Ensign Group(US:ENSG)2023-10-24 16:00PART I. Financial Information Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with detailed notes Condensed Consolidated Balance Sheets Total assets increased to $4.08 billion, liabilities to $2.62 billion, and equity to $1.47 billion by September 30, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $994,347 | $781,125 | | Cash and cash equivalents | $467,870 | $316,270 | | Total Assets | $4,081,981 | $3,452,022 | | Total Current Liabilities | $671,797 | $582,072 | | Long-term lease liabilities | $1,657,955 | $1,355,113 | | Total Liabilities | $2,616,539 | $2,203,222 | | Total Equity | $1,465,442 | $1,248,800 | Condensed Consolidated Statements of Income Q3 2023 total revenue grew 22.2% to $940.8 million, with diluted EPS at $1.11, and nine-month revenue reached $2.75 billion Financial Performance Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $940,791 | $770,005 | $2,748,977 | $2,215,936 | | Income from operations | $79,792 | $74,287 | $232,541 | $221,629 | | Net Income Attributable to Ensign | $63,863 | $56,179 | $187,708 | $164,210 | | Diluted EPS | $1.11 | $0.99 | $3.28 | $2.89 | Condensed Consolidated Statements of Stockholders' Equity Total equity increased to $1.47 billion by Q3 2023, driven by net income and employee stock awards, offset by dividends - Key drivers of the change in stockholders' equity during the first nine months of 2023 include net income of $187.7 million, employee stock award compensation of $22.7 million, and dividends declared of $9.7 million11 Condensed Consolidated Statements of Cash Flows Net cash from operations increased to $291.4 million, with cash and equivalents rising by $151.6 million to $467.9 million by Q3 2023 Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $291,397 | $222,337 | | Net Cash Used in Investing Activities | ($137,754) | ($143,771) | | Net Cash Used in Financing Activities | ($2,043) | ($31,903) | | Net Increase in Cash | $151,600 | $46,663 | | Cash and Cash Equivalents, End of Period | $467,870 | $308,864 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on business operations, accounting policies, revenue, segments, debt, leases, and legal contingencies - As of September 30, 2023, the company's subsidiaries operated 295 facilities with approximately 30,500 skilled nursing beds and 3,000 senior living units. The real estate portfolio includes 112 owned properties21 - Revenue from Medicare and Medicaid programs accounted for 72.8% of total service revenue for the nine months ended September 30, 20236265 - During the nine months ended September 30, 2023, the company expanded its operations by adding 24 stand-alone skilled nursing operations, adding 2,340 operational beds88 - The company is vigorously defending a lawsuit from a qui tam relator alleging violations of the False Claims Act (FCA) and/or the Anti-Kickback Statute (AKS), after the Department of Justice declined to intervene177 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operating results, liquidity, and capital resources, covering business overview, industry trends, and regulatory environment Overview and Recent Activities Ensign operates 295 facilities with occupancy nearing pre-pandemic levels, recognized $10.3 million in state relief, and approved a new $20 million stock repurchase program - Combined Same Facilities and Transitioning Facilities occupancy reached 79.2%, a 2.9% increase from the prior year quarter and nearing the pre-pandemic level of 80.1% in March 2020203 State Relief Funding Recognized as Revenue (in millions) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $10.3 | $21.4 | | Nine Months Ended Sep 30 | $55.1 | $63.5 | - A new stock repurchase program for up to $20.0 million was approved by the Board of Directors on August 29, 2023206 Key Performance Indicators and Revenue Sources Key metrics include skilled mix (29.1% days, 48.4% revenue) and 78.9% occupancy, with Skilled Services and Standard Bearer as segments, and Medicare/Medicaid as primary revenue sources Skilled Mix and Occupancy (Skilled Nursing Services) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Skilled Mix (Days) | 29.1% | 31.6% | 30.7% | 32.1% | | Skilled Mix (Revenue) | 48.4% | 51.6% | 50.6% | 52.3% | | Occupancy Percentage | 78.9% | 75.7% | 78.3% | 75.0% | - The company's two reportable segments are Skilled Services (operation of skilled nursing facilities) and Standard Bearer (real estate properties). Other operations like senior living are reported under "All Other"219220 Government Regulation and Industry Trends The industry faces extensive regulatory changes, including proposed minimum staffing mandates, a 4.0% net increase in SNF PPS rates, and the phasing out of COVID-19 PHE waivers - On September 1, 2023, CMS issued a proposed rule to establish minimum staffing standards for long-term care facilities, including 0.55 HPRD for RNs and 2.45 HPRD for nurse aides, and a 24/7 on-site RN requirement252525 - The SNF PPS Final Rule for FY 2024 provides a net increase of 4.0% in Medicare payments, which includes a 6.4% market basket update offset by a 2.3% parity adjustment recalibration246276 - The end of the Public Health Emergency (PHE) on May 11, 2023, triggered a gradual phase-down of the temporary increase in Federal Medical Assistance Percentage (FMAP) funding, which will be