2023 and 2022 was 29 and 32 , respectively. 26 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Future annual rental income for all leases as of March 31, 2023 were as follows: Year Amount (1) 2023 (remainder) $ 15,543 2024 20,158 2025 19,700 2026 19,468 2027 19,442 2028 19,417 Thereafter 115,363 TOTAL $ 229,091 (1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of March 31, 2023 . 18. DEFINED CONTRIBUTION PLANS 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 has a non-qualified deferred compensation plan (the DCP), whereby certain highly compensated employees who are otherwise ineligible to participate in the Company's 401(k) plan, may defer the receipt of a portion of their base compensation and, for certain employees, up to 100 % of their eligible bonuses. Additionally, the DCP 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 fund savings plans of this nature. The Company paid for related administrative costs, which were not significant during three months ended March 31, 2023 and 2022. As of the three months ended March 31, 2023 and 2022, the Company accrued $ 37,613 and $ 27,980 , 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 investment funds that shadow the investment allocations specified by participants in the deferred compensation plan. Refer to Note 5, Fair Value Measurements for more information on the funds. For the three months ended March 31, 2023, the Company recorded a gain on the investment acquired in connection with its deferred compensation plan of $ 1,239 , which is included in other income (expense), net. During the same period, the Company recorded an offsetting expense of $ 1,280 , which is allocated between cost of services and general and administrative expenses. For the three months ended March 31, 2022, the Company recorded a loss on the investment acquired in connection with its DCP of $ 1,202 , which is included in other income (expense), net. During the same periods, the Company recorded an offsetting reduction in expense of $ 1,211 , which is allocated between cost of services and general and administrative expenses. 19. COMMITMENTS AND CONTINGENCIES Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to review and interpretation. Compliance with such laws and regulations is evaluated regularly, the results of which can be subject to future governmental review and interpretation, and can include significant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is monitoring performed by the Office of Civil Rights which covers the Health Insurance Portability and Accountability Act of 1996, the terms of which require healthcare providers (among other things) to safeguard the privacy and security of certain patient protected health information. Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company. 27 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED 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 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. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s condensed consolidated balance sheets for any of the periods presented. In connection with the spin-off transaction 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. U.S. Department of Justice Civil Investigative Demand — On May 31, 2018, the Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it was investigating whether there had been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to relationships between certain of the Company’s independently operated skilled nursing facilities and persons who serve or have served as medical directors, advisory board participants or other potential referral sources. As a general matter, the Company’s independent operating entities have established and maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. The Company fully cooperated with the U.S. Department of Justice and promptly responded to its requests for information; in April 2020, the Company was advised that the U.S. Department of Justice declined to intervene in any subsequent action filed by a relator in connection with the subject matter of this investigation. U.S. House of Representatives Select Subcommittee Request — In 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis launched a nation-wide investigation into the COVID-19 pandemic, which included the impact of the coronavirus on residents and employees in nursing homes. In June 2020, the Company received a document and information request from the House Select Subcommittee in connection with its investigation. The Company has cooperated in responding to this inquiry. 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. The Company, its independent operating subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. In addition, the Company, its independent operating subsidiaries, and others in the industry are subject to claims and lawsuits in connection with COVID-19 and a facility's preparation for and/or response to COVID-19. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. 28 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED 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. A violation may provide the basis for exclusion from Federally-funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial performance. Under the qui tam or "whistleblower" provisions of the False Claims Act, a private individual with knowledge of fraud or potential fraud may bring a claim on behalf of the Federal Government and receive a percentage of the Federal Government's recovery. Due to these whistleblower incentives, qui tam lawsuits have become more frequent. For example, and despite the decision of the U.S. Department of Justice to decline to participate in litigation based on the subject matter of its previously issued Civil Investigative Demand, the involved qui tam relator has continued on with the lawsuit and is pursuing claims that the Company and certain of its independent operating subsidiaries have allegedly violated the False Claims Act and/or the Anti-Kickback Statute (AKS). In addition to the Federal False Claims Act, some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. Further, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company and its independent operating subsidiaries could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which its independent operating subsidiaries do business. In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) which made significant changes to the Federal False Claims Act and expanded the types of activities subject to prosecution and whistleblower liability. Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any government overpayment. The government can argue, therefore, that a Federal False Claims Act violation can occur without any affirmative fraudulent action or statement, as long as the action or statement is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents. Thus, an employment relationship is generally not required in order to qualify for protection against retaliation for whistleblowing. Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company's independent operating subsidiaries are routinely subjected to varying types of claims, including class action "staffing" suits where the allegation is understaffing at the facility level. These class-action “staffing” suits have the potential to result in large jury verdicts and settlements, and may result in significant legal costs. The Company expects the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims. While the Company has been able to settle these claims without an ongoing material adverse effect on its business, future claims could be brought that may materially affect its business, financial condition and results of operations. 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 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. 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. 29 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company and its independent subsidiaries are also subject to requests for information and investigations by other State and Federal governmental entities (e.g., offices of the attorney general and offices of the inspector general). The Company cannot predict or provide any assurance as to the possible outcome of any inquiry, investigation or litigation. If any such inquiry, investigation or litigation were to proceed, and the Company and its independent operating subsidiaries are subjected to, alleged to be liable for, or agree to a settlement of, claims or obligations under Federal Medicare statutes, the Federal False Claims Act, or similar state and federal statutes and related regulations, or if the Company or its independent operating subsidiaries are alleged or found to be liable on theories of general or professional negligence or wage and hour violations, the Company's business, financial condition and results of operations and cash flows could be materially and adversely affected and its stock price could be adversely impacted. Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged violations, and may also include the assumption of specific procedural and financial obligations by the Company or its independent operating subsidiaries under a corporate integrity agreement and/or other such arrangement. Medicare Revenue Recoupments — The Company's independent operating entities are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors (RAC), Program Safeguard Contractors, and Medicaid Integrity Contractors programs (collectively referred to as Reviews). For several months during the COVID-19 pandemic, the Centers for Medicare and Medicaid Services (CMS) suspended its Targeted Probe and Educate Program. Beginning in August 2020, CMS resumed Targeted Probe and Educate Program activity. If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an extrapolation of the identified error rate to billings in the same time period. The Company anticipates that these Reviews could increase in frequency in the future. As of March 31, 2023 and through the filing date of this report, 17 of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process. Concentrations Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s receivables from Medicare and Medicaid payor programs accounted for 54.7 % and 56.3 % of its total accounts receivable as of March 31, 2023 and December 31, 2022, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.3 % and 73.4 % of the Company's revenue for the three months ended March 31, 2023 and 2022, respectively. Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250. In addition, the Company has uninsured bank deposits with a financial institution outside the U.S. As of March 31, 2023, the Company's uninsured cash deposits are not material. All uninsured bank deposits are held at high quality credit institutions. 20. COMMON STOCK REPURCHASE PROGRAM 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. The share repurchase program does not obligate the Company to acquire any specific number of shares. The Company did not purchase any shares pursuant to this stock repurchase program in the three months ended March 31, 2023. 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. The Company did not purchase any shares pursuant to this stock repurchase program in the three months ended March 31, 2022. In 2022, this repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect. 30 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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. The Company repurchased 133 shares of its common stock for $ 9,882 pursuant to this stock repurchase program during the three months ended March 31, 2022. In 2022, this repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.