The Ensign Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
Ensign provides skilled nursing, senior living and ancillary healthcare services through operating subsidiaries. At quarter-end, it operated 226 facilities across 14 states, with approximately 22,991 operational skilled nursing beds and 2,254 senior living units. Following the October 2019 spin-off of The Pennant Group, Ensign reports one operating segment, transitional and skilled services; 2019 results shown in the financial statements exclude Pennant as discontinued operations.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $599.3 | $512.1 | $1,773.6 | $1,476.3 |
| Income from operations | $55.1 | $30.8 | $167.3 | $89.5 |
| Net income attributable to Ensign | $43.1 | $27.2 | $124.2 | $83.1 |
| Diluted EPS from continuing operations | $0.77 | $0.39 | $2.23 | $1.15 |
| Continuing operating cash flow | Not provided for quarter | Not provided for quarter | $282.2 | $109.1 |
- Revenue rose 17.0% in Q3 and 20.1% year to date. Growth reflected acquisitions, higher skilled mix and reimbursement per patient day, and COVID-19-related Medicaid FMAP revenue. Acquisitions made on or after October 1, 2019 contributed $42.4 million of Q3 revenue and $117.3 million year to date.
- Operating margin increased to 9.2% from 6.0% in Q3 and to 9.5% from 6.1% year to date. Continuing net margin was 7.2% versus 4.4% in Q3 and 7.1% versus 4.4% year to date. Cost of services declined as a share of revenue, while G&A expense increased.
- At September 30, cash and cash equivalents were $175.4 million, versus $59.2 million at December 31, 2019. Total current assets were $526.6 million and current liabilities $525.2 million.
- Total debt was $118.7 million, down from $330.4 million at year-end 2019; there were no borrowings on the $350 million revolving facility at quarter-end. The company reported covenant compliance. Operating lease liabilities totaled $1,000.2 million.
- For the first nine months, capital expenditures were $37.8 million and acquisition cash payments were $23.1 million. The company budgeted approximately $47 million for 2020 renovations, incorporating a temporary suspension of non-essential projects.
Material changes and operating trends
- COVID-19 reduced census and occupancy, particularly among non-skilled patients. Q3 skilled nursing occupancy was 70.7%, down from 78.9% a year earlier; actual patient days declined 1.4% despite additional facilities. Skilled mix by days rose to 32.8% from 28.5%, and by revenue to 53.9% from 47.8%.
- In same facilities, Q3 revenue grew 7.8% while patient days fell 10.2%; higher acuity, skilled reimbursement rates and FMAP support partly offset lower occupancy. Management reported improving occupancy and skilled mix from mid-September to mid-October.
- COVID-19 increased spending on staffing, personal protective equipment, testing and other supplies. Management also cited stronger collections and lower purchased-services costs as offsets.
- The company added five operations during the first nine months of 2020, including three standalone skilled nursing operations, one independent living operation and one campus, for a total purchase price of $23.1 million.
Outlook, unusual items and risks
- No numerical earnings or revenue guidance is provided. Management said the pandemic’s duration and financial effects remain uncertain, expects adverse effects to continue, and believes recovery depends partly on hospital volumes, elective procedures, community infection trends and census.
- COVID-19-related government support materially affected liquidity and reported results. At September 30, the balance sheet included $123.988 million of Provider Relief Fund and Medicare advance payment liabilities: $23.296 million of nursing-home infection-control funds the company intended to repay, and $100.692 million of Medicare advances. Medicare advance repayment was expected to begin in March 2021 under then-current guidance. The company also recorded $33.231 million of deferred employer Social Security taxes, due in installments in 2021 and 2022.
- FMAP funding received was $17.344 million in Q3, of which $11.691 million was recognized as revenue; year-to-date receipts were $32.455 million, of which $24.825 million was recognized. Recognition was limited in some cases to COVID-related expenses incurred. Medicare sequestration relief increased revenue by approximately $3.9 million in Q3 and $6.5 million year to date; the temporary suspension was scheduled to end December 31, 2020.
- Management stated that cash, investments, projected operating cash flow and available financing should support operations for at least 12 months, while noting uncertainty from COVID-19. Operating cash flow benefited from higher earnings, collections, timing of accrued items and deferred payroll taxes; it should not be viewed as wholly recurring.
- Material risks include further pandemic-related census declines and higher care costs; reliance on Medicare and Medicaid, which together represented 75.1% of Q3 revenue; reimbursement and regulatory changes; staffing constraints; and lease obligations. Self-insurance reserves rely on actuarial estimates and could change materially.
- Legal and regulatory matters include a House Select Subcommittee inquiry into nursing-home COVID-19 response, for which the company is cooperating, and a possible qui tam action related to a DOJ investigation of referral-source relationships. DOJ declined to intervene; the relator may continue. The company also faces ordinary-course patient-care, employment and other claims.
- The filing identifies a proposed 9% reduction in Medicare Part B outpatient therapy reimbursement beginning in 2021, subject to the rulemaking process, and notes that Medicare review activity was expected to resume after pandemic-related suspensions.
Important facts for investors to verify
- Whether occupancy and patient days continue recovering, and whether increased skilled mix can offset lower census without weakening care quality or margins.
- How much revenue and cash flow depend on temporary FMAP, sequestration relief and other pandemic support, and the timing and source of repayments or deferred tax payments.
- Whether operating cash flow remains strong after temporary working-capital and payroll-tax effects normalize.
- Progress on COVID-19 costs, staffing availability, acquisitions and renovation spending, alongside the company’s substantial lease commitments.
- Developments in the House inquiry, the DOJ-related relator matter, reimbursement reviews and self-insurance claims that could create material costs or operational restrictions.