The Ensign Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts below are in millions unless otherwise stated. Ensign provides skilled nursing, senior living, rehabilitation and ancillary services through operating subsidiaries. At quarter-end it operated 259 facilities, with 26,630 operational skilled nursing beds and 3,014 senior living units. It also owned 106 real estate properties.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $770.0 | $668.5 | $2,215.9 | $1,934.3 |
| Income from operations | $74.3 | $66.3 | $221.6 | $194.9 |
| Net income | $56.2 | $48.3 | $164.1 | $148.8 |
| Net income attributable to Ensign | $56.2 | $47.3 | $164.2 | $145.9 |
| Diluted EPS | $0.99 | $0.83 | $2.89 | $2.56 |
| Operating cash flow | — | $222.3 | $204.5 |
- Revenue and earnings: Q3 revenue rose 15.2% year over year, operating income 12.0%, net income 16.3%, and diluted EPS 19.3%. For the nine months, revenue rose 14.6%, operating income 13.7%, and net income 10.3%.
- Margins: Q3 operating margin was 9.6% versus 9.9% a year earlier; net margin was 7.3% in both periods. Nine-month operating margin was 10.0% in both years; net margin was 7.4% versus 7.6%. Skilled-services cost of services increased as a share of revenue: 78.3% versus 77.2% in Q3 and 77.9% versus 77.1% year to date.
- Cash flow and investment: Nine-month cash from operations was $222.3; investing cash outflow was $143.8, including $59.7 of property and equipment purchases and substantial acquisition and real estate spending. Financing cash outflow was $31.9. Cash ended the period at $308.9, up from $262.2 at year-end 2021.
- Debt and liquidity: Long-term debt, including current maturities, was $154.1 at September 30 (mortgage loans and notes totaled $157.3 before debt issuance costs). The $600 revolving facility had no borrowings outstanding; $6.7 of capacity was pledged for letters of credit. Current assets were $726.8 and current liabilities $567.0. Lease liabilities totaled $1,320.7, with $2,099.1 of undiscounted future lease payments.
- Other indicators: Skilled nursing occupancy was 75.7% in Q3 versus 73.5%; skilled mix by patient days was 31.6% versus 30.5%. Medicare and Medicaid represented 73.7% of Q3 service revenue and 73.5% year to date. Standard Bearer’s nine-month FFO was $36.5, essentially unchanged from $36.4.
Material changes versus prior comparable periods
- Growth reflected improving occupancy, acquisitions and higher revenue across payor categories. Operations acquired on or after October 1, 2021 contributed $41.5 of Q3 revenue and $77.1 for the nine-month period versus the comparable 2021 periods.
- Q3 occupancy rose 2.2 percentage points overall; same-facility occupancy improved 2.4 points. Nine-month overall occupancy increased 2.5 points.
- Staffing constraints and COVID-19 isolation requirements drove higher overtime, benefits, bonuses and contract labor, contributing to the increase in cost of services.
- Nine-month other expense, net increased to $10.0 from $2.9, including a $5.7 loss on deferred-compensation investments, compared with $0.9 of investment income in 2021. The filing reports an offsetting reduction in operating expenses.
- Investing outflows increased substantially, reflecting acquisitions and real estate purchases. The company added 11 stand-alone skilled nursing operations and one campus during the nine months, and acquired real estate for eight skilled nursing facilities.
Outlook, management commentary and risks
- Management said existing cash and investments, projected operating cash flows and available financing should support normal operations for at least the next 12 months. It budgeted approximately $70.0 for 2022 renovations. The filing provides no specific earnings or revenue guidance.
- Management cited continued occupancy recovery, stronger hospital and managed-care relationships, and an acquisition strategy focused on growing operations and real estate. The newly formed Standard Bearer REIT intends to elect REIT tax treatment beginning with 2022.
- COVID-19 continued to affect operations. Nine-month state relief revenue was $63.5, compared with $52.4 in 2021, and management said it offset COVID-related expenses. The public health emergency had been extended through January 11, 2023 as described in the filing.
- Key exposures include dependence on Medicare and Medicaid reimbursement, staffing availability and wage inflation, regulatory changes and surveys, occupancy recovery, acquisition integration, long-term lease obligations and cross-default provisions, and actuarial uncertainty in self-insurance reserves.
- Legal and regulatory matters include a False Claims Act/Anti-Kickback Statute qui tam case continuing after the DOJ declined to intervene; a House subcommittee inquiry with a July 2022 follow-up request; and Medicare reviews scheduled, on appeal or in dispute resolution for 27 operating subsidiaries. The company said outcomes cannot be predicted.
- Other unusual items include $4.2 of nine-month legal-finding expense and a $3.5 gain on asset sales. California legislation will increase certain malpractice noneconomic-damage caps beginning in 2023.
Important facts for investors to verify
- How much reported growth and future earnings depend on state relief funding, acquisitions and continued occupancy improvement.
- Whether wage, contract-labor and other care-delivery cost pressures continue to outpace reimbursement and revenue growth.
- Performance and funding of Standard Bearer, including its planned REIT election, related-party leases and management fees, and the economics of affiliated rent eliminated in consolidation.
- Lease commitments, master-lease cross-default risks, and compliance with debt and lease covenants; the company reported covenant compliance at quarter-end.
- Developments in the qui tam litigation, government inquiries and Medicare reviews, and any resulting liabilities, repayments or operational restrictions.
- Changes in self-insurance estimates, Medicare and Medicaid reimbursement, and staffing or quality requirements that could affect margins and cash flows.