The Ensign Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statement amounts below are in U.S. dollars; figures are converted from thousands to millions unless otherwise indicated.
Business context
Ensign is a holding company whose independent subsidiaries operate skilled nursing, senior living and ancillary healthcare businesses, and own or lease related properties. At quarter-end, subsidiaries operated 290 facilities, with approximately 29,919 operational skilled nursing beds and 3,025 senior living units. The company added 19 skilled nursing operations through long-term leases during the first half of 2023, adding 1,764 beds.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $921.3m | $732.5m | $1,808.2m | $1,445.9m |
| Income from operations | $77.9m | $78.2m | $152.7m | $147.3m |
| Net income attributable to Ensign | $64.0m | $57.7m | $123.8m | $108.0m |
| Diluted EPS | $1.12 | $1.01 | $2.17 | $1.90 |
| Cash provided by operating activities | Not separately stated for the quarter | $168.1m | $129.8m |
- Q2 revenue grew 25.8%; first-half revenue grew 25.1%. Management attributed growth to occupancy and patient-day recovery, higher skilled census and acquisitions. Operations acquired on or after July 1, 2022 contributed $130.2m of Q2 and $230.1m of first-half service revenue growth versus the comparable periods.
- Operating income was nearly flat in Q2 despite higher revenue. Operating margin declined to approximately 8.5% from 10.7%; cost of services rose to 78.4% of revenue from 76.9%. Management cited staffing costs, wage and benefit pressure, overtime and acquisition-related costs. First-half operating margin was approximately 8.4%, versus 10.2%.
- Net income and diluted EPS increased, while other income/expense improved substantially year over year. Q2 included $5.2m of other income, including gains in the deferred compensation investment program; related compensation expense is recorded in operating expenses.
- Skilled nursing occupancy was 78.0% for Q2, up from 75.2%; same and transitioning facilities’ combined occupancy was reported at 78.2%, up 3.1% year over year. Overall skilled mix by patient days was 30.8% in Q2, versus 31.1%.
- Medicare and Medicaid together accounted for 73.1% of Q2 service revenue and 73.2% for the first half. State relief funding recognized as revenue was $18.5m in Q2 and $44.8m for the first half, compared with $24.5m and $42.1m, respectively, in 2022.
Financial position and liquidity
- Cash and cash equivalents were $420.0m at June 30, 2023, compared with $316.3m at year-end 2022. Current assets were $927.6m and current liabilities $619.0m.
- First-half operating cash flow was $168.1m; investing cash outflow was $62.4m, including $51.6m of property and equipment purchases; financing cash outflow was $1.9m. Cash increased $103.7m during the half.
- Debt was $154.3m before debt issuance costs and current maturities; no borrowings were outstanding on the $600m revolving credit facility. The company reported compliance with its loan covenants.
- Lease liabilities totaled $1,736.5m, including $78.7m current; undiscounted future lease payments were $2,730.3m. Right-of-use assets rose to $1,771.9m from $1,451.0m, reflecting, in part, new long-term lease arrangements.
- Management said cash, operating cash flow and available credit should cover operating needs for at least 12 months. It budgeted approximately $80m for 2023 renovation projects and reported deferring about $50m of 2023 federal and California estimated tax payments until the fourth quarter.
Material changes, outlook and risks
- Ensign reported stronger occupancy and patient-day trends, and expects a return to historical seasonality, with occupancy and skilled mix typically stronger in the first and fourth quarters and softer in the second and third quarters. The filing provides no formal earnings or revenue guidance.
- The temporary increase in federal Medicaid matching support is phasing down and is scheduled to end in 2023. Management noted state-specific rate responses, but the effect of the funding wind-down and Medicaid eligibility redeterminations remains uncertain.
- Labor availability and cost remain key pressures. A federal minimum-staffing rule was anticipated but not finalized in the filing; management warned that such a mandate could increase costs and constrain capacity.
- Regulatory and reimbursement risks include Medicare and Medicaid rate changes, audits, quality requirements and potential ownership-disclosure rules. Thirty-seven operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution as of June 30 and through the filing date.
- Legal exposures include a qui tam action alleging False Claims Act and Anti-Kickback Statute violations related to certain referral-source relationships. DOJ declined to intervene in 2020, but the relator continues the lawsuit. The filing does not provide a clear estimate of potential loss. The company also faces ordinary-course patient-care, staffing, wage-and-hour and other claims.
- Self-insurance reserves depend on actuarial estimates; the company warns actual claims could exceed recorded amounts and materially affect earnings, cash flow or financial condition. Lease master agreements may include cross-default exposure. Standard Bearer’s REIT status and continued qualification are also risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether occupancy gains, same-facility growth and staffing improvements continue, and whether acquisition-driven growth translates into improved operating margins.
- How labor costs, skilled mix and the phase-down of state relief and enhanced Medicaid funding affect earnings and cash conversion.
- Updates on the 37 Medicare reviews, the continuing qui tam action, other litigation and the adequacy of self-insurance reserves.
- Lease obligations, new facility integrations, renovation spending and covenant headroom, notwithstanding the undrawn revolver and reported liquidity.
- Final federal and state staffing, reimbursement, ownership-disclosure and Medicaid eligibility rules, and Standard Bearer’s ongoing REIT qualification.