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| | 2,254 | | | 2,237 | | | 3,021 | | | 3,121 | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| 2020 | | 2021 | | 2022 | | 2023 |
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| | 116 | | | 114 | | | 113 | | | 134 | |
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| 33,723 |
The following table sets forth the location of our facilities and the number of operational beds and units located at our skilled nursing, senior living and campus facilities as of December 31, 2023:
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| Facility Counts | | Bed / Unit Counts |
| Skilled Nursing Operations | Senior Living Communities | Campus Operations | Total | | Skilled Nursing Beds | Senior Living Units | Total Beds / Units |
| California | 67 | — | 3 | 70 | | 6,764 | 197 | 6,961 |
| Texas | 77 | 1 | 5 | 83 | | 9,954 | 603 | 10,557 |
| Arizona | 30 | 1 | 5 | 36 | | 4,535 | 731 | 5,266 |
| Wisconsin | 2 | — | — | 2 | | 100 | — | 100 |
| Utah | 18 | 2 | 1 | 21 | | 1,968 | 163 | 2,131 |
| Colorado | 19 | 5 | 1 | 25 | | 1,986 | 723 | 2,709 |
| Washington | 15 | 1 | — | 16 | | 1,413 | 98 | 1,511 |
| Idaho | 11 | — | 1 | 12 | | 1,002 | 21 | 1,023 |
| Nebraska | 4 | 1 | 2 | 7 | | 413 | 341 | 754 |
| Kansas | 1 | — | 7 | 8 | | 615 | 213 | 828 |
| Iowa | 4 | — | 2 | 6 | | 368 | 31 | 399 |
| South Carolina | 9 | — | — | 9 | | 1,126 | — | 1,126 |
| Nevada | 2 | — | — | 2 | | 358 | — | 358 |
| 259 | 11 | 27 | 297 | | 30,602 | 3,121 | 33,723 |
Real Estate Properties — As of December 31, 2023, we owned 113 real estate properties in Arizona, California, Colorado, Idaho, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin, which include 83 of the 297 facilities that we operate and manage. Of our 113 real estate properties, 30 operations are leased to and operated by third-party operators. One senior living facility is located on the same real estate property as a skilled nursing facility that we own and operate. We further own the real estate property of our Service Center's California location and continue to lease a portion of the office space to third-party tenants. Our Standard Bearer segment reflects the results of operations for 108 of the 113 owned real estate properties.
The following table provides summary information regarding the location of our owned real estate properties as of December 31, 2023:
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| Owned and Operated by Ensign(1) | | Owned and Leased to Third-Party Operators(1) | | Service Center | | Total Properties(1) | |
| California | 11 | | 2 | | 1 | | 14 | |
Texas(1) | 22 | | 6 | | — | | 27 | |
| Arizona | 13 | | 1 | | — | | 14 | |
| Wisconsin | 2 | | 19 | | — | | 21 | |
| Utah | 7 | | — | | — | | 7 | |
| Colorado | 8 | | — | | — | | 8 | |
| Washington | 4 | | 1 | | — | | 5 | |
| Idaho | 5 | | — | | — | | 5 | |
| Nebraska | 2 | | — | | — | | 2 | |
| Kansas | 4 | | — | | — | | 4 | |
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| South Carolina | 5 | | — | | — | | 5 | |
| Nevada | — | | 1 | | — | | 1 | |
| 83 | | 30 | | 1 | | 113 | |
(1) One senior living operation in Texas, which is owned by Ensign and leased to a third-party operator, is located on the same real estate property as a skilled nursing facility that we own and operate. In this situation, the senior living operation is included in the total under "Owned and Leased to Third Party Operators" and the skilled nursing operation is included in the total under "Owned and Operated by Ensign", however, the amount reflected under "Total Properties" only recognizes the operation as a single property.
Item 3. LEGAL PROCEEDINGS
Indemnities — From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which we may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from our use of the applicable premises, (ii) operations transfer agreements, in which we agree to indemnify past operators of facilities we acquire against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to our independent subsidiary, (iii) certain lending agreements, under which we may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with our officers, directors and others, under which we may be required to indemnify such persons for liabilities based on the nature of their relationship to us. 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 our 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 our lease guarantees remain in place for a certain period of time following the spin-off. These guarantees could result in significant additional liabilities and obligations for us if Pennant were to default on their obligations under their leases with respect to these properties.
Litigation and 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 with 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.
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 us.
We and our independent subsidiaries are party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of business, including claims that services provided to patients by our independent subsidiaries have resulted in injury or death, and claims related to employment and commercial matters. For example, in a four-week medical negligence trial in the State of Arizona, the jury returned a verdict against one of our independent subsidiaries in late November 2023. We intend to appeal the verdict. We have in the past appealed and have in some circumstances received returned decisions in our favor. Although we intend to vigorously defend against these claims and in general these types of claims and cases, there can be no assurance that the outcomes of these matters will not have a material adverse effect on operational results and financial condition. Additionally, in certain states in which we have or have had independent subsidiaries, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law and/or public policy prohibitions. There can be no assurance that we and or our independent subsidiaries will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.
The skilled nursing and post-acute care industry is heavily regulated. As such, we and our independent subsidiaries are continuously subject to state and federal regulatory scrutiny, supervision and control in the ordinary course of business. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition to being subject to direct regulatory oversight from state and federal agencies, the skilled nursing and post-acute care industry is also subject to regulatory requirements which, if noncompliance is identified, could result in civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement; authorities could also seek the suspension or exclusion of the provider or individual from participation in their programs. We believe that there has been, and will continue to be, an increase in governmental investigations of post-acute providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in civil legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations, and cash flows. Additionally, such proceedings and/or investigation can be a distraction to the business.
For example, 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, we and our independent subsidiaries received a document and information request from the House Select Subcommittee. We and our independent subsidiaries cooperated in responding to this inquiry. In July 2022 and thereafter, we and our independent subsidiaries received follow up requests for additional documents and information. We and our independent subsidiaries responded to these requests and cooperated 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 in connection with their assigned responsibilities. Also, we, on behalf of our independent subsidiaries, received a Civil Investigative Demand (CID) from the U.S. Department of Justice (DOJ) in January of 2024 indicating that the DOJ is investigating the Company to determine whether we have caused the submission of claims to Medicare and Texas Medicaid for services which were unnecessary or otherwise not consistent with existing reimbursement requirements. The CID covers the period from January 1, 2016 to the present. As a general matter, our independent subsidiaries maintain policies and procedures to promote compliance with all applicable Medicare and Medicaid requirements, including, but not limited to those relating to the presentation of claims for reimbursement for services provided. We intend to fully cooperate with the DOJ in response to the CID. However, we cannot predict the outcome of the investigation or its potential impact to the consolidated financial statements.
In addition to the potential lawsuits and claims described above, we and our independent subsidiaries are also subject to potential lawsuits under the FCA 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 our financial performance. In addition, and pursuant to the qui tam or "whistleblower" provisions of the FCA, 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, on May 31, 2018, we, on behalf of our independent subsidiaries, received a CID from the DOJ stating that it was investigating to determine whether there had been a violation of the False Claims Act (FCA) and/or the Anti-Kickback Statute (AKS) with respect to the relationships between certain of our independent subsidiaries and persons who serve or have served as medical directors. We fully cooperated with the DOJ and promptly responded to its requests for information. In April 2020, we were advised that the DOJ declined to intervene in any subsequent action filed in connection with the subject matter of this investigation. Despite the decision of the DOJ to decline to participate in litigation based on the subject matter of its previously issued CID, the involved qui tam relator moved forward with the complaint in December 2020. From that time until December 2023, and notwithstanding our success in early pre-trial motions, we continued to incur legal defense costs and fees, including significant amounts as part of discovery in the fourth quarter of 2023. In early January 2024, we entered into mediation and on January 19, 2024, the parties agreed to settle the civil case for $48.0 million, subject to the review of the DOJ and other relevant government entities. The settlement does not include admissions on the part of the Company or our independent subsidiaries, and we maintain that we have and continue to comply with all applicable State and Federal statutes (including but not limited to the FCA and the AKS).
In addition to the FCA, 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 FCA. As such, we and our independent subsidiaries could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets where our independent subsidiaries do business.
In May 2009, Congress passed the FERA which made significant changes to the FCA 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 an FCA 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 our independent 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. We expect the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims.
We and our independent 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 in connection with the delivery of healthcare and non-healthcare services. These claims include but are not limited to potential claims related to patient care and treatment (professional negligence claims) as well as employment related claims. In addition, we and our independent subsidiaries, and others in the industry, are subject to claims and lawsuits in connection with COVID-19 and facility preparation for and/or response to the COVID-19 pandemic. While we have been able to settle or otherwise resolve many of these types of claims without an ongoing material adverse effect on our business, a significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be successful in their prosecution of remaining or future claims, could materially adversely affect our business, financial condition, results of operations and cash flows. In addition, these claims could impact our ability to procure insurance to cover our exposure related to the various services provided by our independent subsidiaries to their residents, customers and patients.
Claims and suits, including class actions, continue to be filed against our independent subsidiaries and other companies in the post-acute care industry. We and our independent subsidiaries have been subjected to, and/or are currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour law as related to the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and other such similar causes of action. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business, cash flows, financial condition or results of operations.
Medicare Revenue Recoupments — We and our independent subsidiaries are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments resulting from reviews conducted via RAC, Program Safeguard Contractors, and Medicaid Integrity Contractors (collectively referred to as Reviews). For several months during the COVID-19 pandemic, CMS suspended its Targeted Probe and Educate (TPE) Program. Beginning in August 2020, CMS resumed TPE 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. We anticipate that these Reviews could increase in frequency in the future. As of December 31, 2023, and through the filing date of this report, 40 of our independent subsidiaries had Reviews scheduled or in process.
In June 2023, CMS announced a new nationwide audit, the “SNF 5-Claim Probe & Educate Review”, in which the Medicare Administrative Contractors will review five claims from each SNF to check for compliance. In implementing this SNF 5-Claim Probe & Educate Review, CMS acknowledged that the increase in observed improper payments from 2021 to 2022 may have arisen from a “misunderstanding” by SNFs about how to appropriately bill for claims of service after October 1, 2019. All facilities that are not undergoing TPE reviews, or have not recently passed a TPE review, will be subject to the nationwide audit. MACs will complete only one round of probe-and-educate for each SNF, rather than the three rounds that typically occur in the TPE Program. Additionally, CMS’s education for each SNF will be individualized and based on observed claim review errors, with rationales for denial explained to the SNF on a claim-by-claim basis. This program will apply only to claims submitted after October 1, 2019, and will exclude claims containing a COVID-19 diagnosis.
Item 4. MINE SAFETY DISCLOSURES
None.
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been traded under the symbol “ENSG” on the NASDAQ Global Select Market since our initial public offering on November 8, 2007. Prior to that time, there was no public market for our common stock. As of January 29, 2024, there were approximately 315 holders of record of our common stock.
Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act or the Exchange Act that might incorporate future filings, including the Annual Report on Form 10-K, in whole or in part, the Stock Performance Graph and supporting data which follows shall not be deemed to be incorporated by reference into any such filings except to the extent that we specifically incorporate any such information into any such future filings.
The graph below shows the cumulative total stockholder return of investment of $100 (and the reinvestment of any dividends thereafter) on December 31, 2018 in (i) our common stock, (ii) the Skilled Nursing Facilities Peer Group 1 and (iii) the NASDAQ Market Index. Our stock price performance shown in the graph below is not indicative of future stock price performance.
