The Ensign Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Ensign provides skilled nursing, assisted and independent living, home health, hospice, home care and ancillary services through subsidiaries. At year-end, it operated 244 facilities and 54 agencies across 16 states. The parent company is a holding company without direct operating revenue or employees.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $2,040.7 million | $1,849.3 million |
| Income from operations | $128.5 million | $81.3 million |
| Operating margin | 6.3% | 4.4% |
| Net income attributable to Ensign | $92.4 million | $40.5 million |
| Diluted earnings per share | $1.70 | $0.77 |
| Cash from operating activities | $210.3 million | $73.0 million |
- Revenue increased 10.3% as reported. On a comparable basis using prior revenue guidance, 2018 revenue was $2,073.5 million, up 12.1%. ASC 606 reduced reported 2018 revenue and cost of services by $32.8 million each, without a material earnings effect; prior periods were not restated.
- Net margin attributable to Ensign was approximately 4.5%, versus 2.2% in 2017. The effective tax rate fell to 19.8% from 41.1%, reflecting the lower federal corporate tax rate and share-based compensation tax benefits.
- Cash from operations rose substantially, partly reflecting higher earnings, improved receivable collections, timing of accrued expenses and an $11.0 million tax refund. Investing cash outflow was $151.2 million; financing cash outflow was $70.3 million. Year-end cash was $31.1 million, down from $42.3 million.
- Year-end working capital was $78.8 million. Long-term debt, net of current maturities, was $233.1 million; current maturities were $10.1 million. Total debt principal before debt issuance costs was $246.1 million. The company reported covenant compliance at year-end.
- Contractual operating lease obligations totaled approximately $1.668 billion. Adoption of the new lease standard on January 1, 2019 recognized approximately $1.05 billion in lease assets and $1.03 billion in lease liabilities; management did not expect a material effect on net earnings or a notable effect on liquidity or covenant compliance.
- Adjusted EBITDA was $195.6 million and Adjusted EBITDAR was $319.4 million. These are non-GAAP measures; Adjusted EBITDAR excludes rent and should not be treated as cash flow or a substitute for GAAP earnings.
Fourth-quarter results
For the quarter ended December 31, 2018, revenue was $537.8 million, income from operations was $34.4 million, net income attributable to Ensign was $26.4 million, and diluted EPS was $0.48. In the fourth quarter of 2017, the corresponding figures were $487.7 million, $26.1 million, $11.2 million and $0.21.
Material changes and operating trends
- Transitional and skilled services revenue rose 8.7% as reported; on the prior-guidance basis it increased 10.7%. Home health and hospice revenue grew 18.7% as reported, or 20.0% on that comparable basis. Assisted and independent living revenue increased 11.1%.
- Acquisitions contributed $124.3 million to consolidated revenue growth versus 2017. During 2018, the company added skilled nursing, assisted living, campus and home health, hospice and home care operations; acquisition spending was approximately $90.0 million, with cash payments for acquisitions and asset acquisitions totaling $90.0 million.
- Skilled nursing occupancy improved to 77.4% from 75.4%; assisted and independent living occupancy decreased to 75.7% from 76.4%. Skilled nursing skilled mix declined to 29.5% of patient days from 30.3%, and quality mix declined to 41.7% from 42.8%.
- Cost of services was 79.8% of revenue, down from 81.0%. Results included $9.1 million of long-lived asset and goodwill impairment charges, including impairment at an ancillary operation and assisted living assets. The company also recorded a $1.7 million recovery of unclaimed class-action settlement funds.
- Capital expenditures were $54.9 million. Management budgeted approximately $60 million for 2019 renovations and said cash, operating cash flow and credit-facility availability should meet operating needs for at least the next 12 months.
Outlook, risks and contingencies
- The filing gives no specific company revenue or earnings guidance. Management’s stated strategy is to grow through leadership development, higher-acuity care, operational improvement, acquisitions and expansion of complementary post-acute services.
- Medicaid and Medicare provided 68.5% of 2018 revenue; Medicaid alone represented 41.4% and Medicare 27.1%. Changes to reimbursement, audits, payment delays and value-based payment models could affect revenue and margins. About 60% of expenses were payroll-related, and labor shortages, wage growth and staffing requirements are additional cost risks.
- The DOJ issued a Civil Investigative Demand concerning possible False Claims Act or Anti-Kickback Statute issues involving relationships at ten Southern California skilled nursing facilities. The investigation was expanded to information dating back to 2011. Ensign said it was cooperating; outcome, timing and potential impact were not estimable from the filing.
- Sixteen operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution. Ensign also recorded $0.9 million of hospice cap expense in 2018. The company remains exposed to reimbursement recoupments, regulatory sanctions, litigation and professional-liability claims.
- Ensign had previously paid $48.0 million to resolve a 2013 DOJ matter and entered a five-year corporate integrity agreement. The filing said subsidiaries continued to meet its requirements and pass independent reviews.
- Variable-rate credit-facility borrowings expose the company to interest-rate risk. Lease and debt agreements include financial covenants and, in some cases, cross-default provisions. The company also relies heavily on long-term leases, many of them triple-net.
- CMS payment changes include the SNF Patient-Driven Payment Model effective October 2019 and home-health payment-system changes effective in 2020. Management noted that reimbursement and operational effects remain uncertain.
Most important facts for investors to verify
- Reconcile reported revenue growth and margins with the ASC 606 presentation change and the company’s prior-guidance comparison.
- Assess whether operating cash flow is sustainable after separating the tax refund, working-capital movements and payment timing.
- Review debt maturities, variable-rate exposure, covenant headroom and the substantial lease obligations, including the 2019 lease-accounting transition.
- Track the DOJ investigation, Medicare reviews, hospice cap exposure and any resulting accruals, repayments or restrictions.
- Monitor Medicaid/Medicare reimbursement and labor costs alongside occupancy, skilled mix and quality ratings; verify that acquisition growth converts into durable same-facility performance.