The Ensign Group, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This annual filing reports full-year results; it does not provide a clear standalone fourth-quarter financial summary. Amounts below are in U.S. dollars unless noted.
Business context
Ensign is a holding company whose subsidiaries provide skilled nursing, senior living, rehabilitation and ancillary services, and own and lease healthcare properties. At year-end, the group operated 271 skilled nursing and senior living facilities across 13 states, with 28,130 skilled nursing beds and 3,021 senior living units. Skilled nursing facilities generated approximately 96.1% of revenue.
The business has two reportable segments: Skilled Services and Standard Bearer, its newly formed captive REIT. The filing states that Standard Bearer intends to qualify as a REIT beginning with its 2022 tax year.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $3,025.5 million | $2,627.5 million | +15.1% |
| Operating income | $296.8 million | $260.5 million | +14.0% |
| Operating margin | 9.8% | 9.9% | Down 0.1 percentage point |
| Net income | $224.7 million | $197.7 million | +13.6% |
| Diluted EPS | $3.95 | $3.42 | +15.5% |
| Net cash from operating activities | $272.5 million | $275.7 million | Down $3.2 million |
Net margin was 7.4%, compared with 7.5% in 2021. Revenue growth reflected improved occupancy and acquisitions. Skilled Services revenue rose 15.2% to $2,906.2 million; segment income increased to $408.7 million from $373.6 million. Standard Bearer rental revenue rose 25.5% to $72.9 million, while segment income fell 12.6% to $27.9 million; its FFO was essentially flat at $49.5 million.
Skilled nursing occupancy increased to 75.3% from 72.8%, and patient days rose 11.8%. Skilled mix was 31.8% of nursing days, versus 31.7%, while skilled mix as a share of nursing revenue slipped to 52.0% from 52.3%.
Cost of services increased 16.6% in Skilled Services, faster than segment revenue, and rose to 78.0% of segment revenue from 77.1%. Management cited staffing constraints, overtime, bonuses and contract labor costs, partly offset by non-clinical cost controls. The filing reports $81.8 million of state relief revenue in 2022, compared with $75.2 million in 2021; this funding was recorded in Medicaid revenue and was intended to offset COVID-related expenses.
Cash and cash equivalents were $316.3 million at year-end, with approximately $83.1 million of investments. Long-term debt and notes totaled $156.3 million. The $600 million revolving credit facility had no borrowings outstanding at year-end; $6.7 million of capacity was pledged for letters of credit. Operating lease liabilities were $1.421 billion, with $2.244 billion in undiscounted future lease payments. Cash used in investing activities was $186.2 million, including $87.5 million of capital expenditures and $101.1 million of acquisition spending. Management said available cash, operating cash flow and revolver capacity should cover operating needs for at least the next 12 months.
Material changes and unusual items
- Ensign formed Standard Bearer in January 2022 and acquired ten skilled nursing property interests for $84.7 million. Its real estate portfolio had an estimated fair value of approximately $1.1 billion at year-end. Standard Bearer distributed $30.4 million to shareholders to meet the REIT distribution requirement, of which $30.1 million went to Ensign.
- FY2022 expansion added 23 standalone skilled nursing operations and one campus, as well as five senior living operations transferred from Pennant. Subsequent to year-end, the company added 17 standalone skilled nursing operations under long-term leases.
- The company expanded its revolving facility from $350 million to $600 million, extended maturity to April 2027, and transitioned its reference rate from LIBOR to SOFR.
- Other expense, net increased to $7.7 million from $2.5 million, primarily reflecting a $4.2 million loss on deferred compensation investments, compared with a gain in 2021. This was substantially offset by related expense reductions elsewhere in the income statement.
- The company repurchased $29.9 million of common stock in 2022 and paid $12.2 million of dividends. A separate $20 million repurchase authorization approved in July was unused at year-end.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management emphasized occupancy recovery, acquisition integration, talent development, higher-acuity care, and organic growth. It budgeted approximately $80 million for 2023 renovation projects and said new operations take time to integrate, particularly amid labor pressures.
- Reimbursement and public funding: Medicaid and Medicare represented 73.7% of service revenue. The scheduled phase-down of enhanced federal Medicaid matching funds during 2023, possible Medicaid eligibility redeterminations, and changes to reimbursement rules could affect rates, patient volumes and cash collections.
- Labor and operating costs: Staffing shortages, wage inflation, agency labor and potential staffing requirements may pressure margins. Payroll represented approximately 60% of total expenses.
- Regulatory, billing and litigation exposure: The company reported that 34 operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution. A DOJ investigation concerning alleged False Claims Act and Anti-Kickback Statute issues at certain Southern California facilities remains relevant: DOJ declined to intervene in 2020, but the relator’s lawsuit continues. The filing does not provide a clear estimate of any potential loss from this matter.
- Insurance estimates: General and professional liability reserves were $87.0 million at year-end. Deloitte identified estimation of these self-insurance liabilities as a critical audit matter, reflecting significant actuarial judgment.
- Leases and financing: Long-term lease commitments are substantial, and master leases can include cross-default provisions. The company reported compliance with debt covenants at year-end, but lower occupancy, reimbursement or cash flow could challenge debt and lease coverage.
- REIT and other risks: Standard Bearer’s REIT status depends on continued compliance with complex tax requirements. The filing also cites COVID-19 effects, cyber risk, geographic concentration, liability claims, acquisition integration and potential changes in nursing home oversight.
The independent auditor issued an unqualified opinion on the financial statements and on internal control over financial reporting as of December 31, 2022.
Important facts for investors to verify
- Whether occupancy and patient-day growth continue as recent acquisitions are integrated, and whether staffing costs moderate enough to support margins.
- How the 2023 Medicaid funding phase-down and beneficiary redeterminations affect reimbursement, occupancy and receivable collections.
- Updates on the continuing relator litigation, the 34 Medicare reviews, and any resulting refunds, penalties or reserve changes.
- Whether self-insurance reserves remain adequate as claims develop, and how insurance availability and premiums change.
- Standard Bearer’s REIT qualification, distribution requirements, financing needs and the economics of related-party lease and management arrangements.
- Cash generation relative to acquisition spending, capital expenditures, share repurchases, dividends and substantial lease commitments.