The Ensign Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Amounts are in millions of dollars unless otherwise noted. Ensign provides post-acute healthcare services and operates skilled nursing, senior living, real estate and ancillary businesses through subsidiaries.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $668.5 | $599.3 | $1,934.3 | $1,773.6 |
| Income from operations | $66.3 | $55.1 | $194.9 | $167.3 |
| Net income attributable to Ensign | $47.3 | $43.1 | $145.9 | $124.2 |
| Diluted EPS | $0.83 | $0.77 | $2.56 | $2.23 |
| Operating margin | 9.9% | 9.2% | 10.0% | 9.5% |
| Operating cash flow | — | — | $204.5 | $282.2 |
- Q3 revenue increased 11.6%; Ensign-attributable net income rose 9.8% and diluted EPS rose 7.8%. For the first nine months, revenue grew 9.1%, attributable net income 17.5%, and diluted EPS 14.8%.
- Q3 skilled services revenue grew 12.6%. Occupancy based on operational beds was 73.5%, up from 70.7% a year earlier; same-facility occupancy was 74.4%, up 2.8 percentage points. For the nine-month period, total occupancy was 72.5%, down from 74.5%.
- Skilled mix declined year over year in Q3: 30.5% of nursing days versus 32.8%, and 50.7% of nursing revenue versus 53.9%. Management attributed this partly to a shift from higher-acuity Medicare patients toward long-term residents as COVID-19 cases declined.
- Q3 cost of services for skilled services rose 13.1%, faster than its 12.6% revenue growth; staffing expenses contributed to the increase. Consolidated G&A rose 17.5%, primarily from wages, benefits and growth. Nine-month skilled-services cost of services was 77.1% of segment revenue, unchanged year over year.
- Cash and cash equivalents were $304.6 at September 30, 2021, versus $236.6 at December 31, 2020. Nine-month operating cash flow declined $77.7 year over year, primarily due to working-capital changes, including receivables timing and expenses. Capital expenditures were $50.1, compared with $37.8.
Debt, liquidity and capital
- Gross mortgage loans and promissory notes were $147.3, including $3.5 of current maturities; there were no borrowings under the $350.0 revolving credit facility. The company reported compliance with debt covenants. Outstanding debt was predominantly fixed-rate; HUD-insured mortgage rates were reported at 3.1%–4.2% effective.
- Operating lease liabilities totaled $1,145.2, of which $52.1 was current. Future undiscounted lease payments totaled $1,919.3. Lease obligations are significant given the company’s leased-facility footprint.
- Management said cash, expected operating cash flow and available financing should cover operating needs for at least the next 12 months. The company had budgeted approximately $65.0 for 2021 renovations.
- Ensign repaid the remaining $102.0 of Medicare advance payments in March 2021. It reported $11.6 of Provider Relief Fund receipts and returns during the first nine months and said it had returned all Provider Relief Funds received to date. State relief revenue was $52.4 for the nine months, compared with $24.8 in 2020.
- On October 21, 2021, after quarter-end, the board authorized a stock repurchase program of up to $20.0 over approximately 12 months, beginning October 29.
Outlook, commentary and material risks
- Management described occupancy as recovering through Q3, but said the Delta variant moderated recent growth. Same and transitioning facility occupancy rose 17 basis points from August to September; management expected October occupancy to grow sequentially at a more moderate rate. No specific full-year earnings or revenue guidance is provided in the filing.
- The company added 14 skilled nursing operations in the first nine months, bringing total operations to 242 facilities and ancillary operations. Three additional leased skilled nursing facilities, adding 328 beds, were added after quarter-end. Acquisitions and state relief revenue materially supported reported revenue growth; acquired operations contributed $37.6 in Q3 and $84.6 for the nine months compared with the respective 2020 periods.
- COVID-19 remains a source of uncertainty for census, staffing, operating costs and resident safety. The company cited possible staffing disruption from federal and state vaccination requirements and broader labor shortages and wage pressure.
- Medicare and Medicaid accounted for 73.6% of service revenue in both the Q3 and nine-month 2021 periods. Changes in reimbursement, audits, recoupments and government cost containment could affect revenue and margins. Seven operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution as of September 30, 2021 and subsequently.
- Legal and regulatory exposures include patient-care and employment litigation, COVID-related claims, a House Select Subcommittee information request, and a continuing qui tam lawsuit alleging False Claims Act and Anti-Kickback Statute violations. DOJ declined to intervene in April 2020; the relator continued the lawsuit. Outcomes and potential financial effects are uncertain.
- Self-insurance reserves depend on actuarial estimates; management cautioned that actual claims could materially exceed or fall below recorded estimates. Long-term leases and cross-default provisions may amplify the impact of a facility-level default or regulatory issue.
- The company reported no long-lived asset impairment in 2021; it recorded $2.7 of impairment and sale-related charges in the 2020 comparison period. The nine-month 2021 results included a $0.4 gain on sale of real estate.
Important facts for investors to verify
- How much of revenue and earnings growth reflects sustainable occupancy and operating performance versus acquisitions and state relief funding.
- Whether occupancy recovery continues, and how changes in skilled mix and payor mix affect revenue per patient and margins.
- Labor availability, wage inflation, vaccination-rule compliance and associated effects on staffing, capacity and costs.
- Cash conversion and receivables collection trends, including the reasons operating cash flow was lower year over year.
- Debt and lease coverage, covenant headroom, and the financial consequences of any regulatory, litigation or self-insurance developments.
- Updates on the DOJ-related qui tam matter, the congressional inquiry, Medicare reviews and the newly authorized share repurchase program.