ENSIGN GROUP, INC quarterly report, Q2 FY2020

The Ensign Group, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, financial amounts below are in millions. The 2019 income-statement comparisons reflect continuing operations; Pennant’s results are presented as discontinued operations following the October 2019 spin-off.

Business context

Ensign provides skilled nursing, senior living and ancillary healthcare services through operating subsidiaries. At June 30, 2020, it operated 225 facilities across 14 states, with approximately 22,907 operational skilled nursing beds and 2,118 senior living units. Its sole reportable segment is transitional and skilled services.

Financial performance and liquidity

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Revenue	$584.7	$492.9	$1,174.3	$964.2
Operating income	$55.4	$28.7	$112.2	$58.7
Net income attributable to Ensign	$40.2	$20.7 from continuing operations	$81.1	$42.1 from continuing operations
Diluted EPS from continuing operations	$0.73	$0.37	$1.46	$0.75
Cash provided by operating activities	Not stated quarterly	Not stated quarterly	$174.1	$52.8

Q2 revenue grew 18.6%; management cited acquisitions, higher skilled mix and reimbursement per patient day. Acquisitions contributed $48.2 of Q2 revenue growth, and $12.4 of recognized FMAP revenue was tied to COVID-19-related expenses.
Operating margin was approximately 9.5% in Q2, compared with 5.8% a year earlier. Cost of services fell to 77.3% of revenue from 80.1%; reported net income attributable to Ensign from continuing operations was $40.2.
Q2 occupancy was 73.4%, down from 79.4% a year earlier. Skilled mix by nursing revenue rose to 51.4% from 48.7%, helping offset lower occupancy.
Operating cash flow for the first half increased by $121.3 year over year. Management attributed the increase partly to higher earnings, collections and timing effects, including deferred payroll and income taxes. The filing does not quantify how much of operating cash flow is attributable to temporary timing benefits.
Cash and cash equivalents were $201.7 at June 30, versus $59.2 at year-end 2019. Current assets were $547.3 and current liabilities $581.0.
Total debt principal was $149.6, down from $330.4 at year-end; $30.0 was drawn on the $350.0 revolving facility. Ensign reported compliance with debt covenants. Operating lease liabilities were $1,005.2; undiscounted future lease payments were $1,708.7.
Capital expenditures were $27.1 in the first half. First-half acquisition spending was $14.1; management budgeted approximately $42.0 for 2020 renovations, with non-essential projects temporarily suspended.

Material changes and unusual items

COVID-19 disrupted admissions and reduced occupancy, while higher-acuity patient mix, reimbursement rates, acquisitions and temporary government measures supported reported revenue and earnings. Q2 same-facility revenue rose 7.1% despite a 7.1% decline in patient days.
Ensign received $108.8 of Provider Relief Funds and $98.9 through Medicare’s Accelerated and Advance Payment Program. The company recorded these receipts as liabilities; it says it returned all Provider Relief Funds and began repaying Medicare advances in July. A portion of the Medicare advances had been repaid by the filing date.
At June 30, the company also recorded $16.4 of deferred employer Social Security taxes and $22.5 of income taxes payable; the income-tax payable was paid in July. These deferrals and advance receipts supported near-term liquidity but are not recurring operating revenue.
The first half included $13.1 of recognized FMAP revenue; eight of the 14 states where Ensign operates had approved state-specific FMAP programs by June 30. Revenue recognition was limited to eligible COVID-related expenses in certain operations.
Ensign repurchased $25.0 of shares in Q1 under two programs, which were fully used and expired. Management said it had no active repurchase plan and did not intend to approve another at that time.
Q2 2019 included $8.1 of after-tax income from discontinued operations; Q2 2020 did not. Accordingly, total reported net income comparisons differ from continuing-operations comparisons.

Outlook, risks and contingencies

Management expected COVID-related adverse effects on census to continue through Q3 2020, with a modest recovery in Q4 as hospital volumes increased and virus spread slowed. No quantified full-year earnings or revenue guidance was provided.
Management stated that cash, investments, expected operating cash flow and available financing should cover operating needs for at least 12 months, while emphasizing uncertainty about the pandemic’s duration and financial impact.
COVID-related risks include lower occupancy, increased labor, testing and protective-equipment costs, staffing and supply constraints, infection-control requirements, litigation exposure and potential regulatory changes. As of June 30, 138 operations had reported COVID-19 cases among patients or staff.
Medicare and Medicaid accounted for 74.8% of Q2 revenue. Reimbursement changes, Medicaid budget pressure and the proposed Medicaid Fiscal Accountability Regulation could affect revenue; Ensign identified 69 facilities participating in Utah and Texas supplemental-payment arrangements.
The DOJ declined to intervene in a civil matter related to alleged False Claims Act and Anti-Kickback Statute issues involving certain Southern California facilities; a qui tam relator may still pursue claims. Ensign also received a document request from the House Select Subcommittee on the Coronavirus Crisis and said it was cooperating. Outcomes and potential effects are uncertain.
Management noted that CMS medical reviews were suspended as of June 30 and anticipated reviews could resume and increase. CMS announced reviews would resume beginning August 3, 2020. The filing also identifies one facility on special focus facility status.
Other material exposures include self-insurance estimates, professional-liability claims, master-lease and cross-default provisions, and guarantees of certain Pennant leases for which maximum exposure could not be estimated. Ensign reported no long-lived asset impairment for the periods presented.

Most important facts for investors to verify

Whether occupancy recovered after June, and whether skilled mix and higher reimbursement rates continued to offset lower patient volumes.
How much first-half cash generation was sustainable versus attributable to tax deferrals, advance payments and working-capital timing; also verify repayment of Medicare advances and other temporary liabilities.
The ongoing effects of COVID-19 on facility-level cases, costs, staffing, admissions and regulatory requirements, alongside the company’s Q3/Q4 outlook.
Exposure to government reimbursement changes, including FMAP program duration and potential changes to Medicaid supplemental payments.
Developments in the DOJ-related qui tam matter, the congressional nursing-home inquiry and other patient-care, employment and regulatory claims.
Debt covenant headroom and fixed lease commitments, particularly if occupancy or reimbursement weakens.