The Ensign Group, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. All share and per-share figures reflect the December 2015 two-for-one stock split.
Business context
Ensign is a holding company whose subsidiaries provide skilled nursing, assisted and independent living, home health, hospice, urgent care and mobile ancillary services. At year-end, the company operated 186 skilled nursing and assisted/independent living facilities, 32 home health and hospice agencies, and 17 urgent care centers. It owned 32 facilities and leased 154.
Financial results and key metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1.342 billion | $1.027 billion |
| Income from operations | $93.1 million | $72.9 million |
| Operating margin | 6.9% | 7.1% |
| Net income attributable to Ensign | $55.4 million | $36.0 million |
| Diluted EPS | $1.06 | $0.78 |
| Net cash from operating activities | $33.4 million | $84.9 million |
| Cash and cash equivalents, year-end | $41.6 million | $50.4 million |
| Long-term debt, including current maturities | $99.7 million | $68.4 million |
| Working capital, year-end | $115.1 million | $83.2 million |
Revenue increased 30.6%, with acquisitions contributing $233.8 million of the increase. TSA services generated $1.215 billion; home health and hospice revenue was $90.4 million, up 65.7%. Operating costs rose with the expanded business. Rent expense increased to $88.8 million, primarily reflecting a full year of leases on properties transferred to CareTrust in the 2014 spin-off. The net income margin attributable to Ensign was approximately 4.1%, versus 3.5% in 2014.
At year-end, accounts receivable, net of allowance, was $209.0 million, up from $130.1 million; the allowance for doubtful accounts was $30.3 million. The increase in receivables, including acquisition-related billing delays while licenses were processed, contributed to lower operating cash flow. Investing activities used $168.5 million, including $60.0 million of property and equipment purchases and $110.8 million of business acquisition payments. Financing activities provided $126.3 million, including proceeds from the February stock offering.
Total future operating lease obligations were approximately $1.865 billion. This substantial commitment is distinct from reported debt. Non-GAAP EBITDA was $120.7 million and Adjusted EBITDA was $135.2 million; these measures are company-defined and should be considered alongside GAAP results.
Fourth quarter: Revenue was $373.2 million, compared with $276.9 million in Q4 2014; net income attributable to Ensign was $13.6 million versus $11.5 million. Diluted EPS was $0.26 versus $0.25.
Material changes versus prior periods
- Facility count grew from 136 to 186. The company added 50 skilled nursing and assisted living facilities, seven agencies, and three urgent care centers during 2015.
- Skilled mix by nursing days increased to 30.4% from 27.6%; quality mix rose to 42.5% from 40.7%. Overall occupancy was broadly flat at 77.9% versus 78.0%, reflecting portfolio growth and newly acquired facilities.
- Home health Medicare episodic admissions increased 44.3% to 7,534, and hospice average daily census rose 61.7% to 679.
- Net operating cash flow fell by $51.5 million, principally due to higher receivables and increased insurance subsidiary deposits and investments.
- The February 2015 stock offering generated net proceeds of approximately $106.5 million; $94.0 million was used to repay credit-facility borrowings. The company also declared $0.1525 per share in 2015 dividends.
Outlook, risks and unusual items
- Management gave no specific company revenue or earnings guidance in the supplied filing text. It planned approximately $55 million of renovation projects in 2016 and stated that cash, operating cash flow and available credit were expected to cover operating needs for at least 12 months.
- In February 2016, the credit facility was expanded to $250 million; approximately $111.8 million was outstanding on February 5, 2016. The company reported compliance with its debt covenants at year-end.
- Following clinical survey challenges, Ensign elected to close one skilled nursing facility in early 2016. It estimated operating losses, lease obligations and closure costs of $7.0–$7.5 million, including approximately $5.8 million in present value of rent. The facility represented about 0.5% of 2015 revenue and adjusted EBITDAR.
- Government programs accounted for 67.7% of revenue; exposure to Medicare and Medicaid rate changes, audits, recoupments, and evolving quality and value-based payment rules is material. CMS projected a 1.4% industry payment decrease for home health in 2016 and a 1.2% increase for skilled nursing facilities.
- Ensign had two subsidiaries under Medicare probe review in 2015, and one additional subsidiary was selected for a prepayment review. The company remains subject to a five-year Corporate Integrity Agreement stemming from the 2013 $48 million DOJ settlement; it reported passing its second-year independent review audits.
- Labor availability and wage inflation, self-insurance reserve estimates, clinical and licensing compliance, litigation, and lease cross-defaults are additional risks. Approximately 75.6% of operational beds were in leased facilities.
- Subsequent to year-end, Ensign repurchased 0.7 million shares for $15 million under its authorized repurchase program. It also entered a lease for a new campus adding 70 skilled nursing beds and 30 assisted living units.
Most important facts for investors to verify
- Whether operating cash flow recovers as acquired facilities complete licensing and receivables are collected; monitor receivables and allowance trends.
- Acquisition integration, occupancy, skilled mix and margins, especially at newly acquired facilities, and the effect of higher rent expense.
- Debt capacity and covenant headroom in light of the expanded credit facility, growth plans and approximately $1.865 billion of future lease obligations.
- Outcomes of Medicare reviews, ongoing CIA compliance, survey performance and the financial impact of the facility closure.
- Actual reimbursement and cost effects of Medicare/Medicaid policy changes, home health value-based purchasing, and staffing and wage pressures.