Since our inception in 1999, we completed the spin-off of two independent publicly traded companies. On June 1, 2014, Ensign completed the spin-off of CareTrust REIT, Inc. (CareTrust) into an independent publicly traded company. On October 1, 2019, Ensign completed the spin-off of The Pennant Group, Inc. (Pennant) with the pro rata distribution of 1.18 shares of Pennant’s common stock for every share of Ensign’s common stock to our stockholders, pursuant to which Pennant became an independent company. Pennant's stock traded at $6.15 at opening price on the first day of trading and closed at $15.09. Ensign's stock price was reduced by the same value on the same day. For the purpose of this graph, the effect of the final separation of Pennant is reflected in the cumulative total return of Ensign Common Stock as a reinvested dividend.
COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN*
Among Ensign Group, the NASDAQ Composite Index and Our Peer Group
December 2023
*Assumes $100 invested on December 31, 2018 in stock in index, including reinvestment of dividends.
Fiscal year ended December 31.
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| | December 31, |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
The Ensign Group, Inc.(2) | | $ | 100.00 | | | $ | 127.85 | | | $ | 206.31 | | | $ | 238.12 | | | $ | 268.99 | | | $ | 319.74 | |
| NASDAQ Market Index | | 100.00 | | | 136.69 | | | 198.10 | | | 242.03 | | | 163.28 | | | 236.17 | |
Peer Group(1) | | 100.00 | | | 123.99 | | | 122.37 | | | 128.11 | | | 108.87 | | | 141.47 | |
(1) The current composition of our Peer Group is as follows: Amedysis, Inc., CareTrust REIT Inc., Encompass Healthcare Corp., LTC Properties, Inc., National Healthcare Corporation, National Health Investors, Inc., Omega Healthcare Investors, Inc., Select Medical Holdings Corp. and Welltower Inc.
(2) The value displayed only incorporates the value of The Ensign Group, Inc. stock and does not incorporate the value shareholders received in connection with our spin-off of The Pennant Group, Inc.
Dividend Policy
We do not have a formal dividend policy, but we currently intend to continue to pay regular quarterly dividends to the holders of our common stock. We have been a dividend-paying company since 2002 and have increased our dividend every year for the last 21 years.
Issuer Repurchases of Equity Securities
Stock Repurchase Programs — On August 29, 2023, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from September 1, 2023. Under this program, we are authorized to repurchase our 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. We did not purchase any shares pursuant to this stock repurchase program during the year ended December 31, 2023.
Previously on July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from August 2, 2022. Under this program, we were authorized to repurchase our 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 us to acquire any specific number of shares. The stock repurchase program expired on August 2, 2023 and is no longer in effect. We did not purchase any shares pursuant to this stock repurchase program.
Item 6. [RESERVED]
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K. See Part I. Item 1A. Risk Factors and Cautionary Note Regarding Forward-Looking Statements.
For discussion of 2021 items and year-over-year comparisons between 2022 and 2021 that are not included in this 2023 Form 10-K, refer to “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” found in our Form 10-K for the year ended December 31, 2022, that was filed with the Securities and Exchange Commission on February 2, 2023.
Overview
We are a provider of health care services across the post-acute care continuum. We engage in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. Our independent subsidiaries, each of which strive to be the operation of choice in the community they serve, provide a broad spectrum of services. As of December 31, 2023, we offered skilled nursing, senior living and rehabilitative care services through 297 skilled nursing and senior living facilities. Our real estate portfolio includes 113 owned real estate properties, which includes 83 facilities operated and managed by us, 30 operations leased to and operated by third-party operators and the Service Center location. Of the 30 real estate operations leased to third-party operators, one senior living facility is located on the same real estate property as a skilled nursing facility that we own and operate.
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Segments We have 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 select properties owned by us through our captive REIT and leased to skilled nursing and senior living operations, including our own independent subsidiaries and third-party operators.
We also reported an “all other” category that includes operating results from our senior living operations, mobile diagnostics, transportation, other real estate and other ancillary operations. These businesses are neither significant individually, nor in aggregate and therefore do not constitute a reportable segment. Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level.
Revenue Sources
Skilled Services — Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare payors. We believe that our skilled mix, which we define as the number of days Medicare, managed care and other skilled patients are receiving services at our skilled nursing operations divided by the total number of days patients are receiving services at our skilled nursing operations, from all payor sources (less days from senior living services) for any given period, is an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who are reimbursed by Medicare, managed care and other skilled payors, for whom we receive higher reimbursement rates.
We participate in supplemental payment programs and quality improvement programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts. Numerous independent subsidiaries entered into transactions with various hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts. Each affected independent subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.
Standard Bearer — We generate rental revenue primarily by leasing post-acute care properties that we acquired to healthcare operators under triple-net lease arrangements, whereby the tenants are solely responsible for the costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions. As of December 31, 2023, our real estate portfolio within Standard Bearer is comprised of 108 real estate properties. Of these properties, 79 are leased to our independent subsidiaries and 30 are leased to facilities wholly-owned and managed by third-party operators. During the year ended December 31, 2023, we generated rental revenues of $82.5 million, of which $66.7 million, was derived from our independent subsidiaries' operators and therefore eliminated in consolidation.
Other — Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid payors or through other state-specific programs. In addition, we hold majority membership interests in certain of our other ancillary operations. Payment for these services varies and is based upon the service provided. The payment is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk.
Primary Components of Expense
Cost of Services (exclusive of rent and depreciation and amortization shown separately) — Our cost of services represents the costs of operating our independent subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients. Cost of services also includes the cost of general and professional liability insurance, rent expenses related to leasing our operational facilities that are not included in facility rent - cost of services, and other general cost of services with respect to our operations.
Facility Rent - Cost of Services — Rent - cost of services consists solely of base minimum rent amounts payable under lease agreements to third-party real estate owners. Our independent subsidiaries lease and operate but do not own the underlying real estate and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements. Expenses related to leasing our operations are included in cost of services.
General and Administrative Expense — General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees), litigation expense related to specific proceedings that are outside the ordinary course of business, costs relating to our information systems and stock-based compensation related to our Service Center employees.
Depreciation and Amortization — Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The following is a summary of the depreciable lives of our depreciable assets:
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| Buildings and improvements | Minimum of three years to a maximum of 59 years, generally 45 years |
| Leasehold improvements | Shorter of the lease term or estimated useful life, generally 5 to 15 years |
| Furniture and equipment | 3 to 10 years |
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Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2, Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.
Variable consideration within revenue recognition — Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. We determine the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration. We use 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 the 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 our estimates, we adjust these estimates, which would affect net service revenue in the period such variances become known.
Self-insurance for general and professional liability — The self-insured retention and deductible limits for general and professional liability for all states are self-insured through our wholly-owned captive insurance subsidiary (the Captive Insurance), the related assets and liabilities of which are included in the accompanying consolidated balance sheets. Our general and professional liability as of the year ended December 31, 2023 and 2022 was $117.7 million and $87.0 million, respectively.
Our policy is to accrue amounts equal to the actuarially 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. We develop information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluate the estimates for claim loss exposure on a quarterly basis. We use actuarial valuations to estimate the liability based on historical experience and industry information.
RESULTS OF OPERATIONS
We believe we exist to dignify and transform post-acute care. We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations. Our results serve as a strong indicator that our strategy is working and our transformation is underway. Over the last five years, our total revenue increased by $2.0 billion, or 112.5%, representing a 16.3% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew by $2.56 from 2018 to $3.65 in 2023, representing a 27.4% CAGR.
Our total revenue for the year ended December 31, 2023 increased $703.9 million, or 23.3%, compared to the year ended December 31, 2022. Throughout 2023, we have continued to make progress on targeted initiatives related to increasing occupancy in our facilities, attracting and developing our people and acquiring new skilled nursing operations and integrating them with our proven cultural and operational principals. We continue to experience healthy growth in both revenue and operational earnings.
Our combined Same Facilities and Transitioning Facilities occupancy increased by 3.2% compared to 2022. As our census continues to return to pre-pandemic levels, we anticipate a return to our historical seasonality trends, which typically result in higher occupancy and skilled mix during the first and fourth quarters and softening in the second and third quarters. See Recent Activities for our operational update.
During the year ended December 31, 2023, we added 26 new operations, which included 17 operations in California. These California facilities include a group of highly skilled team members who will further our mission of dignifying long term care. We continue to work diligently with existing and recently acquired operations so that each can reach its full clinical and financial potential.
Our strength remains in our operating model, which empowers each operator to form their own market-specific strategy and adjust to the needs of their local medical communities, including methods for attracting new healthcare professionals into our workforce and retaining and developing existing staff. Despite continued labor pressures, there are positive trends on both turnover and agency usage in some of our markets. During 2023, we added over 5,000 team members, or 18%, to our independent subsidiaries and the Service Center.
The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated:
| | | | | | | | | | | | | | | | |
|
|
| | | | | | | | |
| REVENUE: | | | | | | | | |
| % | | 99.4 | % | |
| | 0.6 | | |
| % | | 100.0 | % | |
| | | | |
| | | | |
| Expenses: | | | | | | | | |
| | 77.8 | | |
| | | | |
| | | | |
| | | | |
| | 5.1 | | |
| | 5.2 | | |
| | 2.1 | | |
| | 90.2 | | |
| | 9.8 | | |
| Other income (expense): | | | | | | | | |
| | (0.3) | | |
| | — | | |
| | (0.3) | | |
| | 9.5 | | |
| | 2.1 | | |
| | | | |
| | | | |
| | 7.4 | | |
| | — | | |
| | | | |
| % | | 7.4 | % | |
| | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | |
|
|
| | | | | | | | |
|
| 464,925 | | | $ | 408,732 | | |
| | 27,871 | | |
| NON-GAAP FINANCIAL MEASURES: | | | | | | | | |
| PERFORMANCE METRICS | | | | | | | | |
| | | | |
| | 314,609 | | |
| | 359,209 | | |
| | | | |
| | | | |
| | 383,570 | | |
| | | | |
| | 49,484 | | |
| | | | | | | | |
| VALUATION METRICS | | | | | | | | |
| 616,854 | | | | |
|
| 2022 |
| | |
|
| 272,762 | | | $ | 289,089 | |
| | |
| | 22,720 | |
| | |
| | (4,380) | |
| | |
| | |
| 365,310 | | | $ | 314,609 | |
(a) Litigation relates to specific proceedings arising outside of the ordinary course of business, which includes the portion attributable to non-controlling interests.
(b) Represents the write-off of deferred financing fees associated with the amendment of the Credit Facility.
(c) Costs incurred to acquire operations that are not capitalizable.
(d) Included in depreciation and amortization are amortization expenses related to patient base intangible assets at newly acquired skilled nursing and senior living facilities.
The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented:
| | | | | | | | | | | | | | | | |
|
| 2022 | |
| | | | | | | | |
|
| 209,850 | | | $ | 224,652 | | |
| | (29) | | |
| | | | |
| | 7,736 | | |
| | 64,437 | | |
| | 62,355 | | |
| | | | |
| | | | |
| 327,303 | | | $ | 359,209 | | |
| | | | | | | | |
| | 22,720 | | |
| | | | |
| | 4,280 | | |
| | (4,380) | | |
| | | | |
| | | | |
| | 669 | | |
| | 1,072 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 419,496 | | | $ | 383,570 | | |
| | 153,049 | | |
| | | | |
| | | | |
| | | | |
| 616,854 | | | | |
| | | | |
| | | | | | | | |
(a) Litigation relates to specific proceedings arising outside of the ordinary course of business, which excludes the portion attributable to non-controlling interests.
(b) Costs incurred to acquire operations that are not capitalizable.
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated.
