The Ensign Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited, compared with Q1 2015. Ensign is a holding company whose operating subsidiaries provide skilled nursing, assisted and independent living, home health, hospice, urgent care and other services. At quarter-end it operated 186 facilities, 34 home health and hospice agencies, and 17 urgent care centers across 14 states.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $383.2 million | $306.5 million |
| Income from operations / margin | $16.3 million / 4.3% | $25.2 million / 8.2% |
| Net income attributable to Ensign | $9.2 million | $15.2 million |
| Diluted EPS | $0.18 | $0.31 |
| Operating cash flow | $12.7 million | $5.9 million |
| Capital expenditures | $18.2 million | $12.7 million |
- Revenue increased 25.0%, while reported operating income, attributable net income and diluted EPS declined. Cost of services rose to 79.9% of revenue from 78.8%; total expenses rose to 95.7% from 91.8%.
- Adjusted EBITDA, a non-GAAP measure, was $37.6 million versus $32.4 million; adjusted EBITDAR was $62.6 million versus $50.9 million. These measures include adjustments for items such as stock compensation, start-up costs and the closed facility; they are not substitutes for GAAP results.
- Cash and cash equivalents were $51.4 million at March 31, up from $41.6 million at year-end. Current assets were $293.2 million and current liabilities $168.1 million.
- Total debt was $146.3 million, including $131.8 million outstanding on the revolving credit facility and $14.5 million of mortgage loans and a promissory note. The company reported covenant compliance. The amended facility provides $250 million of revolving capacity; borrowings were approximately $196.8 million as of May 9, 2016.
- Ensign held about $33.0 million of debt securities at March 31. Future minimum operating lease payments were approximately $2.10 billion, including $97.9 million for the remainder of 2016.
Material changes versus Q1 2015
- Management attributed $62.6 million of the revenue increase to acquisitions. TSA services revenue rose 23.9%; home health and hospice revenue rose 45.6%.
- Same-facility TSA revenue grew 3.7%, but same-facility Medicare revenue declined 5.8%, mainly on a 10.0% decrease in Medicare patient days. Overall occupancy was 77.1%, down from 78.8%; skilled mix by nursing days improved to 32.5% from 30.3%.
- Home health Medicare episodic admissions increased 55.9%, and hospice average daily census increased 57.3%. Medicaid and Medicare together provided 65.2% of revenue, down from 69.1%.
- Cash provided by operations improved, while investing outflow fell to $20.1 million from $36.5 million, primarily because acquisition cash payments were lower. Financing cash flow declined to $17.2 million from $42.8 million; 2015 included equity-offering proceeds, while Q1 2016 included $30.0 million of share repurchases.
Outlook, management commentary and risks
- Management said cash, operating cash flow and available credit should cover operating needs for at least 12 months. It budgeted approximately $60 million for 2016 renovation projects. No specific company revenue or earnings guidance was provided.
- In February, Ensign amended its revolving facility, increasing commitments to $250 million and permitting up to $150 million of incremental revolving or term loans, subject to terms and covenants. Variable-rate borrowings expose the company to interest-rate risk.
- In Q1 the company closed one skilled nursing facility after clinical survey challenges. It recorded $7.9 million of closure and continuing lease costs, including about $6.5 million for the present value of rent obligations. Management said the closure would not materially affect future rent or master-lease coverage ratios; residents were transferred to nearby facilities.
- After quarter-end, Ensign reported transactions adding 18 skilled nursing operations and one hospice agency, for an aggregate purchase price of $52.1 million, including $24.6 million for real estate, and 2,177 operational beds. These transactions add acquisition and integration demands.
- Key risks include Medicare and Medicaid reimbursement changes and audits, regulatory deficiencies, litigation and self-insurance estimates, staffing costs, acquisition integration, and substantial lease commitments and cross-default provisions. Seven subsidiaries were under Medicare probe review at quarter-end; another was selected for prepayment review. The company also remained subject to a five-year corporate integrity agreement effective October 2013 and reported passing its second-year independent reviews.
- CMS reimbursement and quality initiatives could affect results: the filing discusses a proposed 2.1% aggregate SNF payment increase for FY2017 and an estimated 1.4% industry payment reduction for home health in 2016. These are industry estimates, not Ensign guidance.
Important facts for investors to verify
- How much of revenue growth and future earnings depends on acquired facilities versus same-facility performance, particularly as occupancy declined and same-facility Medicare days fell.
- Whether the company can improve margins while absorbing start-up, labor, insurance and integration costs, and how reported results compare with management’s adjusted non-GAAP measures.
- Revolver utilization after quarter-end: borrowings rose from $131.8 million at March 31 to approximately $196.8 million on May 9; confirm remaining availability, covenant headroom and acquisition funding needs.
- The implications of approximately $2.10 billion in future minimum lease payments, including master-lease and cross-default exposure, and the closure-related rent obligation.
- Outcomes of Medicare reviews, regulatory surveys, the corporate integrity agreement, and changes in government reimbursement and quality programs.