The Ensign Group, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, compared with the first quarter of 2021. Ensign provides skilled nursing, senior living, rehabilitation and ancillary services, and owns and leases healthcare properties through subsidiaries. At quarter-end it operated 250 facilities, with approximately 25,513 operational skilled nursing beds and 2,736 senior living units. Its newly formed Standard Bearer captive REIT held 95 owned properties.
Financial performance and condition
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $713.4 million | $627.3 million | Up 13.7%; service revenue was $709.2 million |
| Income from operations | $69.1 million | $63.7 million | Operating margin 9.7%, versus 10.2% |
| Net income attributable to Ensign | $50.3 million | $49.2 million | Up 2.3% |
| Diluted EPS | $0.89 | $0.86 | Up 3.5% |
| Operating cash flow | $45.9 million | $34.3 million | Up $11.6 million |
| Investing cash flow | $(48.2) million | $(12.2) million | Higher acquisition and capital spending |
| Financing cash flow | $(11.3) million | $(103.1) million | Prior-year outflow included repayment of Medicare advances |
| Cash and cash equivalents | $248.5 million | $262.2 million at Dec. 31, 2021 | Quarterly decrease of $13.7 million |
Margins and operating trends. Cost of services rose to 77.9% of revenue from 76.8%; total expenses were 90.3% of revenue versus 89.8%. The effective tax rate increased to 24.4% from 20.6%. EBITDA was $84.0 million, adjusted EBITDA $92.7 million, and Standard Bearer FFO $11.9 million; these are non-GAAP measures and should be considered alongside GAAP results.
Skilled services revenue grew 14.3%. Skilled nursing occupancy based on operational beds improved to 74.2% from 71.1%, while skilled mix by patient days eased to 33.7% from 34.4%. Management attributed growth to recovering census, acquisitions and state relief payments. State relief revenue was $17.6 million, compared with $16.5 million a year earlier, and was tied to COVID-related expenses.
Liquidity, debt and leases. Current assets were $633.1 million and current liabilities $513.6 million, for working capital of approximately $119.6 million. Reported debt was approximately $155.7 million, excluding operating leases; gross mortgage loans and notes were $159.0 million. There were no borrowings under the revolving credit facility at March 31. Operating lease liabilities totaled $1.265 billion. The company reported compliance with debt covenants. On April 8, 2022, after quarter-end, it increased its revolving facility from $350 million to $600 million and extended maturity to April 8, 2027.
Material changes and notable items
- Revenue increased $86.2 million year over year, including $41.6 million of revenue from operations acquired on or after January 1, 2021.
- Q1 expansions added four stand-alone skilled nursing operations and two senior living operations transferred from Pennant. Aggregate purchase price was $33.4 million, including $17.0 million for real estate and $16.4 million for business combinations.
- Ensign formed Standard Bearer in January 2022, with plans for it to elect REIT tax treatment beginning with tax year 2022. It expects the structure to support real estate acquisitions and growth.
- Operating cash flow improved, but investing outflows increased with acquisitions and property investment. The company repurchased 133,000 shares for $9.9 million under a prior program; a new $20 million repurchase authorization had no Q1 purchases.
- Other expense included a $1.2 million loss on investments linked to the deferred compensation plan, compared with a $0.3 million gain in Q1 2021. Adjusted EBITDA also excludes a $3.4 million legal finding against a non-emergent transportation subsidiary.
Outlook, risks and contingencies
Management gave no numerical earnings or revenue guidance. It said cash, investments, projected operating cash flows and available financing should support normal operations for at least the next 12 months. The company budgeted approximately $70 million for 2022 renovation projects and continued to pursue acquisitions and occupancy recovery. Management noted that COVID-19 variants continued to affect operations, staffing and census; the public health emergency was extended through July 14, 2022. The company received no federal Provider Relief Funds in Q1 2022 and had repaid the Medicare advance payments.
Key exposures include dependence on Medicare and Medicaid, which together accounted for 73.4% of service revenue; reimbursement and regulatory changes; labor availability and wage inflation; and execution risks in acquisitions and occupancy recovery. CMS’s April 2022 proposed FY2023 skilled nursing payment rule included a proposed 4.6% PDPM parity reduction and an estimated 0.7% aggregate net payment decrease. Proposed changes are not final. Ensign also cited potential effects from staffing and quality requirements, COVID-related rules, and the expiration of emergency waivers.
The filing describes professional-liability, employment and other litigation; a continuing qui tam action alleging False Claims Act and Anti-Kickback Statute violations after the DOJ declined to participate; a congressional COVID-19 inquiry; and Medicare reviews involving 19 subsidiaries that were scheduled, on appeal or in dispute resolution. Outcomes cannot be predicted. Self-insurance reserves rely on actuarial estimates and could change materially. The company also disclosed lease guarantees related to Pennant and cross-default risks under certain leases and financing arrangements.
Important facts for investors to verify
- Whether occupancy recovery continues and whether staffing costs can be contained without impairing care or growth.
- How Medicare and Medicaid rate changes, including any final PDPM recalibration, affect reimbursement and margins.
- Acquisition contribution, integration progress and the returns achieved on new operations and Standard Bearer properties.
- Cash conversion and capital allocation relative to acquisitions, the $70 million renovation budget, dividends and repurchases.
- Developments in the cited litigation, government reviews, self-insurance estimates and regulatory requirements.
- Standard Bearer’s REIT election, intercompany leases and financing, and the effects of the expanded $600 million credit facility.