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| | Year Ended December 31, 2023 |
| | | Skilled Services | | Standard Bearer | | All Other | | Eliminations | | Consolidated |
| Total revenue | | $ | 3,578,855 | | | $ | 82,486 | | | $ | 155,804 | | | $ | (87,790) | | | $ | 3,729,355 | |
Total expenses, including other income (expense), net | | 3,113,930 | | | 53,421 | | | 377,055 | | | (87,790) | | | 3,456,616 | |
| Segment income (loss) | | 464,925 | | | 29,065 | | | (221,251) | | | — | | | 272,739 | |
| | | | | |
Gain on sale of assets and insurance recoveries from real estate, net | | | | | | | | | | 23 | |
| Income before provision for income taxes | | | | | | | | | | $ | 272,762 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| | | Skilled Services | | Standard Bearer | | All Other | | Eliminations | | Consolidated |
| Total revenue | | $ | 2,906,215 | | | $ | 72,937 | | | $ | 122,610 | | | $ | (76,294) | | | $ | 3,025,468 | |
Total expenses, including other income (expense), net | | 2,497,483 | | | 45,066 | | | 273,391 | | | (76,294) | | | 2,739,646 | |
| Segment income (loss) | | 408,732 | | | 27,871 | | | (150,781) | | | — | | | 285,822 | |
Gain on sale of assets and insurance recoveries from real estate, net | | | | | | | | | | 3,267 | |
| Income before provision for income taxes | | | | | | | | | | $ | 289,089 | |
|
Our total revenue increased $703.9 million, or 23.3%, compared to the year ended December 31, 2022. The increase in revenue was primarily driven by an increase in occupancy of 3.2% from our skilled services Same Facilities and Transitioning Facilities coupled with increasing daily revenue rates and the impact of acquisitions. Specifically, our skilled services Recently Acquired Facilities increased total revenue by $450.0 million, when compared to the same period in 2022, with 52.0% of these operations being acquired in 2023. We believe this demonstrates our ability to increase our market share through strategic acquisitions of operations that have higher skilled mix and higher occupancy than our typical acquisitions. These increases are offset by a decrease in state relief revenue of $17.1 million as the end of the PHE created a gradual phase down of the temporary increase in FMAP funding. All state relief revenue is included in Medicaid revenue.
Skilled Services Segment
Revenue
The following table presents the skilled services revenue and key performance metrics by category during the year ended December 31, 2023 and 2022:
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| Year Ended December 31, |
| | 2023 | | 2022 | | Change | | % Change |
| | | | | | | |
| TOTAL FACILITY RESULTS: | (Dollars in thousands) |
| Skilled services revenue | $ | 3,578,855 | | | 2,906,215 | | | $ | 672,640 | | | 23.1 | % |
| Number of facilities at period end | 259 | | | 234 | | | 25 | | | 10.7 | % |
Number of campuses at period end(1) | 27 | | | 26 | | | 1 | | | 3.8 | % |
| Actual patient days | 8,590,995 | | | 7,243,781 | | | 1,347,214 | | | 18.6 | % |
| Occupancy percentage — Operational beds | 78.5 | % | | 75.3 | % | | | | 3.2 | % |
| Skilled mix by nursing days | 30.4 | % | | 31.8 | % | | | | (1.4) | % |
| Skilled mix by nursing revenue | 50.2 | % | | 52.0 | % | | | | (1.8) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2023 | | 2022 | | Change | | % Change |
| | | | | | | |
SAME FACILITY RESULTS:(2) | (Dollars in thousands) |
| Skilled services revenue | $ | 2,771,633 | | | $ | 2,569,807 | | | $ | 201,826 | | | 7.9 | % |
| Number of facilities at period end | 189 | | | 189 | | | — | | | — | % |
Number of campuses at period end(1) | 24 | | | 24 | | | — | | | — | % |
| Actual patient days | 6,563,672 | | | 6,299,331 | | | 264,341 | | | 4.2 | % |
| Occupancy percentage — Operational beds | 79.2 | % | | 76.0 | % | | | | 3.2 | % |
| Skilled mix by nursing days | 31.9 | % | | 33.0 | % | | | | (1.1) | % |
| Skilled mix by nursing revenue | 51.4 | % | | 53.3 | % | | | | (1.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | Change | | % Change |
| | | | | | | |
TRANSITIONING FACILITY RESULTS:(3) | (Dollars in thousands) |
| Skilled services revenue | $ | 251,872 | | | $ | 231,100 | | | $ | 20,772 | | | 9.0 | % |
| Number of facilities at period end | 22 | | | 22 | | | — | | | — | % |
Number of campuses at period end(1) | 1 | | | 1 | | | — | | | — | % |
| Actual patient days | 655,659 | | | 625,085 | | | 30,574 | | | 4.9 | % |
| Occupancy percentage — Operational beds | 76.1 | % | | 72.9 | % | | | | 3.2 | % |
| Skilled mix by nursing days | 21.4 | % | | 23.1 | % | | | | (1.7) | % |
| Skilled mix by nursing revenue | 38.5 | % | | 41.4 | % | | | | (2.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | Change | | % Change |
| | | | | | | |
RECENTLY ACQUIRED FACILITY RESULTS:(4) | (Dollars in thousands) |
| Skilled services revenue | $ | 555,350 | | | $ | 105,308 | | | $ | 450,042 | | | NM |
| Number of facilities at period end | 48 | | | 23 | | | 25 | | | NM |
Number of campuses at period end(1) | 2 | | | 1 | | | 1 | | | NM |
| Actual patient days | 1,371,664 | | | 319,365 | | | 1,052,299 | | | NM |
| Occupancy percentage — Operational beds | 76.8 | % | | 67.9 | % | | | | NM |
| Skilled mix by nursing days | 27.5 | % | | 24.3 | % | | | | NM |
| Skilled mix by nursing revenue | 49.3 | % | | 42.8 | % | | | | NM |
(1)Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment.
(2)Same Facility results represent all facilities purchased prior to January 1, 2020.
(3)Transitioning Facility results represent all facilities purchased from January 1, 2020 to December 31, 2021.
(4)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2022.
Skilled services revenue increased $672.6 million, or 23.1%, compared to the year ended December 31, 2022. The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $315.9 million, or 23.2%, Medicare revenue of $153.6 million, or 18.5%, managed care revenue of $140.4 million, or 26.7% and private revenue of $62.7 million, or 33.1%.
The increase in skilled services revenue was driven by strong performance across our existing skilled services operations as our census continued to recover in 2023, as well as the favorable impact of skilled census from our recent acquisitions. Our consolidated occupancy increased by 3.2% during the year ended December 31, 2023 compared to the same period in 2022.
Revenue in our Same Facilities increased $201.8 million, or 7.9%, compared to the same period in 2022, due to increases in occupancy from both skilled and long-term care patients and revenue per patient day. Our diligent efforts to strengthen our partnerships with various managed care organizations, hospitals and the local communities we operate in, increased our managed care revenue by 14.8%, mainly due to increases in managed care days of 7.2% and revenue per patient day of 5.3%. We continued to see a shift in our patient population from Medicare to managed care as Medicare Advantage enrollment accounts for a larger portion of the overall population. In addition, Medicaid revenue increased by $116.7 million or 9.9%, mainly from the increases in Medicaid days and revenue per patient day.
Revenue generated by our Transitioning Facilities increased $20.8 million, or 9.0%, primarily due to improved occupancy growth and an increase in revenue per patient day. Our Medicaid revenue increased by 10.9%, Managed Care revenue increased by 12.3% and private revenue increased by 18.1%, demonstrating our ability to focus on increasing occupancy across payer types.
Skilled services revenue generated by Recently Acquired Facilities increased by approximately $450.0 million compared to the year ended December 31, 2022. The increases were primarily due to 26 operational expansions in 2023 as well as the full year impact of the 24 operational expansions in 2022.
In the future, if we acquire additional turnaround or start-up operations, we typically expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio. Historically, we have generally experienced lower occupancy rates and lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth. Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are mature and have higher occupancy rates, higher skilled mix days and higher skilled mix revenue than our typical acquisitions.
The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | Same Facility | | Transitioning | | Acquisitions | | Total |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | | | | | |
| SKILLED NURSING AVERAGE DAILY REVENUE RATES |
| Medicare | $ | 722.96 | | | $ | 694.63 | | | $ | 696.37 | | | $ | 668.05 | | | $ | 788.00 | | | $ | 652.15 | | | $ | 733.47 | | | $ | 691.25 | |
| Managed care | 537.29 | | | 510.18 | | | 536.93 | | | 501.73 | | | 555.55 | | | 455.19 | | | 539.25 | | | 508.53 | |
| Other skilled | 598.35 | | | 576.46 | | | 529.08 | | | 530.18 | | | 441.89 | | | 429.84 | | | 575.34 | | | 563.56 | |
| Total skilled revenue | 617.55 | | | 598.14 | | | 615.58 | | | 593.66 | | | 660.87 | | | 521.24 | | | 623.70 | | | 595.26 | |
| Medicaid | 275.82 | | | 259.89 | | | 270.67 | | | 254.08 | | | 256.51 | | | 227.21 | | | 272.14 | | | 257.67 | |
| Private and other payors | 263.81 | | | 250.80 | | | 253.15 | | | 248.63 | | | 263.71 | | | 199.34 | | | 262.93 | | | 248.54 | |
Total skilled nursing revenue | $ | 383.56 | | | $ | 370.57 | | | $ | 342.57 | | | $ | 332.09 | | | $ | 368.46 | | | $ | 296.15 | | | $ | 378.02 | | | $ | 363.97 | |
(1) These rates exclude state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022.
Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 4.1% and 4.2%, respectively, compared to the year ended December 31, 2022. The increase is attributable to the 2.7% and 4.0% net market basket increase that became effective in October 2022 and October 2023, respectively, offset by the phased reinstatement of the sequestration. During the year ended December 31, 2022, Medicare daily rates included three months of sequestration suspension of 1%, three months of sequestration suspension of 2% and six months of no sequestration suspension.
Our average Medicaid rates increased 5.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states. Medicaid rates exclude the amount of state relief revenue we recorded.
Payor Sources as a Percentage of Skilled Nursing Services — We use our skilled mix as a measure of the quality of reimbursements we receive at our independent skilled nursing facilities over various periods.
