The Ensign Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statement amounts below are in millions of dollars unless noted. The filing was signed August 1, 2016.
Business context
Ensign provides post-acute healthcare through separate operating subsidiaries. At quarter-end, it operated 206 skilled nursing and assisted-living facilities, 35 home health, hospice and home-care agencies, and 17 urgent-care centers and other ancillary operations across 14 states. It owned 34 facilities and leased 172; approximately 22,000 beds and units were operational.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $410.5 | $311.1 | $793.8 | $617.6 |
| Operating income | $19.8 | $22.0 | $36.1 | $47.2 |
| Net income attributable to Ensign | $11.3 | $13.2 | $20.5 | $28.4 |
| Diluted EPS | $0.22 | $0.25 | $0.39 | $0.55 |
| Operating margin | 4.8% | 7.1% | 4.5% | 7.6% |
| Net cash from operations | — | — | $36.8 | $6.8 |
For the six months, investing activities used $99.9 million, including $56.1 million for business acquisitions and $36.4 million for property and equipment. Financing activities provided $55.0 million; the company repurchased $30.0 million of shares and paid $4.1 million in dividends. Cash declined $8.1 million to $33.5 million. Ensign also held $34.5 million in held-to-maturity debt securities.
At June 30, total debt was $184.4 million, including $170.0 million drawn on the revolving credit facility and $14.4 million in mortgage loans and a note. Current liabilities were $178.9 million and current assets were $288.0 million. The company reported compliance with debt covenants. On July 19, it amended the credit facility to provide up to $450 million: a $300 million revolver and a $150 million term loan; approximately $177 million was outstanding as of July 29.
Changes versus the prior comparable period
- Q2 revenue rose 32.0%; six-month revenue rose 28.5%. Management attributed much of the growth to acquisitions, which added $81.4 million of Q2 revenue and $143.9 million for the six-month period.
- Despite higher revenue, operating income, net income and diluted EPS fell in both comparisons. Cost of services, rent, depreciation and interest rose; for the six months, cost of services increased to 80.2% of revenue from 79.3%, while rent increased to 7.3% from 6.2%.
- Same-facility TSA revenue grew 6.3% in Q2 and 5.0% for six months. Overall occupancy declined to 76.3% in Q2 from 78.0% and to 76.7% for six months from 78.4%, as the portfolio expanded.
- Home health and hospice revenue increased 42.9% in Q2 and 44.2% for six months; hospice census and home-health admissions increased substantially.
- Operating cash flow improved by $30.0 million year over year for the six months, which management primarily attributed to the timing of receivable collections and payments.
Outlook, management commentary and risks
- No company-specific earnings or revenue guidance is provided. Management said cash balances, operating cash flow and available credit were expected to meet operating needs for at least the next 12 months. It budgeted approximately $60 million for 2016 renovation projects.
- Acquisition and integration are central to growth. In the first half, Ensign added 18 skilled nursing operations, one home health agency and two hospice agencies; it also entered leases for three new post-acute campuses. Post-quarter activity included another skilled nursing operation and campus agreement.
- In February, Ensign closed one skilled nursing facility following clinical survey challenges, transferring residents to nearby facilities. It recorded $7.935 million of closure and continuing lease-related charges, including approximately $6.512 million for the present value of lease payments. Management said the arrangement would not change future rent expense or materially affect master-lease coverage ratios.
- Q2 included a $1.586 million reserve for settlement of a general/premises liability claim. Self-insurance liabilities depend on actuarial estimates; the filing warns that actual claims could materially exceed estimates.
- Medicare and Medicaid accounted for 65.8% of six-month revenue. Reimbursement changes, audits, recoupments and value-based payment programs pose risks. Eleven operating subsidiaries were subject to Medicare probe reviews at quarter-end; five had closed and six remained in process.
- The company remained subject to a five-year corporate integrity agreement arising from its 2013 $48 million government settlement; it reported meeting its second-year requirements and passing independent review audits. An uncured material breach could threaten participation in federal healthcare programs.
- Lease commitments were approximately $1.94 billion in undiscounted future minimum payments. Cross-default provisions can link facility leases and debt arrangements. Regulatory, staffing, litigation, acquisition-integration and occupancy risks are also significant.
- CMS projected a 2.4% aggregate SNF payment increase for FY2017; its proposed home-health rule projected a 1.0% payment reduction for calendar 2017. These are industry-level estimates, not Ensign guidance.
Key facts for investors to verify
- How much of reported growth and future earnings depends on acquired facilities, and whether acquisition-related costs and start-up spending moderate.
- Whether same-facility occupancy, skilled mix and margins stabilize as the enlarged portfolio is integrated.
- Receivable collections, doubtful-account allowance and cash-flow conversion, given the large government-payor exposure.
- Debt availability, covenant headroom, interest-rate exposure and the terms and use of the expanded credit facility.
- Lease obligations and cross-default exposure, plus whether the closure charge fully captures costs associated with the closed facility.
- Results of the six continuing Medicare probe reviews, ongoing CIA compliance, and changes in self-insurance reserves or litigation exposure.