The Ensign Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Financial statement amounts are in millions of dollars, except per-share data. The company provides skilled nursing, assisted and independent living, home health, hospice, home care, urgent care, and diagnostic services. At quarter-end it operated 143 facilities and reported two segments: transitional, skilled and assisted living services, and home health and hospice services.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $306.5 | $239.7 | +27.9% |
| Income from operations | $25.2 | $24.3 | +3.4% |
| Operating margin | 8.2% | 10.2% | Down 2.0 percentage points |
| Net income attributable to Ensign | $15.2 | $13.5 | +12.2% |
| Diluted EPS | $0.61 | $0.60 | +$0.01 |
| Net cash from operating activities | $5.9 | $21.4 | Down $15.6 |
| Cash and cash equivalents, quarter-end | $62.6 | $50.4 at Dec. 31, 2014 | +$12.2 |
Revenue growth reflected acquisitions and expansion in existing operations. Skilled nursing and assisted/independent living revenue rose 24.4%; home health and hospice revenue rose 64.3%. Same-facility transitional, skilled and assisted living revenue increased 7.1%. Occupancy was 78.8%, versus 78.1%, and skilled mix by nursing days improved to 30.3% from 27.8%.
Cost of services declined slightly as a share of revenue, to 78.8% from 79.1%, but rent expense rose to $19.0 million from $3.5 million following the CareTrust REIT spin-off and related leases. Operating margin contracted despite higher revenue. Interest expense fell substantially, contributing to higher pretax income. The effective tax rate was 38.8%, compared with 38.3%.
Operating cash flow fell primarily because accounts receivable increased by $36.9 million and payment timing changed. Investing cash outflow was $36.5 million, including $38.7 million of acquisition payments and $12.7 million of capital expenditures. Financing cash inflow was $42.8 million, including net proceeds from a stock offering.
Balance sheet, debt and liquidity
- Total assets were $573.3 million at March 31, 2015, compared with $493.9 million at year-end. Current assets were $255.9 million and current liabilities $150.4 million.
- Total debt was approximately $3.4 million, down from $68.4 million at December 31, 2014. The company used $94.0 million of stock-offering proceeds to repay its revolving credit facility. No facility borrowings were outstanding at quarter-end; approximately $20.0 million was outstanding as of May 4, 2015.
- In February, Ensign issued approximately 2.7 million shares at about $41 per share, receiving $106.5 million net of underwriting discounts and commissions, before other issuance costs. The offering increased the share count.
- Management said cash, operating cash flow and availability under its $150 million credit facility were expected to cover operating needs for at least 12 months. The company budgeted approximately $45 million for 2015 renovation projects.
- Future minimum lease payments were approximately $1.364 billion, including the long-term triple-net CareTrust master leases. These leases require Ensign to pay property taxes, insurance, maintenance and other property costs in addition to rent.
Material changes, outlook and risks
- Ensign acquired ten businesses during the quarter—five skilled nursing operations, two assisted living operations, one home health agency and two urgent care centers—for an aggregate purchase price of approximately $42.2 million. Subsequent to quarter-end, it reported further acquisitions, a new facility lease and an approximately $7.3 million purchase of a facility it had previously leased.
- The June 2014 spin-off of CareTrust changed Ensign’s real-estate structure: it leases back 94 facilities under long-term master leases. Q1 rent expense and lease commitments consequently rose materially. The company reported compliance with lease covenants and no known defaults at March 31.
- Medicare and Medicaid represented 69.1% of Q1 revenue, down from 71.1%. Management cited reimbursement changes, government cost-containment measures, audits and documentation requirements as continuing risks. CMS proposed a 1.4% aggregate skilled nursing payment increase for fiscal 2016; this was a proposal, not finalized guidance. The filing provides no company-specific revenue or earnings forecast.
- Ensign had one subsidiary under Medicare probe review and one undergoing targeted review; no facilities were on prepayment review at quarter-end. One hospice subsidiary exceeded annual Medicare caps by approximately $0.1 million.
- The company remains subject to a five-year corporate integrity agreement following its 2013 $48 million government settlement. It said it had met the first-year requirements and passed the independent review audits. An uncured material breach could risk exclusion from federal healthcare programs.
- Other material risks include professional-liability and staffing litigation, self-insurance reserve estimates, potential regulatory sanctions, labor and staffing costs, acquisition integration, and cross-default exposure among leases. Management cautioned that actuarial self-insurance estimates may differ from ultimate claims and could materially affect results.
- Adjusted EBITDA was $32.4 million versus $35.7 million, while reported EBITDA was $31.8 million versus $33.7 million. These are non-GAAP measures; the company noted that Q1 2014 adjusted EBITDA did not include a stock-compensation adjustment of $1.2 million.
Most important facts for investors to verify
- Whether the decline in operating cash flow and the sharp increase in receivables are temporary, and how quickly receivables convert to cash.
- Whether acquisition-led growth can sustain profitability while rent, integration needs and long-term lease obligations weigh on margins and cash requirements.
- Credit-facility availability, covenant compliance and subsequent borrowings, alongside the substantial contractual lease commitments.
- Medicare and Medicaid reimbursement developments, audit outcomes, hospice cap exposure, and continued compliance with the corporate integrity agreement.
- How much reported growth reflects same-facility performance versus acquired operations, and the effects of stock issuance on per-share results.