The Ensign Group, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone Q4 filing; quarterly figures below are included where useful. Dollar amounts are U.S. dollars.
Business context and reporting changes
Ensign provides skilled nursing, senior living, rehabilitation and ancillary services through subsidiaries. Following the October 1, 2019 tax-free spin-off of The Pennant Group, Inc., Ensign’s continuing business is principally transitional and skilled services; it reported one segment. Pennant’s results are presented as discontinued operations for all periods, so comparisons should account for the changed business perimeter.
At year-end, Ensign operated 223 skilled nursing and senior living facilities, including 190 skilled nursing operations, with 22,625 operational skilled nursing beds. Skilled nursing generated about 95% of annual revenue. The company added 26 operations during 2019; reported acquisitions had an aggregate purchase price of approximately $149 million.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Revenue from continuing operations | $2,036.5 million | $1,754.6 million | Up 16.1% |
| Income from operations | $129.2 million | $84.9 million | Operating margin 6.3%, versus 4.8% |
| Net income from continuing operations | $92.2 million | $59.1 million | Continuing diluted EPS $1.64, versus $1.09 |
| Net income attributable to Ensign, including discontinued operations | $110.5 million | $92.4 million | Diluted EPS $1.97, versus $1.70 |
| Continuing operating cash flow | $168.9 million | $170.2 million | Down $1.2 million |
| Cash and cash equivalents | $59.2 million | $31.0 million | Working capital $67.9 million |
| Long-term debt, including current maturities | $330.4 million | $246.1 million | Includes $210 million drawn on the revolving facility |
| Operating lease liabilities | $1,018.9 million | Not recognized on the balance sheet under prior lease accounting | Undiscounted future lease payments totaled $1,755.5 million |
Revenue growth reflected acquisitions, increased patient days and higher daily rates. Same-facility revenue grew 7.9%; overall skilled nursing occupancy increased to 79.2% from 77.4%. Skilled mix declined modestly: skilled nursing days were 29.0% of total days versus 29.5%, and skilled revenue was 48.8% versus 49.6%. Cost of services rose 14.3%, slower than revenue growth, and declined to 79.6% of revenue from 80.8%.
Medicaid and Medicare together contributed 70.4% of revenue; Medicaid alone contributed 39.4%, Medicare 24.5%, managed care 17.2%, and private and other payors 12.4%. Payroll-related costs were approximately 60% of total expenses.
Fourth quarter: Revenue was $560.2 million, compared with $462.4 million in Q4 2018. Continuing-operations net income was $27.3 million, compared with $18.1 million; continuing diluted EPS was $0.49, versus $0.33.
Continuing investing cash outflow was $224.0 million, including $71.5 million of property and equipment purchases. Acquisition cash payments were approximately $148.1 million in aggregate (business and asset acquisitions). The company reported $48.3 million in held-to-maturity debt securities in addition to cash. Its $350 million revolving facility matures October 2024; the company reported covenant compliance at year-end.
Material changes, outlook and risks
- Pennant spin-off: Ensign transferred the home health, hospice and substantially all senior living operations; it retained ownership of 29 properties leased to Pennant. The company reported $12.2 million annual rent from those leases and a $23 million reduction in annual rent expense from lease terminations and modifications. Spin-off costs totaled about $9.1 million since 2018.
- Accounting and financing: Adoption of lease accounting standard ASC 842 added right-of-use assets and lease liabilities to the balance sheet. In connection with the spin-off, Ensign amended its credit facility, replacing the prior term loan with a $350 million revolving line. The 2019 effective tax rate was 20.6%, compared with 17.7% in 2018.
- Payment changes: Medicare’s Patient-Driven Payment Model (PDPM) took effect October 1, 2019. Management said the model affected fourth-quarter revenue but did not quantify the impact. The filing discusses potential reimbursement pressure from Medicare and Medicaid policy changes, including a proposed Medicaid Fiscal Accountability Regulation that could reduce supplemental payments to 17 Utah facilities.
- Management outlook: Ensign planned approximately $55 million in renovation projects for 2020 and said cash, operating cash flow and available credit were expected to cover operating needs for at least 12 months. It cited growth through acquisitions, higher occupancy, higher-acuity services and operating efficiencies. The filing provides no specific numerical revenue or earnings guidance.
- Key risks and contingencies: The DOJ investigation into medical-director, advisory-board and referral-source relationships at ten Southern California facilities remained unresolved; Ensign said it was cooperating and could not predict the outcome. Eight subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution. Other material exposures include reimbursement cuts or delays, staffing shortages and wage inflation, patient-care litigation, self-insurance reserve uncertainty, lease and debt covenants, and potential liabilities related to the spin-off. The prior five-year corporate integrity agreement concluded in 2019.
- Unusual items: Continuing operations recorded $4.1 million of long-lived asset and goodwill impairment charges in 2019 and a $2.9 million gain on real estate sales. The year also included the spin-off and its related transaction costs. Reported full-year net income includes Pennant discontinued-operations income of $19.5 million.
Important facts for investors to verify
- Reconcile continuing-operations results with reported net income and discontinued operations, and assess the impact of the October spin-off on period-to-period comparisons.
- Review the outcome and potential financial exposure of the DOJ investigation, Medicare reviews and other regulatory or patient-care claims.
- Assess the effect of PDPM and proposed Medicaid changes, particularly Utah supplemental payments, on reimbursement and margins.
- Evaluate cash generation and liquidity against acquisition and renovation spending, $330.4 million of debt, and $1.019 billion of recognized lease liabilities.
- Monitor occupancy, skilled mix, labor costs and self-insurance reserves; compare non-GAAP EBITDA and EBITDAR with GAAP earnings and cash flows.