The Ensign Group, Inc. — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; this is an annual filing, not a standalone quarterly filing. Ensign provides skilled nursing, assisted and independent living, home health, hospice, and ancillary services. At year-end it operated 210 facilities and 39 home health, home care, and hospice agencies across multiple states.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,654.9 million | $1,341.8 million | +23.3% |
| Operating income | $91.8 million | $93.1 million | -1.3% |
| Operating margin | 5.6% | 6.9% | -1.3 percentage points |
| Net income attributable to Ensign | $50.0 million | $55.4 million | -9.8% |
| Diluted EPS | $0.96 | $1.06 | -9.4% |
| Net cash from operating activities | $73.9 million | $33.4 million | +$40.5 million |
Revenue growth was driven largely by acquisitions, which contributed $271.4 million of the year-over-year increase. Costs grew faster than revenue: cost of services rose 25.7%, while rent expense rose 40.3% to $124.6 million. Management cited acquisition and startup costs, labor-system implementation, higher insurance costs, and an $8.0 million increase in doubtful-account provision. Adjusted EBITDA, a non-GAAP measure, was $150.1 million versus $135.2 million; adjusted EBITDAR was $262.2 million versus $221.3 million.
At December 31, cash and cash equivalents were $57.7 million, working capital was $121.9 million, and total assets were $1.001 billion. Debt totaled $284.2 million, including $270.1 million under the credit facility; the company reported compliance with loan covenants. Available credit was not stated as a clear year-end figure in the filing. Future operating lease payments totaled $1.84 billion. Operating cash flow improved, while investing activities used $210.6 million, principally for acquisitions and capital expenditures. Capital expenditures were $65.7 million; approximately $55 million was budgeted for 2017 renovations.
Material changes and fourth-quarter results
- Revenue increased across the principal service lines: transitional and skilled services +22.1%; assisted and independent living +40.3%; and home health and hospice +28.2%.
- Skilled nursing occupancy declined to 75.4% from 77.6%, partly reflecting portfolio growth and acquired facilities. Same-facility skilled nursing revenue rose 3.1%, while same-facility patient days fell 1.1%.
- Medicaid and Medicare together accounted for 67.8% of revenue, down from 69.1%. Ensign reported higher skilled nursing quality mix by patient days, 43.4% versus 42.5%.
- In Q4 2016, revenue was $433.0 million versus $373.2 million in Q4 2015; operating income was $35.7 million versus $24.3 million; and net income attributable to Ensign was $18.3 million versus $13.6 million.
- The company realigned its reportable segments in Q4, separating assisted and independent living from transitional and skilled services.
Outlook, commentary, risks, and unusual items
Ensign gave no specific company revenue or earnings guidance. Management said cash balances, operating cash flow, and credit-facility availability were expected to cover operating needs for at least the next 12 months. Its strategy emphasizes developing local leaders, organic improvement, higher-acuity patients, acquisitions, facility expansion, and growth in complementary post-acute businesses.
- Divestiture and closure: Ensign sold its urgent care centers for $41.5 million and recorded a $19.2 million pretax gain. It also recorded $7.9 million of closure and continued-lease obligations after voluntarily closing one skilled nursing facility following clinical survey challenges. The sale was not classified as discontinued operations.
- Reimbursement and regulation: Government programs represented a substantial share of revenue. Rate changes, value-based purchasing, bundled-payment models, new care requirements, audits, and Medicaid budget pressure may affect revenue and costs. CMS projected a 0.7% reduction in 2017 home-health payments and a 2.4% increase in 2017 skilled-nursing payments industry-wide.
- Compliance and litigation: The company remains subject to a five-year corporate integrity agreement stemming from its 2013 $48 million DOJ settlement, which it resolved without admitting wrongdoing. Eighteen operating subsidiaries underwent Medicare probe reviews during 2016; twelve had closed by year-end and six remained under review. The company reported no subsidiaries on extended prepayment review or subject to extrapolation at year-end.
- Insurance and labor: Self-insurance reserves are estimates and could prove inadequate. The company cited rising general and professional liability costs and a workforce that depends on qualified clinical staff; labor accounted for approximately 60% of total expenses.
- Leases and debt: Long-term triple-net leases and cross-default provisions create fixed obligations and potential exposure across facilities. Credit-facility rates are partly variable, creating interest-rate exposure.
- Quality indicators: 50.6% of skilled nursing facilities had CMS four- or five-star ratings, compared with 49.3% in 2015. The company cautioned that CMS rating methodology changed, limiting comparisons across periods.
Most important facts for investors to verify
- Whether acquired operations and new campuses can improve occupancy and margins enough to offset higher labor, insurance, rent, and startup costs.
- How much of revenue and cash flow remains exposed to Medicaid and Medicare reimbursement changes, audit recoveries, and performance-based payment programs.
- The company’s actual available borrowing capacity, debt-covenant headroom, variable-rate exposure, and ability to meet substantial lease commitments.
- Whether self-insurance reserves and receivable allowances adequately reflect claims and collection risks; the allowance for doubtful accounts rose to $39.8 million from $30.3 million.
- Progress on the six Medicare probe reviews still open at year-end, ongoing litigation, and continued compliance with the corporate integrity agreement.
- The sustainability of reported earnings after excluding the urgent-care sale gain and considering facility-closure, acquisition, and other adjustments included in non-GAAP measures.