The Ensign Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Amounts below are U.S. dollars in millions, except per-share data and percentages.
Business context and reporting period
Ensign provided skilled nursing, senior living, home health, hospice, home care and ancillary services through subsidiaries. At quarter-end, it operated 259 facilities and 63 home health, hospice and home care agencies across 17 states. On October 1, 2019, after quarter-end, Ensign completed a tax-free spin-off of Pennant Group, comprising home health, hospice and substantially all senior living operations. Accordingly, Q3 results include those businesses and the filing cautions they are not indicative of Ensign’s future results. Post-spin, Ensign expects to report one segment.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $600.5 | $514.4 | $1,725.4 | $1,502.9 |
| Income from operations | $38.9 | $29.3 | $114.6 | $94.0 |
| Net income attributable to Ensign | $27.2 | $20.9 | $83.1 | $66.0 |
| Diluted EPS | $0.48 | $0.38 | $1.48 | $1.22 |
| Operating margin | 6.5% | 5.7% | 6.6% | 6.3% |
- Revenue grew 16.7% in Q3 and 14.8% year to date; Ensign-attributable net income rose 30.2% and 26.0%, respectively. Diluted EPS increased 26.3% in Q3 and 21.3% year to date.
- Q3 revenue growth reflected acquisitions and higher patient days and rates. Acquisitions contributed $44.0 million to consolidated Q3 revenue and $103.6 million to nine-month revenue versus the comparable periods.
- Cost of services was 79.6% of revenue in Q3 versus 80.4% a year earlier, and 79.1% year to date versus 79.8%. G&A was 5.3% of Q3 revenue, up from 4.8%, largely due to spin-off costs; excluding those costs, management reported 4.7%.
- Skilled nursing occupancy was 78.9% in Q3 versus 77.3%; skilled mix by nursing days was 28.5% versus 28.3%. Senior living occupancy was 75.2%, down from 76.0%.
- Nine-month operating cash flow was $137.6 million, down from $157.3 million. Investing cash outflow was $149.4 million, including $93.3 million of acquisition payments and $55.0 million of property and equipment purchases. Financing provided $25.1 million; cash increased $13.3 million to $44.4 million.
- At September 30, cash was $44.4 million and current assets and liabilities were $393.2 million and $354.6 million, respectively. Gross borrowings were $278.5 million; the company reported compliance with debt covenants. Operating lease liabilities were $1,035.3 million, including $60.8 million current.
Material changes, outlook and risks
- Spin-off and financing: Effective October 1, Ensign amended its credit facility to a $350 million revolver maturing October 1, 2024 and terminated its $107.5 million term loan. About $150 million was outstanding under the facility on October 28. Lease amendments associated with the spin-off were expected to reduce annual rent expense by $23 million; Ensign also retained real estate leased to Pennant, generating approximately $12 million in annual rent. Transition services between the companies are planned for two years.
- Leases: Adoption of ASC 842 on January 1 added approximately $1.05 billion of right-of-use assets and $1.03 billion of lease liabilities. This accounting change substantially increased reported assets and liabilities; it did not materially affect earnings or covenant compliance, according to management.
- Guidance and liquidity: The filing provides no company-specific earnings or revenue guidance. Management said cash, operating cash flow and available credit were expected to meet operating needs for at least 12 months. Approximately $62 million was budgeted for 2019 renovations. CMS’s FY2020 skilled-nursing payment update was a 2.4% aggregate increase; the transition to the Patient-Driven Payment Model began October 1, 2019. Home-health payment changes planned for 2020, including PDGM, may affect reimbursement.
- Unusual items: Spin-off costs were $3.3 million in Q3 and $7.9 million year to date. The company recorded a $1.5 million long-lived-asset impairment and a $2.9 million gain on a real-estate sale during the nine months. The CIA related to the 2013 government settlement concluded in Q1 2019.
- Key risks and contingencies: Medicare and Medicaid accounted for 68.1% of nine-month revenue. A DOJ civil investigative demand concerning potential False Claims Act or Anti-Kickback Statute issues at ten Southern California facilities remained unresolved; the company said it was cooperating and could not predict the outcome. Thirteen subsidiaries had Medicare reviews pending, on appeal or in dispute resolution. The filing also highlights regulatory and reimbursement uncertainty, staffing and labor costs, clinical and litigation exposure, and actuarial uncertainty in self-insurance reserves.
Important facts for investors to verify
- Post-spin operating results, segment reporting, lease costs and the actual effect of the amended credit facility, including debt levels and covenant headroom.
- Whether organic revenue, occupancy and skilled mix sustain growth apart from acquisitions, and whether recently acquired facilities improve margins.
- Outcomes and potential financial exposure from the DOJ inquiry, Medicare reviews, and other regulatory or legal matters.
- Cash conversion and working-capital trends, particularly accounts receivable, alongside acquisition and renovation spending and the company’s substantial lease commitments.