Business context and reporting period
The Ensign Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Through its operating subsidiaries, Ensign provides skilled nursing, assisted and independent living, home health, hospice, home care, urgent care and diagnostic services. At quarter-end it operated 178 facilities and 28 home health and hospice agencies, among other businesses. Ensign is a holding company; operations are conducted by separate subsidiaries.
Growth included acquisitions of 17 skilled nursing, 25 assisted and independent living, three home health, one hospice and one home care operation, plus three urgent care centers during the first nine months. The company owned 27 facilities and leased 151; 94 facilities were under CareTrust master leases following the 2014 REIT spin-off.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $351.1 | $260.8 | $968.7 | $750.5 |
| Income from operations | $21.6 | $15.3 | $68.7 | $53.3 |
| Net income attributable to Ensign | $13.5 | $8.9 | $41.8 | $24.4 |
| Diluted EPS | $0.51 | $0.38 | $1.61 | $1.06 |
| Operating margin | 6.1% | 5.9% | 7.1% | 7.1% |
| Adjusted EBITDA (non-GAAP) | $33.1 | $21.1 | $97.2 | $86.7 |
| Adjusted EBITDAR (non-GAAP) | $57.0 | $38.8 | $158.2 | $115.2 |
Q3 revenue grew 34.6%; nine-month revenue grew 29.1%. Management attributed growth to acquisitions, improved occupancy and revenue per patient day, and organic growth in home health and hospice. Nine-month home health and hospice revenue increased 65.2%. Medicare and Medicaid together represented 68.0% of nine-month revenue, down from 70.6% a year earlier. Nine-month net income attributable to Ensign rose 71.2%; net margin was approximately 4.3% versus 3.3% (calculated from reported figures).
Cash and cash equivalents were $40.1 at September 30, 2015, versus $50.4 at December 31, 2014. Nine-month operating cash flow was $13.3, down from $66.7; investing cash outflow was $120.6, principally acquisitions and capital spending, while financing cash inflow was $96.9, including stock-offering proceeds. Capital expenditures were $42.3. Accounts receivable, net, rose to $192.0 from $130.1; the allowance for doubtful accounts increased to $27.6 from $20.4.
Total debt was $69.8, including $55.0 outstanding on the $150.0 revolving credit facility. Current assets were $269.5 and current liabilities $161.3. Management stated that cash, operating cash flow and credit-facility availability should fund operations for at least 12 months; the company was in compliance with credit-facility and master-lease covenants. Future minimum lease payments were approximately $1.68 billion, including $1.08 billion thereafter. Total rent expense was $62.9 for the first nine months.
Material changes versus the prior comparable period
- Revenue and operating income increased substantially, with acquisitions a major contributor: acquisitions added $159.2 of consolidated revenue in the first nine months. Facility count rose from 127 at September 30, 2014 to 178 at September 30, 2015.
- Same-facility TSA revenue increased 6.0% for the nine months, while overall operational-bed occupancy increased modestly to 78.2% from 77.9%. Skilled mix by nursing days rose to 30.2% from 27.6%.
- Operating cash flow declined by $53.4, primarily from higher accounts receivable, including delayed payment timing associated with acquired facilities and licensure processing.
- Rent expense and rent as a share of revenue rose year over year in the nine-month comparison, reflecting the CareTrust master leases and leases for acquired and newly opened operations. Interest expense fell sharply versus 2014, when results included costs associated with debt repayment and the spin-off.
- The February 2015 common-stock offering issued approximately 2.7 million shares and generated $106.5 net proceeds before other issuance costs; $94.0 was used to repay the revolver.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management budgeted approximately $55 million for 2015 renovation projects and described continued acquisition-driven expansion. It cautioned that recently acquired facilities typically begin with lower occupancy and that portfolio occupancy may vary as acquisitions mature.
- Reimbursement and regulatory exposure is significant: Medicare and Medicaid accounted for 68.0% of nine-month revenue. CMS payment, quality, staffing, value-based purchasing and bundled-payment changes could affect reimbursement, costs and operations. The filing cited a projected 1.2% FY2016 SNF payment increase and a projected 1.4% CY2016 home-health payment decrease.
- One operating subsidiary exceeded its annual Medicare hospice payment cap by approximately $0.3 million. One subsidiary was subject to a Medicare probe review; the filing also reports one subsidiary undergoing targeted review. No affiliated facilities were on prepayment review at quarter-end.
- The company remains subject to a five-year corporate integrity agreement, effective October 2013, after its $48 million DOJ settlement. It reported meeting first-year requirements and passing independent audits; an uncured material breach could result in exclusion from federal healthcare programs.
- Self-insurance reserves rely on actuarial estimates; management warned that actual claims could materially exceed estimates and adversely affect earnings, cash flows and financial condition. The company also faces ordinary-course patient-care, employment and other litigation, and broad regulatory and audit risks.
- Lease concentration and cross-default provisions, labor availability and costs, acquisition integration, delayed government collections, and dependence on a small number of states are additional risks. A flooding-related facility disruption reduced same-facility patient days during the nine-month period; the facility reopened at the end of May.
Important facts for investors to verify
- Whether collections and receivables normalize after the acquisition-related payment delays, and whether doubtful-account provisions remain adequate.
- How much reported growth and profitability is attributable to acquisitions versus same-facility performance, including acquired-facility occupancy and integration costs.
- Whether operating cash flow recovers after its sharp year-over-year decline and how acquisition, renovation and lease commitments are funded.
- Compliance with the corporate integrity agreement, resolution of the Medicare reviews and hospice cap exposure, and any new reimbursement recoupments or litigation developments.
- The effect of Medicare/Medicaid rate and policy changes on margins, and the company’s capacity to service debt and substantial long-term lease obligations.