The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:
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| | Year Ended December 31, |
| | Same Facility | | Transitioning | | Acquisitions | | Total |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | | | | | |
| PERCENTAGE OF SKILLED NURSING REVENUE |
| Medicare | 22.5 | % | | 26.0 | % | | 21.8 | % | | 24.9 | % | | 31.0 | % | | 20.4 | % | | 23.8 | % | | 25.7 | % |
| Managed care | 20.1 | | | 19.2 | | | 12.6 | | | 12.6 | | | 13.3 | | | 9.9 | | | 18.5 | | | 18.3 | |
| Other skilled | 8.8 | | | 8.1 | | | 4.1 | | | 3.9 | | | 5.0 | | | 12.5 | | | 7.9 | | | 8.0 | |
| Skilled mix | 51.4 | | | 53.3 | | | 38.5 | | | 41.4 | | | 49.3 | | | 42.8 | | | 50.2 | | | 52.0 | |
| Private and other payors | 7.5 | | | 7.0 | | | 8.6 | | | 8.1 | | | 8.0 | | | 6.4 | | | 7.6 | | | 7.0 | |
| | | | | | | | | | |
| Medicaid | 41.1 | | | 39.7 | | | 52.9 | | | 50.5 | | | 42.7 | | | 50.8 | | | 42.2 | | | 41.0 | |
| TOTAL SKILLED NURSING | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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| | Year Ended December 31, |
| | Same Facility | | Transitioning | | Acquisitions | | Total |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | | | | | |
| PERCENTAGE OF SKILLED NURSING DAYS |
| Medicare | 11.9 | % | | 13.9 | % | | 10.7 | % | | 12.4 | % | | 14.5 | % | | 9.3 | % | | 12.3 | % | | 13.5 | % |
| Managed care | 14.4 | | | 14.0 | | | 8.0 | | | 8.3 | | | 8.8 | | | 6.4 | | | 13.0 | | | 13.1 | |
| Other skilled | 5.6 | | | 5.1 | | | 2.7 | | | 2.4 | | | 4.2 | | | 8.6 | | | 5.1 | | | 5.2 | |
| Skilled mix | 31.9 | | | 33.0 | | | 21.4 | | | 23.1 | | | 27.5 | | | 24.3 | | | 30.4 | | | 31.8 | |
| Private and other payors | 11.0 | | | 10.4 | | | 11.7 | | | 10.8 | | | 11.1 | | | 9.5 | | | 11.0 | | | 10.3 | |
| | | | | | | | | | |
|
| | | | | | | |
|
| % |
| | | | | | | |
|
|
| | 16.6 | |
| | | | | | | |
Rental revenue — Our rental revenue, including revenue generated from our independent subsidiaries, increased by $9.5 million, or 13.1%, to $82.5 million, compared to the year ended December 31, 2022. The increase in revenue is primarily attributable to five real estate purchases as well as annual rent increases since the year ended December 31, 2022.
FFO — Our FFO increased by $4.8 million, or 9.7%, to $54.3 million, compared to the year ended December 31, 2022. The increase in rental revenue of $9.5 million is offset by increases in interest expense of $4.3 million associated with the intercompany debt arrangements between Standard Bearer and us, as we continue to grow our real estate portfolio.
All Other Revenue
Our other revenue increased by $33.2 million, or 27.1%, to $155.8 million, compared to the year ended December 31, 2022. Other revenue for 2023 includes senior living revenue of $76.4 million, revenue from other ancillary services of $68.3 million and rental income of $11.1 million. The increase in other revenue is primarily attributable to our other ancillary services as well as senior living operations' occupancy starting to rebound from COVID-19.
Consolidated Financial Expenses
Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.2% to 5.3%, primarily due to lease obligations acquired as part of our 22 operational expansions with long-term leases since the year ended December 31, 2022.
General and administrative expense — General and administrative expense increased $104.2 million or 65.6%, to $263.0 million. General and administrative expense as a percentage of revenue increased by 1.9% to 7.1%. This increase was primarily due to increases in litigation expense related to specific proceedings that are outside the ordinary course of business, system implementation costs, bonuses due to enhanced performance and headcount due to acquisition activity. Excluding the litigation expense, general and administrative expense as a percentage of revenue increased by 0.2% to 5.4%.
Depreciation and amortization — Depreciation and amortization expense increased $10.0 million, or 16.1%, to $72.4 million. This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations and capital expenditures. Depreciation and amortization decreased 0.2%, to 1.9%, as a percentage of revenue.
Other income (expense), net — Other income (expense), net as a percentage of revenue increased by 0.8%. Other income primarily includes interest income from our investments offset by interest expense related to our debt. Additionally, our deferred investment program may incur gains or losses depending on market performance. During the year ended December 31, 2023, the deferred compensation investment program had a gain of $4.6 million. During the year ended December 31, 2022, the deferred compensation investment program had a loss of $4.2 million. The offsetting expenses or reduction in expenses are allocated between cost of services and general and administrative expenses.
Provision for income taxes — Our effective tax rate was 23.1% for the year ended December 31, 2023, compared to 22.3% for the same period in 2022. The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses, including non-deductible compensation. See Note 14, Income Taxes, in the Financial Statements for further discussion.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our Credit Facility. Our liquidity as of December 31, 2023 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.
Historically, we have primarily financed the majority of our acquisitions through mortgages on our properties, our Credit Facility and cash generated from operations. Cash paid to fund acquisitions was $69.0 million and $101.1 million for the year ended December 31, 2023 and 2022, respectively. Total capital expenditures for property and equipment were $106.2 million and $87.5 million for the year ended December 31, 2023 and 2022, respectively. We currently have approximately $110.0 million budgeted for renovation projects in 2024. We believe our current cash balances, our cash flow from operations and the amounts available for borrowing under our Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.
We may, in the future, seek to raise additional capital to fund growth, capital renovations, operations and other business activities, but such additional capital may not be available on acceptable terms, on a timely basis, or at all.
Our cash and cash equivalents as of December 31, 2023 consisted of bank term deposits, money market funds and U.S. Treasury bill related investments. In addition, as of December 31, 2023, we held investments of approximately $109.9 million. We believe our investments that were in an unrealized loss position as of December 31, 2023 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.
As mentioned above, our primary source of cash is from our ongoing operations. Our positive cash flows have supported our business and have allowed us to pay regular dividends to our stockholders. We currently anticipate that existing cash and total investments as of December 31, 2023, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.
On August 29, 2023, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from September 1, 2023. Under this program, we are authorized to repurchase our 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 us to acquire any specific number of shares. We did not purchase any shares pursuant to this stock repurchase program during the year ended December 31, 2023.
On July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from August 2, 2022. Under this program, we were authorized to repurchase our 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 did not obligate us to acquire any specific number of shares. The stock repurchase program expired on August 2, 2023 and is no longer in effect. The Company did not purchase any shares pursuant to this stock repurchase program.
The following table presents selected data from our consolidated statement of cash flows for the periods presented:
| | | | | | | | | | | | |
| Year Ended December 31, |
| | 2023 | | 2022 | |
| | | | |
|
| NET CASH PROVIDED BY/(USED IN): | (In thousands) |
| Operating activities | $ | 376,666 | | | $ | 272,513 | | |
| Investing activities | (182,698) | | | (186,182) | | |
| Financing activities | (612) | | | (32,262) | | |
|
| Net increase in cash and cash equivalents | 193,356 | | | 54,069 | | |
| Cash and cash equivalents beginning of period | 316,270 | | | 262,201 | | |
|
|
| Cash and cash equivalents at end of period | $ | 509,626 | | | $ | 316,270 | | |
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.
The $104.2 million increase in cash provided by operating activities for the year ended December 31, 2023 compared to the same period in 2022 was due to cash generated from improved results at our local operations as well as $24.2 million that was paid for deferred social security taxes in 2022, which did not occur in 2023.
Investing Activities
Investing cash flows consist primarily of capital expenditures, investment activities, insurance proceeds and cash used for acquisitions.
The $3.5 million decrease in cash used in investing activities for the year ended December 31, 2023 compared to the same period in 2022 was primarily due to a decrease in cash used for operational expansions of $32.1 million, offset by an increase in cash used for capital expenditures of $18.6 million, an increase in investments of $3.1 million and a decrease of cash proceeds from the sale of fixed assets and insurance proceeds of $7.7 million.
Financing Activities
Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, payment for share repurchases and sale of subsidiary shares.
The $31.7 million decrease in cash used in financing activities for the year ended December 31, 2023 compared to the same period in 2022, was primarily due to $29.9 million of share repurchases as part of our stock repurchase program in 2022.
A discussion of our cash flows for the year ended December 31, 2021 is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 2, 2023.
Material cash requirements from known contractual and other obligations
Total long-term debt obligations outstanding as of the end of each fiscal year were as follows:
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| | December 31, |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
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| | (In thousands) |
| Credit facilities and term loans | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 210,000 | |
Mortgage loans and promissory note | 152,388 | | | 156,271 | | | 159,967 | | | 117,806 | | | 120,350 | |
| TOTAL | $ | 152,388 | | | $ | 156,271 | | | $ | 159,967 | | | $ | 117,806 | | | $ | 330,350 | |
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Significant contractual obligations as of December 31, 2023 were as follows, including the future periods in which payments are expected:
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| | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
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| | | (In thousands) |
| Operating lease obligations | | $ | 191,352 | | | $ | 191,269 | | | $ | 191,058 | | | $ | 190,481 | | | $ | 189,224 | | | $ | 1,722,259 | | | $ | 2,675,643 | |
| Long-term debt obligations | | 3,950 | | | 4,086 | | | 4,227 | | | 3,897 | | | 3,779 | | | 132,449 | | | 152,388 | |
| Interest payments on long-term debt | | 4,623 | | | 4,487 | | | 4,346 | | | 4,207 | | | 4,091 | | | 54,436 | | | 76,190 | |
| TOTAL | | $ | 199,925 | | | $ | 199,842 | | | $ | 199,631 | | | $ | 198,585 | | | $ | 197,094 | | | $ | 1,909,144 | | | $ | 2,904,221 | |
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Not included in the table above are our actuarially determined self-insured general and professional malpractice liability, workers' compensation and medical (including prescription drugs) and dental healthcare obligations, which are broken out between current and long-term liabilities in our financial statements included in this Annual Report on Form 10-K.
As part of the proceeding discussed in Item 3. Legal Proceedings, the parties agreed to settle the litigation for $48.0 million, subject to the review and approval of all parties, including the DOJ and other relevant government entities.
Credit Facility with a Lending Consortium Arranged by Truist
We maintain a revolving credit facility with Truist Securities (Truist) (the Credit Facility) with availability up to $600.0 million in aggregate principal amount. The maturity date of the Credit Facility is April 8, 2027. Borrowings are supported by a lending consortium arranged by Truist. The interest rates applicable to loans under the Credit Facility are, at our 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 Credit Facility). In addition, there is a commitment fee on the unused portion of the commitments that ranges from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.
Mortgage Loans and Promissory Note
As of December 31, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $150.2 million, which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear effective interest rates at a range of 3.1% to 4.2%, including fixed interest rates at a range of 2.4% to 3.3% per annum. In addition to the interest rate, we incur 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 of 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, one of our subsidiaries 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.
Operating Leases
As of December 31, 2023, 214 of our facilities are under long-term lease arrangements, of which 96 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc. (CareTrust). The Master Leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography. Under each master lease, our individual subsidiaries that operate those properties are the tenants and CareTrust's individual subsidiaries that own the properties subject to the Master Leases are the landlords. The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%. At our option, we can extend the Master Leases for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. If we elect to renew the term of a Master Lease, the renewal will be effective as 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 we can exercise starting on December 1, 2024.
We also lease certain facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, we lease certain of our 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.
Eighty of our independent subsidiaries, excluding the subsidiaries that are operated under the Master Leases from CareTrust, are operated under 13 separate master lease arrangements. Under these master leases, a default at a single facility could subject one or more of the other independent subsidiaries 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 our 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 our 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.
Inflation
We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.
Labor, supply expenses and capital expenditures make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk — We are exposed to risks associated with market changes in interest rates through our borrowing arrangements and investments. In particular, our Credit Facility exposes us to variability in interest payments due to changes in SOFR interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our mortgages and promissory note require principal and interest payments through maturity pursuant to amortization schedules.
Our mortgages generally contain provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date. Where prepayment is permitted, we are generally allowed to make prepayments only at a premium which is often designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.
We have a Credit Facility with Truist of up to $600.0 million in aggregate principal amount. We have no outstanding borrowings under our Credit Facility as of December 31, 2023 and through the filing date of this report. In addition, we have outstanding indebtedness under mortgage loans insured with HUD and a promissory note payable to a third party of $152.4 million, all of which are at fixed interest rates.
