The Ensign Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unless noted, financial amounts below are in U.S. dollars. Ensign provides post-acute healthcare services through subsidiaries. Following its October 2019 spin-off of The Pennant Group, Ensign reports one segment, transitional and skilled services; 2019 comparisons include Pennant as discontinued operations where applicable, so they are not fully like-for-like.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $589.6 million | $471.3 million | Up 25.1%; includes $65.4 million of revenue growth from operations acquired on or after January 1, 2019. |
| Income from operations | $56.8 million | $29.9 million | Operating margin was 9.6%, versus 6.4%. |
| Net income from continuing operations | $41.2 million | $21.6 million | Continuing-operations net margin was 7.0%, versus 4.6%. |
| Net income attributable to Ensign | $40.8 million | $27.4 million | 2019 included $5.9 million attributable to Ensign from discontinued operations. |
| Diluted EPS from continuing operations | $0.73 | $0.39 | Up approximately 87%. |
| Cash from operating activities | $27.1 million | $15.8 million | Continuing operations; higher earnings and working-capital timing contributed. |
- Transitional and skilled services revenue increased 24.3% to $558.4 million. Same-facility revenue rose 10.5%; acquired operations were a significant growth contributor.
- Cost of services increased 22.2% to $454.5 million, slower than revenue growth; cost of services declined to 77.1% of revenue from 78.9%. General and administrative expense was $32.2 million, or 5.5% of revenue.
- Medicare and Medicaid together provided 70.5% of revenue. Overall skilled mix was 29.3% of patient days, compared with 29.9% a year earlier; skilled mix by revenue was 50.1%, versus 49.7%.
- Capital expenditures were $15.8 million. Continuing investing activities used $15.5 million, including $14.1 million for asset acquisitions. Financing activities used $7.5 million, including $25.0 million of share repurchases.
- Cash and cash equivalents were $63.2 million at quarter-end; held-to-maturity debt securities were approximately $47.9 million. Accounts receivable, net, was $329.5 million, up from $309.0 million at year-end.
- Gross debt was $349.7 million: $230.0 million drawn on the revolving facility and $119.7 million in mortgage loans and a promissory note. The $350 million revolver matures in October 2024; Ensign reported compliance with its covenants at March 31. It reported approximately $110 million drawn as of May 8.
- Operating lease liabilities totaled $1.016 billion, including $46.1 million current. These lease obligations are separate from reported debt.
Material changes and operating trends
- Revenue growth reflected increased patient days and revenue per day, acquisitions, and improvements at existing and transitioning facilities. Overall Q1 occupancy was 79.4%, unchanged from Q1 2019, while same-facility occupancy improved to 80.1% from 79.9%.
- COVID-19 disrupted admissions and hospital referrals from mid-February. Management reported that combined same and transitioning facility occupancy and skilled-mix days fell 5.2% and 11.8%, respectively, from mid-March to mid-April; occupancy then declined a further 1.7% through early May, while skilled-mix days increased 13.6% over that later interval.
- Q1 acquisitions added three skilled nursing operations and one independent living operation, with 247 skilled beds and 162 senior-living units. Purchase price was $14.1 million.
- Ensign repurchased approximately 692,000 shares for $25.0 million under two programs in March; both programs were completed. Management said it had no active repurchase plan and did not intend to authorize another at that time.
Outlook, risks and unusual items
- COVID-19 outlook: Management said the pandemic was expected to have a significant adverse effect on Q2 2020 results and possibly beyond. It anticipated lower volumes through Q2 and a modest recovery beginning in Q3, while emphasizing that timing and extent remained uncertain. No quantified earnings guidance was provided.
- COVID-related costs included higher spending on protective equipment, medical and cleaning supplies, and labor. Ensign reported cutting discretionary spending, freezing or reducing some non-clinical wages, and suspending non-essential capital projects. Its 2020 renovation budget was approximately $42 million, incorporating the pause in non-essential projects.
- After quarter-end, Ensign received approximately $39.6 million in HHS provider relief funds, subject to acceptance of program terms, and $98.0 million in Medicare accelerated payments. The latter are repayable, with repayment expected to begin 120 days after receipt; management expected repayment in August 2020. These subsequent receipts are not included in March 31 cash.
- Management said cash, investments, projected operating cash flow and available financing were expected to support normal operations for at least the next 12 months, while noting uncertainty from COVID-19. The company also expected benefits from the temporary Medicare sequestration suspension and the 6.2% FMAP increase, but the timing and amount vary.
- Key exposures include reliance on government reimbursement, staffing and supply availability, occupancy declines, regulatory and infection-control requirements, and litigation or claims. Six subsidiaries had Medicare reviews scheduled, on appeal, or in dispute resolution at March 31.
- The DOJ declined to intervene in any subsequent action related to its investigation of referral-source relationships at certain Southern California facilities; the filing notes that a qui tam relator may continue pursuing claims. Ensign also disclosed ongoing ordinary-course patient-care and employment litigation, and uncertainty in actuarial self-insurance reserves.
- Other risks include proposed Medicaid payment changes affecting supplemental UPL arrangements, Medicare payment-model changes, long-term lease and cross-default obligations, and variable-rate borrowing exposure to LIBOR transition. Management reported no long-lived-asset impairment in Q1.
Important facts for investors to verify
- How COVID-19 affected occupancy, skilled mix, staffing costs, infection-control spending and results after Q1, and whether the anticipated Q3 recovery occurred.
- The conditions attached to the $39.6 million HHS relief payment, any amounts retained or returned, and repayment timing for the $98.0 million Medicare advance.
- Collections and aging of receivables, particularly government-payor balances, and any changes in doubtful-account or self-insurance reserves.
- Debt draws, covenant headroom and liquidity after May 8, including the impact of lease commitments and scheduled Medicare advance repayments.
- Developments in the DOJ-related qui tam matter, the six Medicare reviews, and other litigation or regulatory actions.
- Comparability of reported growth with 2019 given the Pennant spin-off and acquisitions, and the contribution of same-facility performance versus acquired operations.