The Ensign Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless stated otherwise, amounts are in millions of dollars. Ensign provides skilled nursing, assisted and independent living, home health, hospice and ancillary services through operating subsidiaries; at quarter-end it operated 236 facilities and 49 home health, hospice and home care agencies.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $514.4 | $471.6 | $1,502.9 | $1,361.6 |
| Income from operations | $29.3 | $25.6 | $94.0 | $55.1 |
| Net income attributable to Ensign | $20.9 | $14.2 | $66.0 | $29.3 |
| Diluted EPS | $0.38 | $0.27 | $1.22 | $0.56 |
| Operating margin | 5.7% | 5.4% | 6.3% | 4.0% |
- Reported revenue rose 9.1% in Q3 and 10.4% year to date. Under a prior-accounting presentation intended to improve comparability, 2018 revenue growth was 10.7% for Q3 and 12.3% year to date. ASC 606 moved most bad-debt expense into revenue as implicit price concessions; prior-year figures were not restated.
- Q3 total expenses were $485.1 million; cost of services was 80.4% of revenue. Nine-month cost of services was 79.8% of revenue. Lower cost ratios supported margin improvement, while general and administrative expense rose to 4.8% of revenue from 4.1% in Q3 2017.
- Cash from operations was $157.3 million for the first nine months, versus $63.2 million a year earlier. Investing used $95.3 million and financing used $58.7 million; cash increased $3.3 million to $45.7 million.
- At September 30, cash was $45.7 million, current assets $348.4 million, and current liabilities $247.9 million (working capital about $100.6 million). Gross debt was $258.6 million, down from $316.0 million at year-end 2017; the revolving facility had no balance outstanding, while the term loan was $135.0 million and mortgages and notes were $123.6 million. Debt covenants were reported in compliance.
- Rent expense was $103.7 million for the first nine months. Future minimum lease payments were $1.676 billion, a substantial fixed commitment not reflected in reported debt.
Material changes and operating trends
- Growth reflected acquisitions and increased service activity. Acquisitions contributed $27.6 million of Q3 revenue growth and $96.9 million of nine-month growth versus the comparable 2017 periods, according to management.
- Skilled nursing occupancy based on operational beds improved to 77.3% in Q3 from 75.7%; however, skilled mix by nursing days declined to 28.3% from 29.4%, and skilled mix by revenue fell to 47.9% from 49.8%. Nine-month occupancy rose to 77.2%, while skilled mix by days declined to 29.9% from 30.7%.
- Home health and hospice revenue increased 21.9% in Q3 and 21.5% year to date. Hospice average daily census increased 19.1% in Q3. Assisted and independent living revenue grew 7.3% in Q3, with occupancy of 76.0% versus 75.7%.
- Nine-month operating cash flow benefited from higher earnings, an $11.0 million income-tax refund, improved receivable collections and timing of tax and other payments. It should not be viewed as solely recurring operating improvement.
- The 2018 effective tax rate was 21.5% for nine months, versus 35.8% in 2017, reflecting the lower federal corporate rate and share-based compensation tax benefits, partly offset by nondeductible items. Tax Act accounting remained incomplete; the company said estimates could change.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided. Management said cash, operating cash flow and credit-facility availability should cover operating needs for at least the next 12 months. It budgeted approximately $55 million for 2018 renovations.
- Management expects adoption of the new lease standard in 2019 to materially increase reported assets and liabilities, primarily due to facility leases. The company was cataloguing contracts and preparing systems and controls.
- Major reimbursement exposure remains: Medicare and Medicaid generated 68.2% of nine-month revenue. Management identified government rate changes, cost containment, audits, quality-linked payment programs, labor availability and rising costs as material risks. The Patient-Driven Payment Model for skilled nursing was scheduled to take effect October 1, 2019.
- On May 31, 2018, the Department of Justice issued a Civil Investigative Demand concerning possible False Claims Act or Anti-Kickback Statute issues involving medical-director, advisory-board and referral-source relationships at ten Southern California facilities. In October, DOJ broadened its information request to cover January 2011 onward. Ensign said it was cooperating but could not predict the outcome or impact; the filing provides no clear estimate of potential loss.
- Thirteen operating subsidiaries had Medicare or Medicaid reviews scheduled or in process. The filing warns that recoupments, penalties, exclusion from government programs, or adverse litigation could materially affect results and cash flows.
- Ensign recorded a $3.7 million goodwill and intangible-asset impairment for an ancillary operation after results and forecast cash flows lagged acquisition expectations. It also recognized a $1.7 million recovery of unclaimed funds from a previously funded wage-and-hour class settlement. The 2017 comparison included an $11.0 million class-action charge and $2.7 million of divestiture losses, which did not recur in 2018.
- Self-insurance reserves are actuarial estimates; the company cautioned that actual claims could exceed reserves and materially affect earnings, cash flows and financial condition. Lease and debt arrangements include cross-default risks tied in part to regulatory compliance.
Important facts for investors to verify
- Compare reported growth with ASC 606 pro forma growth, and assess the contribution from acquisitions versus same-facility performance.
- Track skilled mix, occupancy, Medicaid reimbursement and labor costs, given the high government-payor concentration.
- Monitor the DOJ investigation, the 13 reviews in process, and any subsequent disclosure of potential exposure or regulatory outcomes.
- Assess recurring cash generation separately from the tax refund and working-capital timing effects; review acquisition and renovation spending against cash flow.
- Evaluate total lease commitments alongside debt, including the expected balance-sheet effects of lease accounting adoption.
- Review goodwill impairment assumptions, self-insurance reserve adequacy, and covenant compliance as operating and regulatory conditions change.