The Ensign Group, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, Ensign provided post-acute healthcare services through 245 skilled nursing and senior living facilities and 56 home health, hospice and home care agencies. It owned 72 facilities and leased 173. Results are unaudited and compared with Q1 2018.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $549.2 million | $492.1 million | +11.6% |
| Income from operations | $37.8 million | $33.0 million | +14.6% |
| Net income attributable to Ensign | $27.4 million | $23.1 million | +18.3% |
| Diluted EPS | $0.49 | $0.43 | +14.0% |
| Operating cash flow | $24.8 million | $40.4 million | Down $15.6 million |
Operating margin improved to 6.9% from 6.6%; net margin attributable to Ensign was 5.0% versus 4.7%. Cost of services declined to 78.3% of revenue from 79.3%, while general and administrative expense increased to 6.0% from 5.1%, partly reflecting proposed spin-off costs and higher incentives. Consolidated net income, including noncontrolling interests, was $27.6 million versus $23.3 million.
Cash and cash equivalents were $37.8 million at March 31, 2019. Current assets were $357.7 million and current liabilities $311.4 million. Investing cash outflow was $25.4 million, including $13.6 million of property and equipment purchases and acquisition spending. Financing provided $7.3 million; cash increased $6.7 million during the quarter. Management said cash, operating cash flow and credit availability should cover operating needs for at least 12 months. Capital expenditures were $13.6 million; approximately $60 million was budgeted for 2019 renovations.
Long-term debt had a carrying value of $250.8 million, excluding leases; principal outstanding was approximately $253.6 million. The company reported $131.3 million outstanding under its credit facility and $122.3 million under mortgage loans and a promissory note, and said it complied with loan covenants at quarter-end. Following adoption of ASC 842, operating lease liabilities totaled $1.02 billion, with undiscounted future lease payments of $1.64 billion.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions and growth in existing operations. Acquired operations contributed $23.4 million of incremental revenue year over year.
- Transitional and skilled services revenue rose 10.4%; same-facility revenue increased 6.0%. Skilled nursing occupancy improved to 79.4% from 77.8%, while skilled mix by nursing days fell to 29.9% from 31.6% and by revenue to 49.7% from 52.2%.
- Senior living revenue rose 12.7%; occupancy eased to 75.1% from 75.5%. Home health and hospice revenue increased 16.0%, supported by higher census and acquisitions.
- Operating cash flow fell mainly because of timing of accounts receivable, prepaid expenses and other assets, and accrued wage payments. Accounts receivable, net, rose to $291.7 million from $276.1 million at year-end.
- Adoption of the new lease standard added lease assets and liabilities to the balance sheet and a $9.0 million after-tax retained-earnings adjustment. The company said the standard did not materially affect earnings, liquidity or covenant compliance.
Outlook, commentary, risks and unusual items
No company-specific quantitative financial guidance was provided. Management said it expects sufficient liquidity for at least the next 12 months and described acquisition, renovation and operational improvement as ongoing priorities. CMS proposed a 2.5% aggregate skilled nursing payment increase for fiscal 2020; this was a proposed industry update, not company guidance. Future home health payment changes, including the 2020 Patient-Driven Groupings Model, could affect reimbursement.
On May 6, 2019, after quarter-end, Ensign announced a proposed spin-off of home health, hospice, substantially all senior living and other ancillary operations into Pennant Group. Ensign expected to distribute one Pennant share for every two Ensign shares, subject to customary conditions and board approval. The filing reported $2.99 million of Q1 spin-off transaction costs. The separation was not assured.
Other notable items and exposures include the completion of Ensign’s five-year corporate integrity agreement with the HHS Inspector General; an ongoing Department of Justice investigation concerning certain facility relationships with medical directors and referral sources, with outcome and impact uncertain; and Medicare payment reviews involving 13 subsidiaries. The company also highlighted regulatory and reimbursement uncertainty, litigation and patient-care claims, labor availability and costs, and the possibility that self-insurance reserves may prove inadequate. Government programs accounted for 67.9% of revenue.
Most important facts for investors to verify
- Whether operating cash flow and receivables collection recover, given the year-over-year cash-flow decline and increase in net accounts receivable.
- Whether the proposed Pennant spin-off proceeds, its final terms and costs, and the operating and financial effects on both companies.
- The status and possible financial consequences of the DOJ investigation, Medicare reviews and other regulatory or litigation matters.
- Lease and debt obligations, covenant headroom, and the filing’s separate statement that approximately $111.3 million was outstanding under the revolving credit facility as of May 2, 2019, compared with $20.0 million reported at March 31; clarify the post-quarter borrowing balance and classification.
- Whether reimbursement changes, staffing and quality-rating developments, and declining skilled mix affect occupancy, revenue per patient and margins.