Business context and reporting period
The Ensign Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter filing. Ensign is a holding company whose subsidiaries provide skilled nursing, senior living, rehabilitation and ancillary services, and own and lease healthcare real estate. At year-end, it operated 228 skilled nursing and senior living facilities in 13 states and owned 94 real estate properties. The 2019 comparison reflects Pennant’s October 2019 spin-off and presents its results as discontinued operations.
Beginning in the fourth quarter of 2020, Ensign reported two segments: transitional and skilled services, and real estate. The filing reports that 95.2% of 2020 revenue came from skilled nursing facilities.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $2,402.6 million | $2,036.5 million |
| Income from operations | $223.2 million | $129.2 million |
| Net income from continuing operations | $171.4 million | $92.2 million |
| Net income attributable to Ensign | $170.5 million | $91.7 million from continuing operations |
| Diluted EPS from continuing operations | $3.06 | $1.64 |
| Cash from continuing operating activities | $373.4 million | $168.9 million |
Revenue increased 18.0% year over year. Operating margin rose to 9.3% from 6.4%; net income from continuing operations was 7.1% of revenue versus 4.5%. The filing cites acquisition growth, improved skilled mix, state relief funding and lower interest expense among the factors behind results. Cost of services increased 15.5% in transitional and skilled services, slower than that segment’s 18.3% revenue growth.
For Q4 2020, revenue was $629.0 million versus $560.2 million in Q4 2019; net income attributable to Ensign was $46.3 million versus $27.4 million, and diluted EPS from continuing operations was $0.82 versus $0.49.
Year-end cash and cash equivalents were $236.6 million, up from $59.2 million; working capital was $20.6 million, down from $67.9 million. Total debt was $117.8 million, including $2.96 million of current maturities. The $350 million revolving credit facility was undrawn at year-end, and the company reported compliance with its debt covenants. Lease liabilities totaled approximately $998.5 million on a present-value basis; undiscounted future operating lease payments were $1.674 billion. The company declared dividends of $0.2025 per share for 2020.
Material changes and operating trends
- Skilled nursing occupancy fell to 73.5% from 79.2%, reflecting the pandemic and reduced patient flow. Skilled mix by nursing days increased to 31.7% from 29.0%; skilled mix by nursing revenue rose to 53.1% from 48.8%.
- Transitional and skilled services revenue grew 18.3% to $2,288.2 million. Medicare and managed-care revenue increased, while private revenue declined. Same-facility revenue rose 8.3% even as same-facility patient days fell 6.4%.
- Real estate segment income increased to $31.3 million from $17.5 million; real estate funds from operations (FFO), a non-GAAP measure, increased 51.6% to $49.5 million.
- Ensign added operations and real estate for an aggregate purchase price of approximately $25.0 million, adding 507 skilled nursing beds and 298 senior living units. Four additional skilled nursing operations were leased after year-end.
- The company repurchased $25.0 million of shares in the first quarter and reported no active repurchase plan at year-end.
Outlook, risks and unusual items
Management said it expected occupancy to recover as hospital volumes and elective procedures increased and vaccine access broadened, but emphasized that the timing and pace of recovery were uncertain. It budgeted approximately $65 million for 2021 renovation projects and said available cash, operating cash flows and financing were expected to cover operating needs for at least the next 12 months. The filing provides no quantified earnings or revenue guidance.
COVID-19 reduced occupancy and increased costs for labor, testing, personal protective equipment and other supplies. Ensign recognized $45.4 million of state relief revenue, which management said corresponded to COVID-related expenses. It received approximately $141.7 million in Provider Relief Funds during 2020 and returned all of those funds by year-end; it also received and returned a further $5.1 million after year-end. It retained $102.0 million of Medicare advance payments as a liability, with repayment scheduled to begin in April 2021. Deferred employer Social Security taxes totaled $48.3 million, with repayment due in 2021 and 2022.
Key risks include dependence on Medicare and Medicaid reimbursement (74.5% of 2020 service revenue), pandemic-related census and cost volatility, staffing availability and expense, regulatory surveys and billing reviews, and substantial lease commitments. Four operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute at year-end. The DOJ declined to intervene in a subsequent relator action related to an investigation of referral-source relationships; the relator may continue the case. Ensign was also responding to a House subcommittee information request concerning nursing homes and COVID-19. Other material exposures include patient-care and employment litigation, self-insurance reserve estimation, and lease guarantees connected to the Pennant spin-off. No goodwill or intangible asset impairment was recorded in 2020; long-lived asset impairment charges were $2.7 million.
Important facts for investors to verify
- Whether occupancy and patient admissions recovered after year-end, and how that affected revenue, labor costs and margins.
- Repayment and recoupment timing for the $102.0 million Medicare advance-payment liability and deferred payroll taxes; confirm no additional Provider Relief Funds were retained.
- State Medicaid relief and reimbursement trends, and the sustainability of the higher skilled mix and Medicare rates.
- Developments in the relator litigation, government inquiries, Medicare reviews and COVID-related claims or enforcement actions.
- Lease obligations, cross-default exposure and Pennant-related guarantees; also assess self-insurance estimates, including $96.8 million of total accrued self-insurance liabilities.
- Cash flow quality: 2020 operating cash flow benefited from working-capital timing, including deferred payroll taxes, collections and accrued liabilities.