The Ensign Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial figures below are in millions of dollars unless otherwise noted. Ensign provides skilled nursing, assisted living, home health and hospice services. At quarter-end it operated 209 facilities, 38 home health, hospice and home care agencies, and 14 urgent care centers, with 22,377 operational beds and units.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $428.1 | $351.1 | $1,221.8 | $968.7 |
| Operating income | $20.0 | $21.6 | $56.2 | $68.7 |
| Net income attributable to Ensign | $11.2 | $13.5 | $31.7 | $41.8 |
| Diluted EPS | $0.21 | $0.25 | $0.61 | $0.81 |
| Adjusted EBITDA (non-GAAP) | $38.5 | $33.1 | $113.5 | $97.2 |
- Revenue increased 21.9% in Q3 and 26.1% for the nine-month period, while operating income and attributable net income declined in both comparisons. Operating margin fell to 4.8% from 6.1% in Q3 and to 4.6% from 7.1% for the nine months.
- Cost of services rose to 81.5% of revenue in Q3 from 79.9%, and to 80.7% for the nine months from 79.5%. Rent, depreciation and amortization, and interest expense also increased.
- Growth was substantially acquisition-driven: management attributed $66.4 million of Q3 revenue growth and $210.3 million of nine-month growth to acquisitions. Same-facility TSA revenue rose 3.3% in Q3 and 4.4% for the nine months.
- Adjusted EBITDA is a company-defined non-GAAP measure; it excludes specified items and should not be treated as a substitute for GAAP earnings or cash flow.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was $71.2 million, versus $13.3 million in 2015; investing cash outflow was $112.4 million versus $120.6 million, and financing cash inflow was $40.1 million versus $96.9 million. Cash declined $1.2 million to $40.4 million. Management said the operating cash flow improvement primarily reflected timing of receivable collections and operating payments.
- At September 30, cash was $40.4 million and current assets were $308.8 million against current liabilities of $199.1 million. Total debt was approximately $170.6 million, up from $99.7 million at December 31, 2015. The filing reports $157.0 million outstanding under the credit facility and $14.2 million of mortgage and note debt.
- The amended credit facility provides up to $450 million, comprising a $300 million revolver and a $150 million term loan. The company reported compliance with debt covenants at quarter-end. It said cash, operating cash flow and available credit should cover operating needs for at least 12 months.
- Future minimum operating lease payments were approximately $1.905 billion. Total rent expense was $33.5 million in Q3 and $91.6 million for the nine months.
- Net accounts receivable was $232.5 million; the allowance for doubtful accounts increased to $37.0 million from $30.3 million at year-end. The nine-month provision for doubtful accounts was $20.1 million, compared with $13.8 million in 2015.
Material changes and unusual items
- Ensign acquired 19 skilled nursing operations, two home health agencies and four hospice agencies during the first nine months, and opened five newly constructed post-acute campuses. Acquisition spending was $63.8 million; capital expenditures were $52.3 million.
- It sold three Colorado urgent care centers in July for $7.4 million, recording a $2.5 million pretax gain. It agreed to sell its 14 Washington centers, expected to close in Q4 2016; management estimated an approximately $12 million after-tax gain, subject to change.
- The company closed one skilled nursing facility in February after clinical survey challenges, recording $7.9 million of lease-related and closing charges in Q1. The facility had represented about 0.5% of 2015 revenue and adjusted EBITDAR.
- Q3 occupancy across operational beds was 75.5%, down from 77.9% a year earlier; nine-month occupancy was 76.2%, versus 78.2%. Q3 skilled mix by nursing days was 30.0%, compared with 30.2%.
- Two legal settlements were recorded in 2016: approximately $1.9 million for a premises-liability matter and $2.8 million for a professional-negligence matter. Management stated these resolutions would not have a material ongoing adverse effect.
Outlook, risks and contingencies
- The filing provides no company-specific earnings or revenue guidance. Management cited acquisition opportunities and operational growth, while noting that acquisition pace, facility integration and occupancy can vary.
- Government programs accounted for 66.6% of Q3 revenue and 66.1% of nine-month revenue. Reimbursement changes, audits, recoupments and cost-containment measures could affect results. CMS projected FY2017 skilled nursing facility payments to increase 2.4%, hospice payments to increase 2.1%, and calendar-year 2017 home health payments to decrease 0.7%.
- During the nine months, 16 operating subsidiaries faced Medicare probe reviews; six had closed by September 30, and 10 remained under review. The company said none was then on extended prepayment review or subject to extrapolation.
- The company remains subject to a five-year corporate integrity agreement effective October 2013, following a $48 million 2013 settlement with the DOJ. It reported passing its second-year independent review audits; an uncured material breach could result in exclusion from federal healthcare programs.
- Key risks include clinical and regulatory compliance, professional liability and self-insurance reserve uncertainty, staffing and labor costs, reliance on Medicare and Medicaid, and substantial lease obligations. Cross-default provisions in some leases and debt arrangements could amplify the impact of a facility-level default.
- New long-term-care facility requirements take effect in phases beginning November 2016. The company noted potential compliance costs and implementation uncertainty. It also expects the new lease accounting standard, effective for its fiscal 2019, to materially affect its financial position; the impact was still being assessed.
Important facts for investors to verify
- Whether acquisition-led growth can improve occupancy and margins, given declining consolidated occupancy and higher operating costs.
- Whether operating cash flow remains strong after the reported improvement, which management attributed largely to working-capital timing.
- Progress and final proceeds from the planned Washington urgent care sale, including whether the estimated gain is realized.
- Changes in receivable allowances, insurance reserves and outcomes of Medicare reviews or other regulatory proceedings.
- Debt covenant headroom, interest-rate exposure, and the company’s capacity to meet debt service and long-term lease commitments.