ENSIGN GROUP, INC quarterly report, Q2 FY2019

The Ensign Group, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Financial statement amounts below are in millions of dollars unless otherwise noted. Ensign provides post-acute healthcare services through operating subsidiaries; at quarter-end it operated 254 skilled nursing and senior living facilities and 62 home health, hospice, and home care agencies.

Financial performance and position

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Revenue	$575.7	$496.4	$1,124.9	$988.5
Income from operations	$37.8	$31.8	$75.7	$64.8
Net income attributable to Ensign	$28.6	$22.0	$56.0	$45.1
Diluted EPS	$0.51	$0.41	$1.00	$0.84
Operating margin	6.6%	6.4%	6.7%	6.6%

• Q2 revenue grew 16.0% and Ensign-attributable net income grew 30.0% year over year. First-half revenue grew 13.8% and attributable net income grew 24.1%.
• Cost of services declined as a share of revenue: 79.4% versus 79.8% in Q2 and 78.9% versus 79.5% for the first half. General and administrative expense rose to 5.3% of Q2 revenue from 4.5%, largely due to spin-off transaction costs and higher incentives.
• Operating cash flow was $72.3 for the first half, down from $101.2. The company attributed the decline primarily to accounts-receivable collection timing and the absence of an $11.0 tax refund received in the prior-year period. Investing cash outflow was $98.3, including $35.8 of property and equipment purchases and acquisition payments.
• Cash and cash equivalents were $39.0 at June 30, 2019, versus $31.1 at year-end 2018. Current assets were $375.5 and current liabilities $327.3. The company also reported $46.9 of held-to-maturity debt securities, rated AA, A, or BBB.
• Gross debt was approximately $281.0, including $159.4 under the credit facility and $121.7 of mortgage loans and notes. Long-term debt, net of current maturities and issuance costs, was $268.2. Ensign reported compliance with debt covenants at quarter-end; revolving-facility borrowings increased to approximately $111.3 by July 30.
• Following adoption of lease accounting standard ASC 842, the balance sheet included $1,074.4 of right-of-use assets and $1,047.8 of lease liabilities. Future undiscounted lease payments were $1,719.2. These operating lease obligations are significant fixed commitments, distinct from reported debt.

Material changes and operating trends

• Growth reflected acquisitions as well as operating performance. Acquisitions completed in the first half added seven stand-alone skilled nursing operations, one senior living operation, three campuses, and multiple home health, hospice, and home care agencies; aggregate purchase price was $65.4. Acquired operations contributed $59.6 to first-half revenue growth year over year.
• Same-facility skilled nursing revenue increased 7.0% in the first half, and occupancy across skilled nursing operations improved to 79.4% from 77.2%. However, skilled mix by nursing days fell to 29.5% from 30.7%, and quality mix by nursing days declined to 41.3% from 42.8%.
• Home health and hospice revenue rose 18.9% in the first half; hospice average daily census increased 21.1%. Senior living revenue grew 12.9%, while occupancy was 75.3% versus 75.4%.
• Ensign adopted ASC 842 on January 1, 2019, recording $1.051 billion of right-of-use assets and $1.029 billion of lease liabilities at adoption. The $9.0 net-of-tax retained-earnings adjustment related to a prior sale-leaseback; management said the standard did not materially affect earnings or liquidity.

Outlook, commentary, risks, and contingencies

• Management said cash, operating cash flow, and credit availability should cover operating needs for at least the next 12 months. It budgeted approximately $60 million for 2019 renovations. The filing provides no company-specific numerical revenue or earnings guidance.
• Management cited acquisition opportunities and aging-population demand, but noted newly acquired operations often have lower occupancy and margins and require integration and operational improvement.
• A proposed spin-off would separate skilled and transitional care from home health, hospice, and substantially all senior living operations. Pennant was expected to include 62 agencies and 51 senior living communities; Ensign anticipated distributing one Pennant share for every two Ensign shares. Completion remained subject to customary conditions, including tax and regulatory approvals and board approval. Spin-off costs were $4.6 in the first half.
• Key reimbursement changes included the skilled nursing Patient-Driven Payment Model (PDPM), scheduled for October 1, 2019, and the home health Patient-Driven Groupings Model (PDGM), scheduled for January 1, 2020. The filing cautioned that payment-method changes and government cost containment could affect reimbursement and results.
• Government programs accounted for 68.0% of revenue in the first half. The company identified reimbursement reductions, audits and recoupments, staffing shortages and wage inflation, regulatory compliance, and patient-care litigation as material risks. Ten subsidiaries had Medicare reviews scheduled, on appeal, or in dispute.
• The DOJ was investigating possible False Claims Act and Anti-Kickback Statute issues concerning relationships at certain Southern California facilities; Ensign said it was cooperating and could not predict the outcome or impact. Separately, the OIG confirmed completion of Ensign’s five-year corporate integrity agreement in 2019.
• Self-insurance reserves depend on actuarial estimates; management warned actual claims could exceed recorded amounts and materially affect earnings, cash flows, and financial condition. The company also cited lease cross-default risks and substantial long-term lease commitments.

Important facts for investors to verify

• Whether acquisition-led revenue growth translates into sustained same-facility profitability, particularly as skilled and quality mix declined.
• Accounts-receivable collections and operating cash flow recovery; first-half cash flow was materially below the prior year.
• Post-quarter revolving-credit borrowings, remaining availability, covenant headroom, and the impact of lease commitments on fixed-charge capacity.
• Implementation effects of PDPM and PDGM, including any changes to reimbursement, patient mix, and operating costs.
• Progress and final terms of the proposed Pennant spin-off, including tax treatment, transition arrangements, and associated costs.
• Developments in the DOJ inquiry, Medicare reviews, self-insurance estimates, and other legal or regulatory contingencies.