Our cash and cash equivalents as of December 31, 2023 consisted of bank term deposits, money market funds and U.S. Treasury bill related investments. In addition, as of December 31, 2023, we held investments of approximately $109.9 million. We believe our investments that were in an unrealized loss position as of December 31, 2023 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so. Our market risk exposure is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve principal, while at the same time maximizing the income we receive from our investments without significantly increasing risk. Due to the low risk profile of our investment portfolio, an immediate 10.0% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.
The above only incorporates those exposures that exist as of December 31, 2023 and does not consider those exposures or positions which could arise after that date. If we diversify our investment portfolio into securities and other investment alternatives, we may face increased risk and exposures as a result of interest risk and the securities markets in general.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE ENSIGN GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
The Ensign Group, Inc.
San Juan Capistrano, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Ensign Group Inc. and subsidiaries (the "Company") as of December 31, 2023, and 2022, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 1, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Self-Insurance Liabilities (General and Professional Liability Claims) - Refer to Notes 2 and 19 to the financial statements
Critical Audit Matter Description
The Company's self-insurance liabilities for general and professional liability claims totaled $117.7 million at December 31, 2023. The Company develops information about the size of the ultimate claims based on historical experience, current industry information, and actuarial analysis.
The determination of reserves for general and professional liability claims is highly subjective. Given the significant judgments in estimating the general and professional liability claims, we have determined this to be a critical audit matter. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management estimates of reserves for open claims as well as for claims that are incurred but not reported (IBNR).
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgment regarding the estimation of the reserve for general and professional liability claims included the following, among others:
•We tested the effectiveness of controls over the reserve for general and professional liabilities, including those related to both the determination of reserves for open claims and estimation of the IBNR claims.
•We obtained an understanding of the factors considered and assumptions made by management and its external actuarial specialists in developing the estimate of the general and professional liability reserves, including the sources of data relevant to these factors and assumptions. We tested underlying claims data, including testing the completeness and accuracy of open cases.
•We involved our actuarial specialists to assist in our evaluation of the methodologies applied by management's specialist and to develop an independent range of expected reserves. We compared the recorded reserves to the estimated independent range.
•We performed a retrospective review in which we compared the prior-year recorded amounts for ultimate losses and current liabilities to the subsequent claim emergence.
/s/
February 1, 2024
We have served as the Company's auditor since 1999.
THE ENSIGN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
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| December 31, |
| 2023 | | 2022 |
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| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | | | | $ | | |
Accounts receivable—less allowance for doubtful accounts of $ and $ at December 31, 2023 and 2022, respectively | | | | | |
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| Investments—current | | | | | |
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| Prepaid expenses and other current assets | | | | | |
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| Total current assets | | | | | |
| Property and equipment, net | | | | | |
| Right-of-use assets | | | | | |
| Insurance subsidiary deposits and investments | | | | | |
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| Deferred tax assets | | | | | |
| Restricted and other assets | | | | | |
| Intangible assets, net | | | | | |
| Goodwill | | | | | |
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| TOTAL ASSETS | $ | | | | $ | | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | | | | $ | | |
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| Accrued wages and related liabilities | | | | | |
| Lease liabilities—current | | | | | |
| Accrued self-insurance liabilities—current | | | | | |
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| Other accrued liabilities | | | | | |
| Current maturities of long-term debt | | | | | |
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| Total current liabilities | | | | | |
| Long-term debt—less current maturities | | | | | |
| Long-term lease liabilities—less current portion | | | | | |
| Accrued self-insurance liabilities—less current portion | | | | | |
| Other long-term liabilities | | | | | |
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See accompanying notes to consolidated financial statements.
THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Year Ended December 31, |
| (In thousands) | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | | | | $ | | | | $ | | |
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| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | | | | | | | | |
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| Amortization of deferred financing fees | | | | | | | | |
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| Non-cash leasing arrangement | | | | | | | | |
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| Write-off of deferred financing fees | | | | | | | | |
| Deferred income taxes | () | | | () | | | () | |
| Provision for doubtful accounts | | | | | | | | |
| Stock-based compensation | | | | | | | | |
| Cash received from insurance proceeds | | | | | | | | |
| Gain on sale of assets | () | | | () | | | () | |
(Gain)/loss on insurance claims, legal matters and asset disposals | () | | | | | | () | |
Litigation | | | | | | | | |
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| Change in operating assets and liabilities | | | | | |
| Accounts receivable | () | | | () | | | () | |
| Prepaid income taxes | | | | | | | () | |
| Prepaid expenses and other assets | | | | () | | | () | |
Deferred employer portion of social security taxes (Note 3) | | | | () | | | () | |
| Cash surrender value of life insurance policy premiums | () | | | () | | | () | |
| Deferred compensation liability | | | | | | | | |
| Operating lease obligations | () | | | | | | () | |
| Accounts payable | | | | | | | | |
| Accrued wages and related liabilities | | | | | | | | |
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| Other accrued liabilities | | | | | | | | |
| Accrued self-insurance liabilities | | | | | | | | |
| Other long-term liabilities | () | | | () | | | () | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | $ | | | | $ | | | | $ | | |
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| Cash flows from investing activities: | | | | | |
| Purchase of property and equipment | () | | | () | | | () | |
Cash payments for business acquisitions (Note 7) | | | | () | | | () | |
Cash payments for asset acquisitions (Note 7) | () | | | () | | | () | |
| Escrow deposits | () | | | | | | | |
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| Cash from insurance proceeds | | | | | | | | |
| Cash proceeds from the sale of assets | | | | | | | | |
| Deconsolidation of an ancillary business | | | | | | | () | |
| Cash payments for Medicare and Medicaid licenses | | | | | | | () | |
| Purchases of investments | () | | | () | | | () | |
| Maturities of investments | | | | | | | | |
| Other restricted assets | | | | | | | () | |
NET CASH USED IN INVESTING ACTIVITIES | $ | () | | | $ | () | | | $ | () | |
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| Cash flows from financing activities: | | | | | |
Proceeds from debt (Note 15) | | | | | | | | |
Payments on debt (Note 15) | () | | | () | | | () | |
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| Issuance of common stock upon exercise of options | | | | | | | | |
| Repurchase of shares of common stock to satisfy tax withholding obligations | () | | | () | | | () | |
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Repurchase of shares of common stock (Note 21) | | | | () | | | () | |
| Dividends paid | () | | | () | | | () | |
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Proceeds from sale of subsidiary shares (Note 6) | | | | | | | | |
| Non-controlling interest distribution | () | | | () | | | () | |
| Purchase of non-controlling interest | () | | | () | | | | |
| Payments of deferred financing costs | () | | | () | | | () | |
| Proceeds from CARES Act Provider Relief Fund and Medicare Advance Payment Program (Note 3) | | | | | | | | |
| Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment Program (Note 3) | | | | | | | () | |
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NET CASH USED IN FINANCING ACTIVITIES | $ | () | | | $ | () | | | $ | () | |
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| Cash and cash equivalents beginning of period | | | | | | | | |
| Cash and cash equivalents end of period | $ | | | | $ | | | | $ | | |
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| Year Ended December 31, |
| (In thousands) | 2023 | | 2022 | | 2021 |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | |
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| Cash paid during the period for: | | | | | |
| Interest | $ | | | | $ | | | | $ | | |
| Income taxes | $ | | | | $ | | | | $ | | |
| Lease liabilities | $ | | | | $ | | | | $ | | |
| Non-cash financing and investing activity | | | | | |
| Accrued capital expenditures | $ | | | | $ | | | | $ | | |
| Accrued dividends declared | $ | | | | $ | | | | $ | | |
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| Right-of-use assets obtained in exchange for new and modified operating lease obligations | $ | | | | $ | | | | $ | | |
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See accompanying notes to consolidated financial statements.
THE ENSIGN GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, shares and options in thousands, except per share data)
1.
facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. Subsequent to December 31, 2023, one of the Company's independent subsidiaries expanded its operations into Tennessee. The Company's independent subsidiaries have a collective capacity of approximately operational skilled nursing beds and senior living units. As of December 31, 2023, the Company's independent subsidiaries operated facilities under long-term lease arrangements and had options to purchase of those facilities. The Company's real estate portfolio includes owned real estate properties, which includes facilities operated and managed by the Company's independent subsidiaries, operations leased to and operated by third-party operators, and the Service Center (defined below) location. Of those operations, senior living facility is located on the same real estate property as a skilled nursing facility that an independent subsidiary 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 independent 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 independent 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 REIT structure provides the Company with an efficient vehicle for future acquisitions of properties that could be operated by Ensign's independent subsidiaries or other third parties. Refer to Note 6, Standard Bearer for additional information on Standard Bearer.
Each of the Company's independent subsidiaries are operated by wholly-owned subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this Annual Report are 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.
2.
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| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
See Note 5, Fair Value Measurements for additional information.
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| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.
financing lease that is not material to the consolidated balance sheet. Rights and obligations of these leases are included as right-of-use assets and current and long-term lease liabilities on the Company's 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 utilizes 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 or more and typically include or more options to renew, with renewal terms that generally extend the lease term for an additional ten to 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 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.
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| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
Management has evaluated its long-lived assets and determined there was no impairment during the years ended December 31, 2023, 2022, and 2021.
, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date. Trade names at independent subsidiaries are amortized over years and customer relationships are amortized over a period of up to years.The Company's indefinite-lived intangible assets consist of trade names and 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.
Management has evaluated its goodwill and intangible assets and determined there was no impairment during the years ended December 31, 2023, 2022, and 2021. The Company has recognized cumulative goodwill impairment losses of $, since inception in 1999.
per claim, subject to an additional one-time deductible of $ for the Company's independent subsidiaries in California and a separate, one-time, deductible of $ for the Company's independent subsidiaries not in California. For all independent subsidiaries, except those located in Colorado, the third-party coverage above these limits is $ per claim, $ per operation, with a $ blanket aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, the third-party coverage above these limits is $ per claim and $ per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado. Subsequent to December 31, 2023, the self-insured retention is $ per claim, subject to an additional one-time deductible of $ for the Company's independent subsidiaries in California. For the independent subsidiaries not in California, the self-insured retention is $ per claim, subject to an additional one-time deductible of $. For all independent subsidiaries, except those located in Colorado, the third-party coverage above these limits is $ per claim, $ per operation, with a $ blanket aggregate limit and an additional state-specific aggregate where required by state law.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
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 $ for each covered person for fiscal years 2023 and 2022, respectively, and $ for each covered person for fiscal year 2021.
The Company believes that adequate provision has been made in the 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.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
Comprehensive Income — The Company does not have any components of other comprehensive income recorded within its Financial Statements and, therefore, does not separately present a statement of comprehensive income in its Financial Statements.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
3.
%, % and % for the years ended December 31, 2023, 2022, and 2021, 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 years ended December 31, 2023, 2022, and 2021.
| | | % | | $ | | | | | % | | $ | | | | | % |
| Medicare | | | | | | | | | | | | | | | | | |
| Medicaid — skilled | | | | | | | | | | | | | | | | | |
| Total Medicaid and Medicare | | | | | | | | | | | | | | | | | |
| Managed care | | | | | | | | | | | | | | | | | |
Private and other(2) | | | | | | | | | | | | | | | | | |
| SERVICE REVENUE | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
(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 is $, $ and $ for the years ended December 31, 2023, 2022, and 2021.
State relief funding
The Company received 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.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
Federal relief funding
In prior years, as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act), the Company received cash distributions of relief fund payments (Provider Relief Funds) and funds authorized by U.S. Department of Health and Human Services (HHS) to be used to protect residents of nursing homes and long-term care (LTC) facilities from the impact of COVID-19. During the years ended December 31, 2023 and 2022, the Company did not receive Provider Relief Funds. During the year ended December 31, 2021, the Company received and returned $ in Provider Relief Funds.
