The Ensign Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context
Ensign provides skilled nursing, assisted and independent living, home health, hospice, home care, urgent care, and related services through its operating subsidiaries. At June 30, it operated 150 facilities and had 16,019 operational beds or units. It owned 26 facilities and leased 124, including 94 properties under long-term triple-net leases with CareTrust REIT following the June 2014 spin-off.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $311.1 | $250.0 | $617.6 | $489.7 |
| Operating income | $22.0 | $13.6 | $47.2 | $38.0 |
| Operating margin | 7.1% | 5.5% | 7.6% | 7.8% |
| Net income attributable to Ensign | $13.2 | $2.0 | $28.4 | $15.5 |
| Diluted EPS | $0.50 | $0.09 | $1.11 | $0.68 |
| EBITDAR (non-GAAP) | $47.4 | $30.2 | $98.1 | $67.4 |
Q2 revenue rose 24.4%; six-month revenue rose 26.1%. Medicare and Medicaid together represented 68.5% of Q2 revenue and 68.8% for the first half. Skilled nursing, assisted and independent living generated 90.5% of Q2 revenue. Home health and hospice revenue increased 57.0% in Q2 and 60.4% for the first half. Overall occupancy was 78.0% in Q2 versus 77.8% a year earlier; skilled mix by nursing days increased to 30.1% from 27.8%.
For the six months, operating cash flow was $6.8, down from $37.1. The company attributed the decline primarily to a $49.7 increase in accounts receivable and timing of payments, partly offset by improved operating results. Investing cash outflow was $89.4, including $61.0 for business acquisitions and $28.8 for property and equipment. Financing cash inflow was $82.8, including common-stock offering proceeds and revolving-credit activity. Cash ended the period at $50.6.
At June 30, total debt was $49.5 ($0.5 current), versus $68.4 at December 31, 2014. The $150.0 revolving facility had $40.0 outstanding at quarter-end; the company reported covenant compliance. Current assets were $255.9 and current liabilities $143.8. The company also reported $24.6 of held-to-maturity debt securities. Future minimum lease payments were $1.308 billion, including $56.0 annual rent under the CareTrust master leases during each of their first two years.
Changes and notable items
- Growth reflected acquisitions as well as existing operations. Ensign acquired 18 businesses in the first half for an aggregate purchase price of about $64.5, and also completed asset acquisitions and entered a new long-term lease. Recently acquired facilities contributed substantially to TSA revenue growth; same-facility TSA revenue grew 4.7% in Q2 and 5.9% for the first half.
- Q2 2015 net interest expense was $0.4 versus $8.6 a year earlier; first-half net interest expense was $0.9 versus $11.8. The comparison reflects debt repayment associated with the 2014 spin-off. The 2014 comparison also included $7.3 of Q2 and $8.9 of first-half spin-off costs, which did not recur.
- Rent expense rose with the CareTrust leases and other leases: $19.1 in Q2 and $38.3 in the first half, versus $8.4 and $12.1 in the comparable 2014 periods. Q2 cost of services improved as a share of revenue, while home health and hospice cost of services increased as a share of revenue, which management attributed to start-up and transition costs.
- In February, Ensign issued approximately 2.7 million shares at about $41 per share, receiving approximately $106.5 net proceeds before other issuance costs; $94.0 was used to repay the revolving facility.
Outlook, risks and contingencies
- Management said cash, operating cash flow, and availability under the credit facility were expected to cover operating needs for at least the next 12 months. It budgeted approximately $45.0 for 2015 renovation projects. No company revenue or earnings guidance was provided in the filing.
- Management noted that overall occupancy can vary as acquisitions mature; recently acquired facilities have generally had lower occupancy and skilled and quality mix. Post-quarter acquisitions included a skilled nursing operation, assumed and new leases covering additional facilities, and a hospice agency.
- Government reimbursement is a material exposure: Medicare and Medicaid generated roughly 69% of first-half revenue. The filing discusses proposed Medicare payment and care-model changes, Medicaid cost-containment, audits and recoupments, staffing and regulatory requirements, and potential reimbursement or compliance effects. CMS’s final FY2016 skilled-nursing rule estimated a 1.2% industry payment increase; proposed home-health changes included episode payment reductions.
- Ensign reported one subsidiary under Medicare probe review and one under targeted review; no subsidiary was on prepayment review. One hospice subsidiary exceeded annual Medicare caps by approximately $0.3 in the first half. The company also faces ordinary-course patient-care, employment and other litigation risks, and warns that self-insurance reserves are actuarial estimates that could prove insufficient.
- The company had settled a prior DOJ investigation for $48.0 in 2013 and remains subject to a five-year corporate integrity agreement. It reported meeting the first-year requirements and passing the independent review audits; an uncured material breach could threaten federal program participation.
- Long-term triple-net leases, cross-default provisions and financial covenants create fixed obligations. The company reported no known lease defaults and compliance with lease covenants at June 30. It also disclosed that the spin-off’s tax-free status depends on specified facts, representations and undertakings, with potentially significant tax and indemnity exposure if the transaction were found taxable.
Important facts for investors to verify
- Whether operating cash generation improves and receivables are collected: first-half operating cash flow was only $6.8 despite $28.3 of consolidated net income.
- How much growth and profitability are attributable to acquisitions versus same-facility performance, and whether acquired operations integrate as expected.
- Whether occupancy, skilled mix, and home health and hospice margins develop as management anticipates.
- Available revolver capacity and covenant headroom after letters of credit, acquisitions, and subsequent-period borrowing activity.
- Exposure to lease obligations, government reimbursement changes, audits, self-insurance claims, and ongoing compliance-agreement requirements.