The Ensign Group, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2023, compared with the same period in 2022. Ensign is a holding company whose subsidiaries provide skilled nursing, senior living and related services and own or lease healthcare properties. At quarter-end, subsidiaries operated 290 facilities, with approximately 29,915 skilled nursing beds and 3,027 senior living units.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $886.8 million | $713.4 million | +24.3% |
| Income from operations | $74.9 million | $69.1 million | +8.3% |
| Net income attributable to Ensign | $59.9 million | $50.3 million | +18.9% |
| Diluted EPS | $1.05 | $0.89 | +18.0% |
| Operating cash flow | $48.3 million | $45.9 million | +$2.5 million |
| Capital expenditures | $26.7 million | $15.8 million | +$10.8 million |
- Operating margin was 8.4%, down from 9.7%; net margin was 6.7%, down from 7.1%. Cost of services rose to 78.5% of revenue from 77.9%, rent expense to 5.3% from 5.0%, and G&A to 5.9% from 5.3%.
- Adjusted EBITDA, a non-GAAP measure, was $99.8 million versus $92.7 million; EBITDA was $91.9 million versus $84.0 million. Standard Bearer FFO was $13.2 million, up 10.6%.
- Cash and cash equivalents were $327.0 million at March 31, 2023, up from $316.3 million at year-end 2022. The company also reported approximately $102.2 million of investments. Current assets were $830.5 million and current liabilities $585.3 million.
- Debt was $155.3 million gross, including $3.9 million current maturities; no borrowings were outstanding under the $600 million revolving facility. Long-term operating lease liabilities were $1.677 billion, with total lease liabilities of $1.754 billion on the balance sheet. Future undiscounted lease payments totaled $2.776 billion.
- Cash flow from investing was negative $36.0 million and financing cash flow was negative $1.7 million; cash increased $10.7 million during the quarter.
Material changes and operating drivers
- Revenue growth reflected higher occupancy and census, acquisitions, and state relief funding. Operations acquired on or after April 1, 2022 contributed $102.5 million of year-over-year revenue growth. Ensign added 19 skilled nursing operations through long-term leases in Q1, adding 1,764 beds; it paid no cash for acquisitions in the quarter.
- Skilled nursing occupancy, based on operational beds, increased to 77.9% from 74.2%. Same-facility occupancy was 78.8%, versus 74.6%. However, skilled mix declined to 32.3% of patient days from 33.7%, and to 52.7% of nursing revenue from 54.3%.
- State relief revenue was $26.4 million versus $17.6 million. Management noted the temporary FMAP increase was expected to phase down during 2023, from 6.2% in Q1 to 5% in Q2, 2.5% in Q3 and 1.5% in Q4; some state relief programs were expected to continue through year-end.
- Service revenue from Medicare and Medicaid represented 73.3% of service revenue, broadly unchanged from 73.4%. The allowance for doubtful accounts increased to $9.6 million from $7.8 million at year-end.
Outlook, risks and unusual items
- No quantitative full-year earnings or revenue guidance is provided. Management said cash, investments, projected operating cash flow and available financing should cover normal operating needs for at least the next 12 months. It budgeted approximately $80 million for 2023 renovation projects.
- Management cited improved occupancy and positive trends in turnover and agency labor in some markets, while also reporting continued hiring and retention pressure, overtime, bonuses and contracted labor costs. Skilled-services cost of services increased 25.6%, faster than skilled-services revenue growth of 23.9%.
- The end of the COVID-19 public health emergency and the FMAP phase-down may affect funding, operations and compliance. Other material risks include potential Medicare and Medicaid rate or policy changes, proposed staffing requirements, regulatory surveys and audits, labor availability, integration of acquired facilities, and long-term lease commitments.
- Healthcare litigation and self-insurance are significant exposures. The company reported $88.8 million of accrued general and professional liability claims and $27.6 million of workers’ compensation liabilities. Management cautioned that actuarial reserve estimates may change materially.
- A DOJ investigation concerning alleged False Claims Act and Anti-Kickback Statute issues resulted in DOJ declining to intervene in April 2020; the related qui tam relator lawsuit continues. Seventeen subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution as of the filing date. The company reported no facilities currently on CMS’s Special Focus Facility list.
- Other income, net was $3.5 million versus a $2.9 million expense in Q1 2022. Deferred-compensation investment gains and related offsetting expense were approximately $1.2 million each in Q1 2023; the filing also identifies a $67,000 legal finding and $460,000 of acquisition-related costs among non-GAAP adjustments. The company reported no long-lived asset impairment in either comparison period.
Investor verification points
- Assess whether occupancy and census gains can continue while skilled mix remains below the prior-year level.
- Track the margin effect of labor costs, acquired operations and lease expense, alongside cash collection and receivables quality.
- Confirm the impact of the FMAP phase-down, Medicaid eligibility renewals and any final CMS reimbursement or staffing rules.
- Monitor developments in the qui tam litigation, the 17 payment reviews and changes in self-insurance reserves.
- Review lease obligations, acquisition pace, renovation spending and the terms and covenant headroom of available credit facilities.