The Ensign Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Financial statement amounts below are in millions except per-share data. The filing is unaudited.
Business context
Ensign is a holding company whose independent subsidiaries provide skilled nursing, senior living and ancillary healthcare services, and own or lease healthcare properties. At quarter-end, subsidiaries operated 295 facilities, with approximately 30,469 operational skilled nursing beds and 3,003 senior living units. The business reports skilled services and Standard Bearer, its real estate segment.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $940.8 | $770.0 | $2,749.0 | $2,215.9 |
| Income from operations | $79.8 | $74.3 | $232.5 | $221.6 |
| Net income attributable to Ensign | $63.9 | $56.2 | $187.7 | $164.2 |
| Diluted EPS | $1.11 | $0.99 | $3.28 | $2.89 |
| Operating cash flow | Not separately provided | Not separately provided | $291.4 | $222.3 |
- Growth and margins: Q3 revenue rose 22.2% and diluted EPS rose 12.1%. Nine-month revenue rose 24.1% and diluted EPS rose 13.5%. Operating margin was 8.5% in Q3 versus 9.6% a year earlier, and 8.5% for nine months versus 10.0%. Net income attributable to Ensign was 6.8% of revenue in both 2023 periods, compared with 7.3% for Q3 2022 and 7.4% for nine months 2022.
- Revenue drivers and mix: Growth reflected acquisitions, improved occupancy and patient days. Acquired operations added $117.3 million to Q3 service revenue and $300.1 million to nine-month service revenue, relative to the prior-year periods. Medicare and Medicaid generated 72.1% of Q3 and 72.8% of nine-month service revenue. State relief funding recognized was $10.3 million in Q3 and $55.1 million year to date, down from $21.4 million and $63.5 million, respectively.
- Occupancy and acuity: Skilled nursing occupancy based on operational beds was 78.9% in Q3, up from 75.7%; nine-month occupancy was 78.3%, up from 75.0%. Skilled mix by nursing days declined to 29.1% for Q3 from 31.6%, and to 30.7% year to date from 32.1%.
- Expense pressure: Skilled-services cost of services rose to 79.0% of segment revenue in Q3 from 78.3%, and to 78.9% year to date from 77.9%. Management cited acquisition-related costs, higher wages and staffing expenses, and increased professional-liability reserves. Consolidated rent and G&A also increased as a share of revenue.
- Cash flow and liquidity: Nine-month operating cash flow was $291.4 million; investing cash use was $137.8 million and financing cash use was $2.0 million. Cash and cash equivalents at September 30 were $467.9 million, versus $316.3 million at December 31, 2022. Management also reported approximately $103.3 million of investments.
- Debt and leases: Gross mortgage-loan and promissory-note principal was approximately $153.4 million; the $600 million revolving credit facility had no borrowings outstanding. The company reported $1.739 billion of operating lease liabilities, including $81.0 million current. Nine-month cash payments on lease liabilities were $146.2 million. The company was in compliance with its credit-facility and lease covenants at quarter-end.
Material changes, outlook and risks
- During the first nine months, the company added 24 stand-alone skilled nursing operations and 2,340 operational beds; Standard Bearer also acquired real estate for three of those operations and one campus. A further leased operation with 45 beds was added after quarter-end. Management cautioned that newer acquisitions may have lower occupancy and skilled mix while they are integrated.
- Management said occupancy was recovering toward pre-pandemic levels and expected a return to historical seasonality, with stronger occupancy and skilled mix generally in the first and fourth quarters. No company-specific full-year revenue or earnings guidance is provided in the filing.
- State relief revenue is declining as temporary enhanced federal Medicaid matching funds phase out by year-end 2023. The company also disclosed a proposed federal minimum staffing rule, including specified nurse hours per resident day and a 24/7 on-site RN requirement; management expects a final mandate could raise labor costs, but its effect is not yet clear.
- Liquidity benefited from deferred federal and California estimated tax payments. Approximately $50 million of 2023 estimated payments had been deferred as of Q3; the company subsequently paid $69.4 million in October for taxes incurred through Q3. Management stated that cash, operating cash flow and available borrowing capacity should cover needs for at least 12 months.
- Legal and regulatory exposure: A qui tam lawsuit alleging False Claims Act and Anti-Kickback Statute violations related to medical-director relationships remains pending after the DOJ declined to intervene. The company is defending the case and cannot estimate a loss range; an adverse outcome could materially affect results, financial condition and cash flows. As of quarter-end and through filing, 41 subsidiaries had Medicare reviews scheduled or in process, and one facility was on CMS’s Special Focus Facility list.
- Other key risks include dependence on government reimbursement, Medicaid eligibility redeterminations, staffing shortages and potential minimum staffing requirements, litigation and self-insurance reserve estimates, acquisition integration, and long-term lease obligations and cross-default exposure. Q3 2023 other income also included market-related deferred-compensation investment effects; the company reported $4.3 million of other income for the quarter and $15.0 million for the nine-month period.
Important facts for investors to verify
- Whether occupancy gains continue while skilled mix remains below prior-year levels, and how this affects reimbursement and margins.
- How the phaseout of state relief funding and Medicaid redeterminations affect revenue, collections and working capital.
- Whether wage, staffing and professional-liability costs stabilize, and whether self-insurance reserve estimates require revision.
- Developments in the pending qui tam litigation, the 41 Medicare reviews and CMS staffing-rule proceedings.
- The timing and cash impact of tax payments, acquisition spending, capital expenditures and the company’s substantial operating lease commitments.
- Management’s reported $103.3 million of investments and the composition of that amount relative to balance-sheet investment categories; the filing presents investments across multiple balance-sheet captions.