The Ensign Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Ensign is a holding company whose subsidiaries provide skilled nursing, assisted and independent living, home health, hospice and ancillary services. At quarter-end, the company operated 229 facilities and 43 home health, hospice and home care agencies across 13 states.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $471.6 | $428.1 | $1,361.6 | $1,221.8 |
| Income from operations | $25.6 | $20.0 | $55.1 | $56.2 |
| Net income attributable to Ensign | $14.2 | $11.2 | $29.3 | $31.7 |
| Diluted earnings per share | $0.27 | $0.21 | $0.56 | $0.61 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $63.2 | $71.2 |
- Q3 revenue rose 10.2%; operating income rose 27.5%, and attributable net income rose 27.4%. Operating margin was approximately 5.4%, versus 4.7%.
- Nine-month revenue increased 11.4%, while operating income declined 1.8% and attributable net income declined 7.5%. Operating margin was approximately 4.1%, versus 4.6%.
- Cost of services was 80.9% of revenue in Q3, down from 81.5%; for the nine-month period it was 81.1%, up from 80.7%. Q3 attributable net margin was approximately 3.0%, versus 2.6%; nine-month margin was approximately 2.1%, versus 2.6%.
- Cash and cash equivalents were $40.1 at September 30, 2017, down from $57.7 at December 31, 2016. Current assets were $339.8 and current liabilities $222.5. The filing also reports $35.4 of held-to-maturity debt securities.
- Total debt, including current maturities, was approximately $295.6, versus $283.6 at year-end 2016. Nine-month interest expense was $10.0, compared with $5.0 in 2016. The company reported compliance with its debt covenants at quarter-end.
- Nine-month investing cash outflow was $83.1, including $83.9 for business acquisitions and $39.8 for property and equipment purchases; financing cash inflow was $2.2. The company received $38.0 from a sale-leaseback.
- Dividends were $0.0425 per share in Q3 and $0.1275 per share for the first nine months.
Material changes and operating trends
- Growth reflected acquisitions and expanded operations. Nine-month revenue from operations acquired on or after January 1, 2016 increased $116.7 year over year. Acquisitions during the first nine months cost $84.1 and added skilled nursing, assisted living, home health and hospice operations.
- Q3 revenue increased in transitional and skilled services by 10.3%, assisted and independent living by 13.5%, and home health and hospice by 21.8%. Home health and hospice growth reflected higher volume and acquisitions.
- Skilled nursing occupancy was 75.7% in Q3 versus 74.8% a year earlier, but skilled mix by nursing revenue declined to 49.8% from 51.3%. For the first nine months, occupancy was 75.1% versus 75.7%, and skilled mix by nursing revenue was 51.7% versus 52.8%.
- Medicare and Medicaid represented 68.8% of Q3 revenue and 68.4% of nine-month revenue. Revenue growth therefore remains materially exposed to government reimbursement and audit outcomes.
- Nine-month results included an $11.0 class-action settlement accrual and $2.7 of net losses related to divestitures and operational closures, partly offset by a $1.3 recovery of prior closure losses. The prior-year comparison included a $2.5 gain on the sale of urgent care centers.
Liquidity, outlook and principal risks
- Management said cash, operating cash flows and amounts available under the credit facility should cover operating needs for at least the next 12 months. The $300.0 revolving facility had $140.0 drawn at September 30; approximately $4.5 of borrowing capacity was pledged for letters of credit. The company reported approximately $267.5 outstanding under the credit facility as of November 3.
- The company budgeted approximately $55.0 for 2017 renovations and continued to pursue acquisitions. No specific company-wide revenue or earnings guidance was provided in the filing.
- Future minimum lease payments were approximately $1.78 billion, including $135.3 due in 2018. Many facilities operate under long-term triple-net leases; defaults may have cross-default consequences across facilities or financing arrangements.
- In the second quarter, Ensign sold three facility properties for $38.0 and leased them back under a 20-year triple-net master lease. It deferred a $13.2 gain to be amortized over the lease term. The company also closed one skilled nursing facility and terminated leases for four facilities under development and one newly constructed facility.
- The pending wage-and-hour class action settlement, accrued at $11.0, remained subject to final documentation and California Superior Court approval. Seven subsidiaries had Medicare payment probes scheduled or in process; none was on extended prepayment review or subject to extrapolation at quarter-end.
- Key risks include Medicare and Medicaid rate changes and recoupments, regulatory and clinical compliance, staffing and labor costs, liability claims and self-insurance estimates, acquisition integration, occupancy and payor mix, and reliance on long-term leases. The filing notes that two facilities were affected by Hurricane Harvey and expected to reopen in Q4 2017 and Q1 2018.
- Reported policy changes include a 1.0% FY2018 Medicare rate update for skilled nursing facilities, subject to quality-reporting requirements, and a 0.4% reduction in 2018 Medicare home health payments under a CMS rule issued November 1, 2017. These changes may affect future reimbursement.
- The company adopted share-based payment accounting guidance in 2017, recognizing excess tax benefits in income tax expense; this contributed to a lower effective tax rate. It anticipated adopting the new revenue standard on January 1, 2018 and expected most bad-debt expense to be presented as a reduction of revenue. The forthcoming lease standard was expected to significantly increase reported balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether the $11.0 class-action settlement receives final court approval and whether the recorded accrual proves sufficient.
- Trends in occupancy, skilled mix and same-facility results, separately from acquisition-driven growth and the integration performance of newer operations.
- Outcomes of Medicare probes, future recoupments, and the company’s ability to maintain compliance with regulatory and quality-reporting requirements.
- Cash generation, debt balances and covenant headroom alongside the substantial lease commitments and planned renovation and acquisition spending.
- The realized impact of reimbursement changes, self-insurance claims, and implementation of the new revenue and lease accounting standards.