The Ensign Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise. Dollar amounts below are in millions, except per-share data. Ensign provides post-acute healthcare services through operating subsidiaries and reports skilled services and real estate segments. At quarter-end, it operated 240 facilities and ancillary operations, with approximately 24,500 skilled nursing beds and 2,200 senior living units.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $638.5 | $584.7 | $1,265.8 | $1,174.3 |
| Income from operations | $64.9 | $55.4 | $128.5 | $112.2 |
| Net income attributable to Ensign | $49.4 | $40.2 | $98.6 | $81.1 |
| Diluted EPS | $0.87 | $0.73 | $1.73 | $1.46 |
| Operating cash flow | — | — | $108.4 | $174.1 |
- Q2 revenue grew 9.2%; income from operations rose about 17.0%, and net income attributable to Ensign increased about 22.8%. Diluted EPS rose 19.2%.
- First-half revenue increased 7.8%; net income attributable to Ensign increased about 21.6%. Operating margin was 10.2% for both the quarter and first half of 2021, versus 9.4% and 9.6%, respectively, in 2020. First-half net margin was 7.9%, versus 7.1%.
- Service revenue was $634.6 million in Q2 and $1,257.9 million for the first half. Medicare and Medicaid together represented 73.1% of Q2 service revenue and 73.6% for the first half.
- First-half operating cash flow declined $65.7 million, primarily from working-capital timing, including receivables, prepaid taxes and expenses, and accrued wages, partly offset by higher earnings. Capital expenditures were $33.8 million; operating cash flow less capital expenditures was approximately $74.6 million.
- Cash and cash equivalents were $198.4 million at June 30, down from $236.6 million at year-end. First-half investing cash outflow was $40.9 million and financing cash outflow was $105.7 million; financing included repayment of $102.0 million of Medicare advance payments.
- Debt was $116.6 million, primarily fixed-rate mortgage loans; no borrowings were outstanding under the $350 million revolving facility. The company reported covenant compliance. Operating lease liabilities totaled $1,086.3 million, with $1,808.1 million of future lease payments before the present-value adjustment.
- Non-GAAP measures: Q2 EBITDA was $77.5 million and Adjusted EBITDA $82.5 million; first-half EBITDA was $154.2 million and Adjusted EBITDA $163.4 million. These measures are not GAAP substitutes.
Material changes and operating trends
- Skilled services revenue increased 10.1% in Q2 and 8.9% for the first half. Growth reflected acquisitions, higher skilled mix and revenue per patient day, and state COVID-19 relief revenue. First-half revenue from operations acquired on or after January 1, 2020 increased $46.9 million year over year.
- Occupancy remained below prior-year levels: 72.7% in Q2 versus 73.4%, and 71.9% for the first half versus 76.4%. Management said occupancy had recovered from late 2020 and continued improving sequentially in the first half of 2021. Higher-acuity mix helped offset lower census.
- Q2 skilled mix by nursing days rose to 30.9% from 29.7%; the first-half measure rose to 32.6% from 29.5%. Same-facility occupancy was 73.9% in Q2, unchanged year over year.
- Cost of services as a percentage of revenue improved modestly: skilled-services cost was 77.0% of segment revenue for both the quarter and first half, compared with 77.4% and 77.3%, respectively, in 2020. General and administrative expense increased, reflecting wages, benefits, performance and growth.
- The company added 12 stand-alone skilled nursing operations in the first half, adding 1,263 operational beds. Acquisition purchase price was $11.2 million. It also extended one master lease by 15 years; the lease changes increased right-of-use assets and lease liabilities by $54.7 million.
- Real estate segment income was $8.9 million in Q2 and $17.7 million in the first half. First-half funds from operations, a non-GAAP measure, was $27.2 million, up 17.1%.
Outlook, risks and unusual items
- Management outlook: No specific company revenue or earnings guidance is provided in the filing. Management cited continued occupancy recovery and anticipated that cash, investments, projected operating cash flow and available financing would support operating needs for at least the next 12 months. It noted forecasts may change as the pace of recovery becomes clearer.
- COVID-19 and relief: Management reported fewer cases as vaccination became more widespread, but cautioned that pandemic impacts remain uncertain. The company recognized $16.7 million of state relief revenue in Q2 and $33.2 million in the first half, tied to COVID-related expenses. It returned all Provider Relief Funds received; it repaid the remaining $102.0 million of Medicare advance payments in March 2021.
- Reimbursement and operating risks: Government programs account for a large share of revenue. The filing highlights potential Medicare and Medicaid rate or rule changes, proposed FY2022 Medicare skilled-nursing rate increases of 1.3%, and a possible PDPM parity adjustment of up to 5.0%. Labor availability and costs, occupancy, quality ratings, regulatory compliance, and acquisition integration are also material risks.
- Legal and regulatory matters: A qui tam relator continues litigation alleging False Claims Act and Anti-Kickback Statute violations involving referral-source relationships; DOJ declined to intervene. The company is cooperating with a House subcommittee inquiry into COVID-19 and nursing homes. The filing describes ongoing patient-care, employment and other litigation risks, but does not provide a clear quantified estimate of potential exposure. One facility was identified as a special focus facility. No subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution as of June 30.
- Insurance and estimates: Self-insurance reserves depend on actuarial estimates; actual claims may exceed recorded amounts and could materially affect earnings or cash flows. The company recorded no impairment of long-lived assets, goodwill or intangible assets for the periods presented.
- Other obligations: Deferred employer Social Security taxes of $48.3 million recorded in 2020 include $24.2 million due in 2021 and $24.2 million due in 2022. Lease master agreements may contain cross-default provisions, and certain guarantees of Pennant leases remain in place.
Important facts for investors to verify
- Whether occupancy and patient volumes continued to recover after June 30, 2021, and how much earnings growth depends on higher-acuity and managed-care mix.
- The sustainability and expense linkage of state relief revenue, and the timing of remaining deferred payroll-tax payments.
- Cash conversion and working-capital trends, particularly receivables and operating cash flow relative to capital expenditures and acquisition spending.
- Lease commitments, master-lease cross-default exposure, and the company’s fixed debt and liquidity headroom under the revolving facility.
- Developments in the qui tam litigation, congressional inquiry, regulatory reviews, and self-insurance claims that could change contingencies or reserve requirements.
- Final Medicare reimbursement rules, including PDPM adjustments and Part B therapy changes, and their potential effects on reimbursement and margins.