In fiscal year 2020, the Company applied for and received $ through the Medicare Accelerated and Advance Payment Program under the CARES Act. The purpose of the program is to assist in providing needed liquidity to care delivery providers. The Company repaid $ of the funds in 2020 and the remaining funds of $ in March 2021.
The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with approximately 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022. The Company recorded $ of deferred payments of social security taxes as a liability during 2020, and paid the first and second half of the payments in the fourth quarters of 2021 and 2022, respectively.
Balance Sheet Impact
Included in the Company’s 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 December 31, 2023 and 2022, or activity during the years ended December 31, 2023, 2022, and 2021.
| | $ | | | | $ | | | | | | | |
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|
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| | | | |
| | | | $ | | | | $ | | |
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|
|
| | | | $ | | | | $ | | |
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|
| | | | | | |
| | | | |
| | | | $ | | | | $ | | |
| | | | |
| | | | | (1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were , and for the years ended December 31, 2023, 2022 and 2021, respectively.
5.
and $ as of December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, the amortized cost basis of the Company's financial assets included in the captive insurance subsidiary's investments are considered to approximate the fair value of these financial assets and are derived using Level 2 inputs.
Also included are contracts insuring the lives of certain employees who are eligible to participate in non-qualified deferred compensation plans that 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 and are held at fair value. As of December 31, 2023, and 2022, the fair value of the investment funds was $ and $, respectively, which are derived using Level 2 inputs.
Additionally, the Company has other investments held at historical cost basis, which are not material, where the fair value is derived using Level 3 inputs. The Company believes its amortized cost basis investments that were in an unrealized loss position as of December 31, 2023 and 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.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
6.
of the Company's owned real estate properties, of which are operated and managed by the Company's independent subsidiaries and are leased to and operated by third-party operators. Of those operations, senior living facility is located on the same real estate property as a skilled nursing facility that an independent subsidiary owns and operates. Standard Bearer elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2022. During the year ended December 31, 2023, Standard Bearer acquired the real estate of stand-alone skilled nursing facilities and campus operations for an aggregate purchase price of $. Of these additions, the skilled nursing facilities and campus operation acquired are operated by the Company's independent subsidiaries and the other campus operation is leased to a third-party operator. During the year ended December 31, 2022, Standard Bearer acquired the real estate of skilled nursing facilities for an aggregate purchase price of $, of which were previously operated and managed by the Company's independent subsidiaries. Refer to Note 7, Operation Expansions, for additional information.
As part of the formation of Standard Bearer, certain of the Company's independent subsidiaries, Standard Bearer and Standard Bearer's independent real estate 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 8, 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 independent subsidiaries and Standard Bearer independent real estate subsidiaries have entered into triple-net master lease agreements (collectively, the Standard Bearer Master Leases). The lease periods range from to years with 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 ) or (2) %. In addition to rent, the independent 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. Rental revenue generated from the Company's independent subsidiaries was $, $, and $ for the years ended December 31, 2023, 2022, and 2021, 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 % of total rental revenue and an incentive management fee that is equal to % of funds from operations (FFO) and is capped at % of total rental revenue, for a total of %. Management fee generated between Standard Bearer and the Service Center for the year ended December 31, 2023 and 2022 was $ and $, respectively. management fees were recorded in 2021, which was prior to the formation of Standard Bearer.
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 Credit Facility to fund acquisitions and working capital needs. The interest rate under the Credit Facility is a base rate plus a margin ranging from % to % per annum or SOFR plus a margin range from % to % 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.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
Also, during the year ended December 31, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $. 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.
stand-alone skilled nursing operations and campus operation. Of these additions, Standard Bearer acquired the real estate of of the stand-alone skilled nursing operations and campus operation, which were leased back to the Company's independent subsidiaries. Refer to Note 6, Standard Bearer, for additional information on the purchase of real estate properties. These new operations added a total of operational skilled nursing beds and operational senior living units to be operated by the Company's independent subsidiaries. The Company also invested in new ancillary services that are complementary to its existing businesses. 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 each prior operator as part of each transaction.
Subsequent to December 31, 2023, the Company expanded its operations through a long-term lease, with the addition of stand-alone skilled nursing operations, totaling operational skilled nursing beds operated by the Company's independent subsidiaries, including one in a new state, Tennessee.
2022 Expansions
During the year ended December 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 stand-alone skilled nursing operations and campus operation. Of these additions, Standard Bearer acquired the real estate of of the stand-alone skilled nursing operations, which were leased back to Ensign's independent subsidiaries. Refer to Note 6, Standard Bearer, for additional information on the purchases of real estate properties. In addition, the Company added senior living operations that were transferred from The Pennant Group, Inc. (Pennant), of which are part of campuses operated by the Company's independent subsidiaries. These new operations added a total of operational skilled nursing beds and operational senior living units to be operated by the Company's independent subsidiaries. The Company also invested in new ancillary services that are complementary to its existing businesses.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
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 each prior operator as part of each transaction.
2021 Acquisitions
During the year ended December 31, 2021, the Company expanded its operations through a combination of long-term leases and a real estate purchase, with the addition of stand-alone skilled nursing operations and real estate purchases, of which the Company previously operated and continues to operate. The remaining real estate purchase is operated by Pennant. These new operations added a total of operational skilled nursing beds operated by the Company's independent subsidiaries.
Of the new operations acquired during the year ended December 31, 2021, $ was concentrated in goodwill and accordingly, the transactions were classified as business combinations.
In connection with the new operations made 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.
| | $ | | | | $ | | |
| Building and improvements | | | | | | | | |
| Equipment, furniture, and fixtures | | | | | | | | |
| Assembled occupancy | | | | | | | | |
|
| Goodwill | | | | | | | | |
|
| Leased asset | | | | | | | | |
| Other indefinite-lived intangible assets | | | | | | | | |
|
| TOTAL ACQUISITIONS | $ | | | | $ | | | | $ | | |
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 independent subsidiaries. The assets added during the year ended December 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 consolidated balance sheets of the Company, and the operating results have been included in the consolidated statements of income of the Company since the date the Company gained effective control.
8.
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.
As of December 31, 2023, the skilled services segment includes skilled nursing operations and campus operations that provide both skilled nursing and rehabilitative care services and senior living services. The Company's Standard Bearer segment consists of owned real estate properties.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
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.
| | $ | | | | $ | | | | $ | () | | | $ | | | Rental revenue(3) | | | | | | | | | | | () | | | | |
| TOTAL REVENUE | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
| Segment income (loss) | | | | | | | | () | | | | | | | |
| | | | | |
Gain on sale of assets and insurance recoveries from real estate, net | | | | | | | | | | | |
| Income before provision for income taxes | | | | | | | | | | $ | | |
| Depreciation and amortization | | | | | | | | | | | | | | | |
Interest expense(4) | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
| | | | | | (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 independent subsidiaries 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 $ for the year ended December 31, 2023. Intercompany rental revenue represents rental income generated by both Standard Bearer and other real estate properties with the Company's independent subsidiaries. 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. Intercompany interest expense is eliminated in the "Intercompany Elimination" column.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
| | $ | | | | $ | | | | $ | () | | | $ | | |
Rental revenue(3) | | | | | | | | | | | () | | | | |
| TOTAL REVENUE | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
| Segment income (loss) | | | | | | | | () | | | | | | | |
Gain on sale of assets and insurance recoveries from real estate, net | | | | | | | | | | | |
| Income before provision for income taxes | | | | | | | | | | $ | | |
| Depreciation and amortization | | | | | | | | | | | | | | | |
Interest expense(4) | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
| | | | | | (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 independent subsidiaries 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 independent subsidiaries. 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. Intercompany interest expense is eliminated in the "Intercompany Elimination" column.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended December 31, 2021 |
| | | Skilled Services | | Standard Bearer | | All Other (1) | | Intercompany Elimination | | Total |
Service revenue(2) | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
Rental revenue(3) | | | | | | | | | | | () | | | | |
| TOTAL REVENUE | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
| Segment income (loss) | | | | | | | | () | | | | | | | |
| Gain on real estate insurance recoveries | | | | | | | | | | | |
| Income before provision for income taxes | | | | | | | | | | $ | | |
| Depreciation and amortization | | | | | | | | | | | | | | | |
| Interest expense | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | |
|
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|
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| | | | | | | | | |
| | | | | | | | | |
| | | | | % |
(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.
(3) All Other incorporates intercompany eliminations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2021 | |
(3) | Total Service Revenue | | Revenue % | |
| | | | $ | | | | | % | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | $ | | | | | % | |
(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.
(3) All Other incorporates intercompany eliminations.
9.
| | $ | | | | Buildings and improvements | | | | | |
| Leasehold improvements | | | | | |
| Equipment | | | | | |
| Furniture and fixtures | | | | | |
| Construction in progress | | | | | |
| | | | | | |
| Less: accumulated depreciation | () | | | () | |
| PROPERTY AND EQUIPMENT, NET | $ | | | | $ | | |
The Company completed the sale of assets for a sale price of $ and recorded a gain of $ within the Company's consolidated statement of income as cost of services during the year ended December 31, 2022. In addition, the Company evaluated its long-lived assets and did not record an impairment charge for the fiscal years ended 2023, 2022, and 2021. See also Note 6, Standard Bearer and Note 7, Operation Expansions for information on acquisitions during the year ended December 31, 2023.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
10.
| $ | | | | $ | () | | | $ | | | | $ | | | | $ | () | | | $ | | | | Facility trade name | | | | | | | () | | | | | | | | | () | | | | |
| Customer relationships | | | | | | | () | | | | | | | | | () | | | | |
| TOTAL | | | | $ | | | | $ | () | | | $ | | | | $ | | | | $ | () | | | $ | | |
During the years ended December 31, 2023, 2022, and 2021, amortization expense was $, $ and $, respectively, of which $, $ and $ was related to the amortization of right-of-use assets, respectively. The Company did t record any impairment charge to intangible assets during the years ended December 31, 2023, 2022, and 2021.
| | 2025 | | | |
| 2026 | | | |
| 2027 | | | |
| 2028 | | | |
| Thereafter | | | |
| | | $ | | |
| | $ | | | | | |
| | | | $ | | |
| | |
| | | | $ | | |
| | |
| | |
| | | | $ | | |
12.
| | $ | | | | Long-term insurance losses recoverable asset | | | | | |
|
| Capital improvement reserves with landlords and lenders | | | | | |
|
| Deposits with landlords | | | | | |
| Escrow deposits | | | | | |
| Other | | | | | |
|
| RESTRICTED AND OTHER ASSETS | $ | | | | $ | | |
Included in restricted and other assets as of December 31, 2023 and 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.