completely phased out by the end of 2023204261 Results of Operations Q3 2023 total revenue grew 22.2% year-over-year, driven by acquisitions and occupancy gains, while cost of services increased due to acquisition and staffing expenses Q3 2023 vs Q3 2022 Revenue Growth | Segment | Revenue Change ($M) | % Change | | :--- | :--- | :--- | | Skilled Services | +$163.6 | +22.1% | | Standard Bearer | +$2.2 | +12.0% | | All Other | +$7.3 | +22.9% | | Total Revenue | +$170.8 | +22.2% | - Revenue from operations acquired since October 1, 2022, increased consolidated service revenue by $117.3 million in Q3 2023 compared to Q3 2022362 - For the nine months ended Sep 30, 2023, skilled services cost of services increased to 78.9% of revenue from 77.9% in the prior year, driven by new acquisitions, higher liability reserves, and wage expenses404 Liquidity and Capital Resources The company maintains strong liquidity with $467.9 million in cash and a $600 million undrawn credit facility, supported by $291.4 million in operating cash flow - As of September 30, 2023, the company had cash and cash equivalents of $467.9 million and no outstanding debt under its $600 million revolving credit facility421428 - Cash provided by operating activities increased by $69.1 million to $291.4 million for the nine months ended September 30, 2023, compared to the prior year, primarily due to higher net income and deferral of income tax payments423 - The company deferred approximately $50.0 million of 2023 federal and California estimated tax payments, which were paid in October 2023414 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure from its variable-rate credit facility, though fixed-rate debt and low-risk investments mitigate this - The company is exposed to interest rate risk through its $600.0 million revolving credit facility, which has variable rates tied to SOFR. However, there were no outstanding borrowings as of September 30, 2023437439 - The company's $153.4 million in mortgage loans and promissory notes are at fixed interest rates, reducing exposure to interest rate fluctuations439 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report442 - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting443 PART II. Other Information Legal Proceedings The company faces various legal and regulatory proceedings, including a qui tam lawsuit, patient care litigation, and class actions, with uncertain but potentially material adverse outcomes - The company is defending a lawsuit from a qui tam relator alleging violations of the False Claims Act (FCA) and Anti-Kickback Statute (AKS) related to medical director relationships, after the DOJ declined to intervene in April 2020449451 - The company and its subsidiaries are subject to an increasing number of claims and lawsuits, including professional liability, elder abuse, and class action "staffing" suits, which have the potential for large verdicts and settlements452458 - As of September 30, 2023, 41 of the company's independent operating subsidiaries had regulatory reviews (RAC, TPE, etc.) scheduled or in process to audit Medicare billings and potential overpayments461 Risk Factors This section details significant business and industry risks, including reimbursement changes, staffing mandates, litigation, and stock ownership risks like dividend policy and anti-takeover provisions Risks Related to our Business and Industry The company faces substantial risks from potential Medicare/Medicaid reimbursement reductions, federal staffing mandates, labor shortages, extensive litigation, and cybersecurity threats - Reductions in reimbursement rates or changes to rules from Medicare and Medicaid, which accounted for a combined 72.8% of service revenue in the first nine months of 2023, could materially harm financial results468476 - Proposed federal minimum staffing mandates, if enacted, are expected to adversely affect labor costs, the ability to maintain patient capacity, and profitability due to increased demand for a limited supply of nurses525526 - The company is subject to government reviews, audits, and investigations, including a pending qui tam lawsuit, which could result in significant fines, refunds, and potential exclusion from Medicare/Medicaid programs494502575 Risks Related to Ownership of our Common Stock Risks for common stock owners include dividend payment ability, restricted by credit agreements, and anti-takeover provisions that could affect stock price - The company's ability to pay dividends is subject to operational performance and is restricted by its Amended Credit Agreement in the event of a default648 - Anti-takeover provisions, including a classified board and "blank check" preferred stock, could discourage or prevent a change in control, potentially limiting the stock price649651 Other Information This section discloses President & COO Spencer W. Burton's Rule 10b5-1 trading plan for potential stock sales and gifts of up to 8,280 shares - On September 12, 2023, President & COO Spencer W. Burton entered into a Rule 10b5-1 trading plan for the potential sale of up to 8,280 shares of common stock between December 14, 2023, and August 30, 2024652 Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents and CEO/CFO certifications - The exhibits include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002657