The Ensign Group, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Ensign provides skilled nursing, senior living, rehabilitation and related healthcare services through subsidiaries. This filing covers the three and six months ended June 30, 2022; dollar amounts below are in millions unless noted. At quarter-end, Ensign operated 251 facilities, with approximately 25,549 operational skilled nursing beds and 2,973 senior living units. The company formed Standard Bearer, a captive real estate investment trust, in January 2022.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $732.5 | $638.5 | $1,445.9 | $1,265.8 |
| Income from operations | $78.2 | $64.9 | $147.3 | $128.5 |
| Net income attributable to Ensign | $57.7 | $49.4 | $108.0 | $98.6 |
| Diluted EPS | $1.01 | $0.87 | $1.90 | $1.73 |
| Operating cash flow | Not separately stated for the quarter | $129.8 | $108.4 |
- Q2 revenue rose 14.7%; diluted EPS rose 16.1%. For the first half, revenue increased 14.2% and diluted EPS increased 9.8%.
- Q2 operating margin was 10.7%, compared with 10.2%; net margin was 7.9% in both periods. First-half operating margin was 10.2% versus 10.2%, while net margin was 7.5% versus 7.9%.
- Non-GAAP Adjusted EBITDA was $96.1 million in Q2 versus $82.5 million, and $188.8 million for the first half versus $163.4 million.
- At June 30, cash and cash equivalents were $285.6 million; current assets were $682.7 million and current liabilities $531.9 million. Long-term debt, including current maturities, was $155.0 million; operating lease liabilities totaled $1,275.1 million.
- The revolving credit facility was expanded to $600 million and extended to April 2027. No amounts were outstanding at June 30; the company reported compliance with its debt covenants. It also held $49.1 million of held-to-maturity debt securities.
Changes versus prior comparable periods
- Growth reflected higher occupancy and patient days, acquisitions, and state relief revenue. Q2 skilled services revenue increased 14.6%; companywide occupancy based on operational beds reached 75.2%, up from 72.7%.
- Same-facility skilled services revenue grew 7.7% in Q2, while revenue from operations acquired on or after January 1, 2021 contributed $41.1 million more consolidated revenue than in Q2 2021.
- Skilled-services cost of services grew 15.4% in Q2, faster than segment revenue, with staffing costs—particularly agency labor—and acquisition-related expenses cited as drivers. Consolidated Q2 cost of services rose to 76.9% of revenue from 76.4%.
- First-half investing cash outflow increased to $76.6 million from $40.9 million, primarily reflecting greater acquisition and capital spending. Financing cash outflow was $29.8 million versus $105.7 million, when the prior-year period included repayment of Medicare advances.
Outlook, commentary, risks and unusual items
- Management gave no specific numerical earnings or revenue guidance. It said cash, investments, expected operating cash flows and available financing should cover operating needs for at least the next 12 months. Approximately $70 million was budgeted for 2022 renovation projects.
- Management described occupancy recovery and continued acquisition growth, while noting that newly acquired or transitioning facilities typically have lower occupancy and skilled mix. The company added four skilled nursing operations and five senior living operations in the first half; subsequent to quarter-end, it announced additional expansions with a stated purchase price of $47.9 million.
- COVID-19 continued to affect operations. The company recognized $24.5 million of state relief revenue in Q2 and $42.1 million in the first half, intended to offset COVID-related expenses. It received no federal Provider Relief Fund distributions in the period. The public health emergency was extended through October 13, 2022.
- Medicaid and Medicare represented 73.4% of service revenue. Reimbursement changes, labor shortages and wage pressure, occupancy, regulatory enforcement, quality ratings, and acquisition integration are material business risks. Management also warned of potential lease cross-defaults and substantial long-term lease commitments.
- Unusual items included a $3.3 million Q2 loss on deferred-compensation investments, compared with a $0.8 million gain a year earlier, with an offsetting expense reduction. The company recorded a $2.6 million gain on asset sales in Q2 and a $3.4 million legal finding in the first half.
- Legal and regulatory matters include an ongoing relator lawsuit alleging False Claims Act and Anti-Kickback Statute violations after DOJ declined to intervene, and a July 2022 follow-up information request from a U.S. House subcommittee investigating nursing homes’ COVID-19 response. The company said it is cooperating; outcomes cannot be predicted.
Investor verification priorities
- Assess how much revenue and earnings growth is organic versus acquisition-driven and dependent on state relief funding.
- Track labor and agency staffing costs, occupancy recovery, skilled mix, and reimbursement rates, especially given the high government-payor concentration.
- Review the scale and terms of lease obligations, facility-level and cross-default exposures, and liquidity available for acquisitions and capital needs.
- Monitor outcomes of the relator litigation, government reviews and investigations, and any resulting reserve, repayment or operating implications.
- Confirm post-quarter acquisition activity and Standard Bearer’s planned REIT tax election, alongside the assumptions underlying management’s liquidity outlook.