13.
| | $ | | | | Refunds payable | | | | | |
| Resident advances | | | | | |
| Unapplied state relief funds | | | | | |
| Cash held in trust for patients | | | | | |
|
| Dividends payable | | | | | |
| Property taxes | | | | | |
|
Accrued litigation (Note 20) | | | | | |
| Other | | | | | |
| OTHER ACCRUED LIABILITIES | $ | | | | $ | | |
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 consolidated balance sheets.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
14.
| | $ | | | | $ | | | | State | | | | | | | | |
| | | | | | | | | |
| Deferred: | | | | | |
| Federal | () | | | () | | | () | |
| State | () | | | () | | | () | |
| () | | | () | | | () | |
|
|
| TOTAL | $ | | | | $ | | | | $ | | |
% | | | % | | | % | | State income taxes - net of federal benefit | | | | | | | | |
| Non-deductible expenses | | | | | | | | |
| Equity compensation | () | | | () | | | () | |
|
| Other adjustments | () | | | () | | | () | |
| TOTAL INCOME TAX PROVISION | | % | | | % | | | % |
The Company's effective tax rate was % for the year ended December 31, 2023, compared to % for the same period in 2022 and % in 2021. The higher effective tax rate is due to higher non-deductible expenses compared to tax benefits from stock compensation.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
| | $ | | | | Revenue related reserves | | | | | |
| Tax credits | | | | | |
| Insurance | | | | | |
| Lease liability | | | | | |
| State taxes | | | | | |
| | | | | |
| Valuation allowance | () | | | () | |
| TOTAL DEFERRED TAX ASSETS | | | | | |
| State taxes | () | | | | |
| Depreciation and amortization | () | | | () | |
| Prepaid expenses | () | | | () | |
| Right of use asset | () | | | () | |
| TOTAL DEFERRED TAX LIABILITIES | () | | | () | |
| NET DEFERRED TAX ASSETS | $ | | | | $ | | |
The Company had state credit carryforwards as of December 31, 2023 and 2022 of $ and $, respectively. These carryforwards almost entirely relate to state limitations on the application of Enterprise Zone employment-related tax credits. Unless the Company uses the Enterprise Zone credits beforehand, the carryforward began to expire in 2023. The remainder of these carryforwards relate to credits against the Texas margin tax and is expected to carryforward until 2027. As of December 31, 2023 and 2022, the valuation allowance of $, for both years, was primarily recorded against the Enterprise Zone credits as the Company believes it is more likely than not that some of the benefit of the credits will not be realized.
The Company's operating loss carry forwards for states were not material during the year ended December 31, 2023 and 2022.
As of December 31, 2023, 2022 and 2021, the Company did not have any unrecognized tax benefits, net of its state benefits that would affect the Company's effective tax rate. The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense or income. Such amounts are not material.
The federal statutes of limitations on the Company's 2019, 2018, and 2017 income tax years lapsed during the third quarter of 2023, 2022, and 2021, respectively. During the fourth quarter of each year, various state statutes of limitations also lapsed. The lapses during the years ended December 31, 2023 and 2022 had no impact on the Company's unrecognized tax benefits.
During the year ended December 31, 2021, the state of Wisconsin initiated and completed an examination of the Company's 2019, 2018, and 2017 state tax years with no adjustments. The Company is not under examination by any major income tax jurisdiction.
15.
| | $ | | | |
| Less: current maturities | () | | | () | |
| Less: debt issuance costs, net | () | | | () | |
| LONG-TERM DEBT LESS CURRENT MATURITIES | $ | | | | $ | | |
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
Borrowings made under the 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 independent subsidiaries as well as a first lien on substantially all of such independent subsidiaries' personal property. The Credit Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its independent 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. 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 :1.00; provided that if the aggregate consideration for approved acquisitions in a period is greater than $, then the ratio can be increased at the election of the Company with notice to the administrative agent to :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 :1.00). As of December 31, 2023, there was outstanding debt under the Credit Facility. The Company was in compliance with all loan covenants as of December 31, 2023.
Mortgage Loans and Promissory Note
The Company has subsidiaries that have mortgage loans insured with HUD in the aggregate amount of $, which subjects these subsidiaries to HUD oversight and periodic inspections. The mortgage loans bear effective interest rates in a range of % to %, including fixed interest rates in a range of % to % 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 % and is reduced by % in the fourth year of the loan, and reduced by % per year for years five through ten of the loan. There is prepayment penalty after year ten. The terms for all the mortgage loans are to years.
In addition to the HUD mortgage loans above, the Company has a promissory note of $ that bears a fixed interest rate of % per annum and has a term of years. The note, which was assumed as part of 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.
| | 2025 | | | |
| 2026 | | | |
| 2027 | | | |
| 2028 | | | |
| Thereafter | | | |
| | | $ | | |
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.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
16.
active stock incentive plan, the 2022 Omnibus Incentive Plan (the 2022 Plan). Including the shares rolled over from the 2017 Omnibus Incentive Plan, the 2022 Plan provides for the issuance of shares of common stock. The number of shares available to be issued under the 2022 Plan will be reduced by (i) share for each share that relates to an option or stock appreciation right award and (ii) 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 equal annual installments, or the length of the term if less than , on the completion of each year of service measured from the grant date. All other options generally vest over at % per year on the anniversary of the grant date. Options expire from the date of grant. At December 31, 2023, the total number of shares available for issuance under the 2022 Plan was .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. The Black-Scholes model required the Company to make several key judgments including:
•The expected option term is calculated by the average of the contractual term of the options and the weighted average vesting period for all options. The calculation of the expected option term is based on the Company's experience due to sufficient history.
•The Company utilizes its own experience to calculate estimated volatility for options granted.
•The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.
•The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term.
•Estimated forfeiture rate of approximately % per year is based on the Company's historical forfeiture activity of unvested stock options.
Stock Options
The Company granted , and stock options during the years ended December 31, 2023, 2022, and 2021, respectively.
| % | | years | | % | | % | | 2022 | | | | % | | years | | % | | % |
| 2021 | | | | % | | years | | % | | % |
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
| $ | | | | $ | | | | 2022 | | | | $ | | | | $ | | |
| 2021 | | | | $ | | | | $ | | |
The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended December 31, 2023, 2022 and 2021 and therefore, the intrinsic value was $ at the date of grant.
| | $ | | | | | | | $ | | | | Granted | | | | | | | | | |
| Forfeited | () | | | | | | | | |
| Exercised | () | | | | | | | | |
| December 31, 2021 | | | | $ | | | | | | | $ | | |
| Granted | | | | | | | | | |
| Forfeited | () | | | | | | | | |
| Exercised | () | | | | | | | | |
| December 31, 2022 | | | | $ | | | | | | | $ | | |
| Granted | | | | | | | | | |
| Forfeited | () | | | | | | | | |
| Exercised | () | | | | | | | | |
| December 31, 2023 | | | | $ | | | | | | | $ | | |
- | | | | | | $ | | | | | | | | | 2015 | | | - | | | | | | | | | | | | |
| 2016 | | | - | | | | | | | | | | | | |
| 2017 | | | - | | | | | | | | | | | | |
| 2018 | | | - | | | | | | | | | | | | |
| 2019 | | | - | | | | | | | | | | | | |
| 2020 | | | - | | | | | | | | | | | | |
| 2021 | | | - | | | | | | | | | | | | |
| 2022 | | | - | | | | | | | | | | | | |
| 2023 | | $ | - | $ | | | | | | | | | | | |
| TOTAL | | | | | | | | | $ | | | | | | | |
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
| | $ | | | | $ | | | | Vested | | | | | | | | | |
| Expected to vest | | | | | | | | | |
| |
|
|
| | | | |
|
| | | | $ | | | | $ | | |
(1)Rent- cost of services includes deferred rent expense adjustments of $, $ and $ for the years ended December 31, 2023, 2022 and 2021, respectively. Additionally, rent- cost of services includes other variable lease costs such as consumer price index increases and short-term leases of $, $, $ for the years ended December 31, 2023, 2022, and 2021 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 consolidated statements of income.
| | $ | | | | $ | | | (1) Pennant rental income includes variable rent such as property taxes of $, $, and $ during the year ended December 31, 2023, 2022, and 2021. In addition, the number of senior living operations leased to and operated by Pennant was during the year ended December 31, 2023 and decreased from to during the year ended December 31, 2022.(2) Other third-party includes rental revenue associated with the Company's subleases to third parties of $ for the year ended December 31, 2023. There was sublease rental revenue for the years ended December 31, 2022 and 2021.
|
and $ as of December 31, 2023 and 2022, respectively. Included in long-term insurance losses recoverable as of December 31, 2023 and 2022 are anticipated insurance recoveries related to the Company's general and professional liability claims that are recorded on a gross rather than net basis in accordance with GAAP.
20.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
In addition to the FCA, 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 FCA. As such, the Company and its independent 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 subsidiaries do business.
In May 2009, Congress passed the FERA which made significant changes to the FCA 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 an FCA 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 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 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 ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
In June 2023, CMS announced a new nationwide audit, the “SNF 5-Claim Probe & Educate Review”, in which the Medicare Administrative Contractors (MACs) will review five claims from each SNF to check for compliance. In implementing this SNF 5-Claim Probe & Educate Review, CMS acknowledged that the increase in observed improper payments from 2021 to 2022 may have arisen from a "misunderstanding" by SNFs about how to appropriately bill for claims of service after October 1, 2019. All facilities that are not undergoing TPE reviews, or have not recently passed a TPE review, will be subject to the nationwide audit. MACs will complete only one round of probe-and-educate for each SNF, rather than three rounds that typically occur in the TPE. Additionally, CMS's education for each SNF will be individualized and based on observed claim review errors, with rationales for denial explained to the SNF on a claim-by-claim basis. This program applies only to claims submitted after October 1, 2019, and will exclude claims containing a COVID-19 diagnosis.
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 % and % of its total accounts receivable as of December 31, 2023 and 2022, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for %, % and % of the Company's revenue for the years ended December 31, 2023, 2022 and 2021, 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 December 31, 2023, the Company's uninsured cash deposits are not material. All uninsured bank deposits are held at high quality credit institutions.
| | | | | | | | |
| THE ENSIGN GROUP, INC. | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) |
21.
of its common stock under the program for a period of approximately months from September 1, 2023. 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 us to acquire any specific number of shares. The Company did not purchase any shares pursuant to this stock repurchase program during the year ended December 31, 2023.On July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which the Company could repurchase up to $ of its common stock under the program for a period of approximately months from August 2, 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 share repurchase program did not obligate the Company to acquire any specific number of shares. The stock repurchase program expired on August 2, 2023 and is no longer in effect. The Company did not purchase any shares pursuant to this stock repurchase program.
shares of its common stock for $ during the year ended December 31, 2022, and shares of its common stock for $ during the year ended December 31, 2021, related to two separate stock repurchase programs that are no longer in effect.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the preparation of this Annual Report on Form 10-K our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
(b) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). As a result of this assessment, management concluded that, as of December 31, 2023, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued an audit report, included herein, on the effectiveness of our internal control over financial reporting. Their report is set forth below.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, that occurred during the fourth quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
The Ensign Group, Inc.
San Juan Capistrano, California
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Ensign Group, Inc. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31,2023, of the Company and our report dated February 1, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California February 1, 2024
Item 9B. OTHER INFORMATION
, , a Rule 10b5-1 trading arrangement on (the "Rule 10b5-1 Plan"). Mr. Christensen's 10b5-1 Plan provides for the potential sale of up to shares of the Company's common stock between February 6, 2024 and December 31, 2024.
, , a Rule 10b5-1 trading arrangement on (the "Rule 10b5-1 Plan"). Ms. Wittekind's 10b5-1 Plan provides for the potential exercise of vested stock options and the associated sale of up to shares of the Company's common stock between March 14, 2024 and October 31, 2024.
These Rule 10b5-1 trading arrangements were entered into during open trading windows and are intended to satisfy the affirmative defense conditions of Rule 10b5-1 (c) under the Securities Exchange Act of 1934, as amended, and the Company's policies regarding transactions in Company securities.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2024 Annual Meeting of Stockholders.
We have adopted a code of ethics and business conduct that applies to all employees, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), and employees of our subsidiaries, as well as each member of our Board of Directors. The code of ethics and business conduct is available on our website at www.ensigngroup.net under the Investor Relations section. The information contained in, or that can be accessed through, our website does not constitute a part of this Annual Report on Form 10-K. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the code of ethics by posting such information on our website, at the address specified above.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2024 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2024 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2024 Annual Meeting of Stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2024 Annual Meeting of Stockholders. Our principal accountant is Deloitte & Touche LLP (PCAOB ID No.).
