The Ensign Group, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2018. Ensign provides skilled nursing, assisted and independent living, home health, hospice and ancillary services through subsidiaries. At quarter-end it operated 235 facilities and 46 home health, hospice and home care agencies across 15 states.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $496.4 | $448.3 | $988.5 | $890.0 |
| Income from operations | $31.8 | $22.0 | $64.8 | $29.6 |
| Net income attributable to Ensign | $22.0 | $12.2 | $45.1 | $15.1 |
| Diluted EPS | $0.41 | $0.23 | $0.84 | $0.29 |
| Operating margin | 6.4% | 4.9% | 6.6% | 3.3% |
| Net margin attributable to Ensign | 4.4% | 2.7% | 4.6% | 1.7% |
| Adjusted EBITDA (non-GAAP) | $46.3 | $38.1 | $93.0 | $79.2 |
Reported revenue grew 10.7% in Q2 and 11.1% in the first half. Because ASC 606 adoption changed revenue presentation, management also provided comparisons on the prior-accounting basis: revenue growth was 12.8% for Q2 and 13.1% for the first half. The standard’s principal presentation effect was to record most expected credit losses as reductions to revenue rather than bad-debt expense; management said adoption did not materially affect revenue measurement or recognition at transition.
For Q2, transitional and skilled services revenue was $408.5 million, assisted and independent living revenue $37.2 million, and home health and hospice revenue $41.2 million. Home health and hospice grew 19.1% year over year; hospice average daily census rose 26.5%. Skilled nursing occupancy improved to 76.6% from 74.7%, while skilled mix by revenue declined to 50.2% from 52.1%. Assisted/independent living occupancy declined to 75.2% from 77.4%.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $101.2 million, versus $24.9 million a year earlier. Management attributed the increase to higher earnings, improved receivable collections and timing of payments, and an $11.0 million income-tax refund.
- First-half investing cash outflow was $81.2 million, including $55.5 million for asset acquisitions and $24.3 million for property and equipment. Financing cash outflow was $35.1 million. Cash declined $15.2 million to $27.2 million.
- At June 30, current assets were $327.6 million and current liabilities $230.3 million. Current investments were $13.0 million. Net accounts receivable was $251.0 million.
- Long-term debt, including current maturities and net of debt issuance costs, was approximately $278.1 million, down from $312.9 million at December 31, 2017. The company reported $156.9 million outstanding under its credit facility and $124.2 million under mortgage loans and a promissory note. It was in compliance with debt covenants.
- Undiscounted future minimum operating lease payments totaled $1.735 billion. Management expected adoption of the new lease standard in 2019 to materially increase reported assets and liabilities.
Changes, outlook and material risks
- Growth and acquisitions: First-half revenue growth reflected higher patient days and rates, operating improvements and acquisitions. Acquired operations contributed $69.2 million to first-half revenue growth, according to management. Ensign spent $55.5 million on first-half asset acquisitions and bought an office building for $31.5 million. Subsequent to quarter-end, it reported acquisitions totaling $4.1 million.
- Costs and earnings: Cost of services fell as a share of revenue, to 79.8% in Q2 from 81.9% (on reported figures) and to 79.5% for the first half from 81.2%. General and administrative expense increased to $22.4 million in Q2 from $17.3 million, partly due to growth-related wages and incentives.
- Unusual items and taxes: First-half results included a $1.7 million recovery of unclaimed class-action settlement funds. The prior-year period included an $11.0 million class-action charge and closure-related costs. The first-half 2018 effective tax rate was 21.7%, versus 35.2%, reflecting the lower federal tax rate and share-based compensation benefits; the company had not finalized its accounting for the Tax Act.
- Liquidity outlook: Management said cash, operating cash flow and credit-facility availability should cover operating needs for at least 12 months. It budgeted approximately $60 million for 2018 renovation projects. No specific earnings or revenue guidance was provided in the supplied filing text.
- Government investigation: In May 2018, the DOJ issued a Civil Investigative Demand concerning possible False Claims Act or Anti-Kickback Statute violations involving relationships at ten Southern California skilled nursing facilities, for the period from October 2013 to the present. Ensign said it was cooperating but could not predict the timing, outcome or financial impact.
- Other key risks: Medicare and Medicaid generated 68.2% of Q2 revenue. Reimbursement changes, audits and recoupments, staffing and labor costs, patient-care litigation, self-insurance estimates, regulatory compliance, acquisition integration, and lease or debt covenant defaults could adversely affect results. Four operating subsidiaries had Medicare probe reviews in process; a hospice ZPIC audit was under appeal. The company also had a five-year corporate integrity agreement arising from a 2013 settlement.
- Capital allocation: The board authorized a share repurchase program of up to $30 million through February 20, 2019; no shares had been repurchased under it as of the filing.
Important facts for investors to verify
- Review comparable revenue and margin trends using the ASC 606 pro forma figures, as reported revenue growth is not directly comparable with prior periods.
- Track the DOJ investigation, Medicare and hospice audits, and any resulting accruals, repayment obligations or compliance restrictions.
- Assess the sustainability of operating cash flow, including the $11.0 million tax refund and working-capital timing benefits.
- Monitor occupancy and skilled mix, particularly the lower skilled mix and assisted-living occupancy, alongside acquisition-driven growth.
- Evaluate debt capacity and the substantial lease commitments, including the expected balance-sheet effects of lease-accounting adoption.