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as a part of this report:
(a) (1) Financial Statements: | | |
The Financial Statements described in Part II. Item 8 and beginning on page 91 are filed as part of this Annual Report on Form 10-K. |
(a) (3) Exhibits: The following exhibits are filed or furnished with or incorporated by reference this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exhibit | | | | | | File | | Exhibit | | Filing | | Filed |
| No. | | Exhibit Description* | | Form | | No. | | No. | | Date | | Herewith |
| | Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., filed with the Delaware Secretary of State on November 15, 2007 | | 10-Q | | 001-33757 | | 3.1 | | | 12/21/2007 | | |
| | Certificate of Amendment to the Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., filed with the Delaware Secretary of State on February 4, 2020 | | 10-K | | 001-33757 | | 3.2 | | | 2/5/2020 | | |
| | Certificate of Amendment to the Fifth Amended and Restated Certificate of Incorporation of The Ensign Group, Inc., filed with the Delaware Secretary of State on May 18, 2023 | | 10-Q | | 001-33757 | | 3.3 | | | 7/27/2023 | | |
| | Amended and Restated Bylaws of The Ensign Group, Inc. | | 10-Q | | 001-33757 | | 3.2 | | | 12/21/2007 | | |
| | Amendment to the Amended and Restated Bylaws, dated August 5, 2014 | | 8-K | | 001-33757 | | 3.2 | | | 8/8/2014 | | |
| | Description of the Common stock of The Ensign Group, Inc. | | 10-K | | 001-33757 | | 4.1 | | | 2/5/2020 | | |
| | Specimen common stock certificate | | S-1 | | 333-142897 | | 4.1 | | | 10/5/2007 | | |
| + | The Ensign Group, Inc. 2007 Omnibus Incentive Plan | | S-1 | | 333-142897 | | 10.3 | | | 10/5/2007 | | |
| + | Amendment to The Ensign Group, Inc. 2007 Omnibus Incentive Plan | | 8-K | | 001-33757 | | 99.2 | | | 7/28/2009 | | |
| + | Form of 2007 Omnibus Incentive Plan Notice of Grant of Stock Options; and form of Non-Incentive Stock Option Award Terms and Conditions | | S-1 | | 333-142797 | | 10.4 | | | 10/5/2007 | | |
| + | Form of 2007 Omnibus Incentive Plan Restricted Stock Agreement | | S-1 | | 333-142897 | | 10.5 | | | 10/5/2007 | | |
| + | Form of Indemnification Agreement entered into between The Ensign Group, Inc. and its directors, officers and certain key employees | | S-1 | | 333-142897 | | 10.6 | | | 10/5/2007 | | |
| | Form of Independent Consulting and Centralized Services Agreement between Ensign Facility Services, Inc. and certain of its subsidiaries | | S-1 | | 333-142897 | | 10.41 | | | 5/14/2007 | | |
| | Form of Health Insurance Benefit Agreement pursuant to which certain subsidiaries of The Ensign Group, Inc. participate in the Medicare program | | S-1 | | 333-142897 | | 10.48 | | | 10/19/2007 | | |
| | Form of Medi-Cal Provider Agreement pursuant to which certain subsidiaries of The Ensign Group, Inc. participate in the California Medicaid program | | S-1 | | 333-142897 | | 10.49 | | | 10/19/2007 | | |
| | Form of Provider Participation Agreement pursuant to which certain subsidiaries of The Ensign Group, Inc. participate in the Arizona Medicaid program | | S-1 | | 333-142897 | | 10.50 | | | 10/19/2007 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exhibit | | | | | | File | | Exhibit | | Filing | | Filed |
| No. | | Exhibit Description* | | Form | | No. | | No. | | Date | | Herewith |
| | Form of Contract to Provide Nursing Facility Services under the Texas Medical Assistance Program pursuant to which certain subsidiaries of The Ensign Group, Inc. participate in the Texas Medicaid program | | S-1 | | 333-142897 | | 10.51 | | | 10/19/2007 | | |
| | Form of Client Service Contract pursuant to which certain subsidiaries of The Ensign Group, Inc. participate in the Washington Medicaid program | | S-1 | | 333-142897 | | 10.52 | | | 10/19/2007 | | |
| | Form of Provider Agreement for Medicaid and UMAP pursuant to which certain subsidiaries of The Ensign Group, Inc. participate in the Utah Medicaid program | | S-1 | | 333-142897 | | 10.53 | | | 10/19/2007 | | |
| | Form of Medicaid Provider Agreement pursuant to which a subsidiary of The Ensign Group, Inc. participates in the Idaho Medicaid program | | S-1 | | 333-142897 | | 10.54 | | | 10/19/2007 | | |
| | Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and The Ensign Group, Inc. dated October 1, 2013. | | 10-K | | 001-33757 | | 10.74 | | | 2/13/2014 | | |
| | Settlement agreement dated October 1, 2013, entered into among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General ("OIG-HHS") of the Department of Health and Human Services ("HHS") (collectively the "United States") and the Company. | | 8-K | | 001-33757 | | 10.75 | | | 5/8/2014 | | |
| | Form of Master Lease by and among certain subsidiaries of The Ensign Group, Inc. and certain subsidiaries of CareTrust REIT, Inc. | | 8-K | | 001-33757 | | 10.1 | | | 6/5/2014 | | |
| | Form of Guaranty of Master Lease by The Ensign Group, Inc. in favor of certain subsidiaries of CareTrust REIT, Inc., as landlords under the Master Leases | | 8-K | | 001-33757 | | 10.2 | | | 6/5/2014 | | |
| | Amended and Restated Credit Agreement as of February 5, 2016, by and among The Ensign Group, Inc., SunTrust Bank, now known as Truist, as administrative agent, and the lenders party thereto | | 8-K | | 001-33757 | | 10.1 | | | 2/8/2016 | | |
| | Second Amended Credit Agreement as of July 19, 2016, by and among The Ensign Group, Inc., SunTrust Bank, now known as Truist, as administrative agent, and the lenders party thereto | | 8-K | | 001-33757 | | 10.1 | | | 7/25/2016 | | |
| | The Ensign Group, Inc. 2017 Omnibus Incentive Plan | | DEF 14A | | 001-33757 | | A | | 4/13/2017 | | |
| | Form of 2017 Omnibus Incentive Plan Notice of Grant of Stock Options; and form of Non-Incentive Stock Option Award Terms and Conditions | | 10-K | | 001-33757 | | 10.87 | | | 2/8/2018 | | |
| | Form of 2017 Omnibus Incentive Plan Restricted Stock Agreement | | 10-K | | 001-33757 | | 10.88 | | | 2/8/2018 | | |
| | Form of U.S. Department of Housing and Urban Development Healthcare Facility Note and schedule of individual subsidiary loans, by and among The Ensign Group, Inc.'s subsidiaries listed therein and U.S. Department of Housing and Urban Development | | 8-K | | 001-33757 | | 10.1 | | | 1/3/2018 | | |
| | Form of U.S. Department of Housing and Urban Development Security Instrument/Mortgage/Deed of Trust | | 8-K | | 001-33757 | | 10.2 | | | 1/3/2018 | | |
| | Third Amended and Restated Credit Agreement, dated as of October 1, 2019, by and among The Ensign Group, Inc., SunTrust Bank, now known as Truist, as administrative agent, and the lenders party thereto | | 8-K | | 001-33757 | | 10.4 | | | 10/1/2019 | | |
| | Lease Agreement, dated as of October 1, 2019, by and between The Ensign Group, Inc. and The Pennant Group, Inc. | | 8-K | | 001-33757 | | 10.5 | | | 10/1/2019 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exhibit | | | | | | File | | Exhibit | | Filing | | Filed |
| No. | | Exhibit Description* | | Form | | No. | | No. | | Date | | Herewith |
| + | The Ensign Services, Inc. Deferred Compensation Plan | | 10-K | | 001-33757 | | 10.1 | | | 2/3/2021 | | |
| + | First Amendment to The Ensign Services, Inc. Deferred Compensation Plan | | 10-K | | 001-33757 | | 10.2 | | | 2/3/2021 | | |
| | First Amendment to Third Amended and Restated Credit Agreement, dated as of February 8, 2022, by and among The Ensign Group, Inc., Standard Bearer Healthcare REIT, Inc., Truist Bank (as successor by merger to SunTrust Bank), as administrative agent, and the lenders party thereto | | 10-K | | 001-33757 | | 10.1 | | | 2/9/2022 | | |
| | Second Amendment to Third Amended and Restated Credit Agreement, dated as of April 8, 2022, by and among The Ensign Group, Inc. and Truist Bank, as administrative agent, and the lenders party thereto. | | 8-K | | 001-33757 | | 10.1 | | | 4/12/2022 | | |
| + | The Ensign Group, Inc. 2022 Omnibus Incentive Plan | | DEF 14A | | 001-33757 | | A | | 4/14/2022 | | |
| + | Form of 2022 Omnibus Incentive Plan Notice of Grant of Stock Options; and form of Non-Incentive Stock Option Award Terms and Conditions | | 10-K | | 001-33757 | | 10.32 | | | 2/2/2023 | | |
| + | Form of 2022 Omnibus Incentive Plan Restricted Stock Agreement | | 10-K | | 001-33757 | | 10.33 | | | 2/2/2023 | | |
| | | | | | | |
| | Subsidiaries of The Ensign Group, Inc., as amended | | | | | | | | | | X |
| | Consent of Deloitte & Touche LLP | | | | | | | | | | X |
| | | | | | | |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| + | Policy for Recovery of Erroneously Awarded Incentive-Based Compensation | | | | | | | | | | X |
| 101 | | | Interactive data file (furnished electronically herewith pursuant to Rule 406T of Regulations S-T) | | | | | | | | | | |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | | | |
| + | | Indicates management contract or compensatory plan. |
| * | | Documents not filed herewith are incorporated by reference to the prior filings identified in the table above. |
Item 16. FORM 10-K SUMMARY
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | THE ENSIGN GROUP, INC. |
| | |
| February 1, 2024 | BY: | /s/ SUZANNE D. SNAPPER |
| | | Suzanne D. Snapper |
| | | Chief Financial Officer, Executive Vice President and Director (Principal Financial Officer and Accounting Officer and Duly Authorized Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ BARRY R. PORT | | Chief Executive Officer and Director (principal executive officer) | | February 1, 2024 |
| Barry R. Port | | | | |
| | | | |
| /s/ SUZANNE D. SNAPPER | | Chief Financial Officer, Executive Vice President and Director (principal financial officer and accounting officer and duly authorized officer) | | February 1, 2024 |
| Suzanne D. Snapper | | | | |
| | | | |
| /s/ CHRISTOPHER R. CHRISTENSEN | | Executive Chairman and Chairman of the Board | | February 1, 2024 |
| Christopher R. Christensen | | | | |
| | | | |
| /s/ ANN S. BLOUIN | | Director | | February 1, 2024 |
| Ann S. Blouin | | | | |
| | | | |
| /s/ SWATI B. ABBOTT | | Director | | February 1, 2024 |
| Swati B. Abbott | | | | |
| | | | |
| /s/ DAREN J. SHAW | | Director | | February 1, 2024 |
| Daren J. Shaw | | | | |
| | | | |
| /s/ JOHN O. AGWUNOBI | | Director | | February 1, 2024 |
| John O. Agwunobi | | | | |
| | | | |
| /s/ BARRY M. SMITH | | Director | | February 1, 2024 |
| Barry M. Smith | | | | |
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