The Ensign Group, Inc. — Q1 2018 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. Ensign provides skilled nursing, assisted and independent living, home health, hospice and ancillary services through operating subsidiaries. At quarter-end, it operated 232 facilities and 46 home health, hospice and home care agencies.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $492.1 million | $441.7 million |
| Income from operations | $33.0 million | $7.6 million |
| Net income attributable to Ensign | $23.1 million; $0.43 diluted EPS | $2.8 million; $0.05 diluted EPS |
| Operating cash flow | $40.4 million | $19.6 million |
| Capital expenditures | $11.1 million | $12.0 million |
- Revenue and operations: Revenue increased 11.4% as reported. Under the prior revenue-accounting method, Q1 2018 revenue would have been $500.9 million, 13.4% above Q1 2017. Cost of services was 79.3% of reported revenue, versus 80.5% a year earlier; operating margin was approximately 6.7%, versus 1.7%.
- Growth drivers: Management attributed growth to acquisitions and operating improvement. Transitional and skilled services revenue increased 9.3% as reported (11.5% on the prior-accounting pro forma basis); assisted and independent living revenue rose 11.6%; home health and hospice revenue increased 23.7%.
- Cash and liquidity: Cash was $35.1 million at March 31, down from $42.3 million at year-end. Current assets were $344.7 million and current liabilities $211.3 million. Operating cash flow improved by $20.8 million year over year; cash declined $7.3 million during the quarter.
- Debt and leases: Debt before unamortized issuance costs was $293.6 million, including $168.8 million outstanding under the credit facility and $124.8 million of mortgage loans and notes. Ensign reported covenant compliance. Future minimum operating lease payments were approximately $1.73 billion; these commitments are distinct from reported debt.
- Other measures: Adjusted EBITDA, a non-GAAP measure, was $46.6 million versus $41.1 million; Adjusted EBITDAR was $76.8 million versus $68.7 million. The quarterly dividend was $0.045 per share.
Material changes versus Q1 2017
- Reported revenue growth and margins should be read with the ASC 606 change in mind: Ensign adopted the standard on January 1, 2018, did not restate prior periods, and reported Q1 2018 revenue $8.8 million below the amount that would have appeared under the prior method. The company said adoption did not materially affect revenue measurement or recognition overall.
- Net income rose sharply in part because Q1 2017 included an $11.0 million class-action settlement charge and $4.0 million of divestiture and closure losses. Q1 2018 included a $1.7 million recovery of unclaimed settlement funds. These items make the year-over-year earnings comparison less representative of recurring operations.
- Skilled nursing occupancy based on operational beds improved to 77.8% from 74.9%; skilled mix by nursing days edged down to 31.6% from 32.0%. Assisted-living occupancy declined to 75.5% from 76.8%.
- Debt declined from $316.0 million at December 31, 2017. Cash flow from operations more than doubled, while cash at quarter-end was lower than at year-end.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flow and credit-facility availability should meet operating needs for at least the next 12 months. It budgeted approximately $60 million for 2018 renovations. No quantified full-year earnings or revenue guidance is provided in the supplied filing text.
- After quarter-end, Ensign acquired a skilled nursing operation and a campus for $19.5 million, adding 253 skilled nursing beds and 143 assisted-living units. The company also authorized a stock-repurchase program of up to $30 million, expiring February 20, 2019; no shares had been repurchased under it as of the filing.
- Key exposures include dependence on Medicare and Medicaid, which generated 67.9% of Q1 revenue; reimbursement and regulatory changes; staffing availability and labor costs; audits and potential recoupments; patient-care, employment and other litigation; and actuarial uncertainty in self-insurance reserves. Four subsidiaries had Medicare probe reviews scheduled or in process, and a hospice ZPIC audit result was under appeal. No subsidiary was on extended prepayment review.
- Ensign described a proposed CMS skilled-nursing payment model and other reimbursement changes, which could affect payment and operations. The 2019 lease-accounting standard is expected to significantly increase reported assets and liabilities. The company had not completed its accounting for the Tax Act, though it reported a 21.9% effective tax rate for Q1 2018 versus 32.8% in Q1 2017.
- Other notable commitments include long-term, largely triple-net facility leases and potential cross-default exposure across lease and debt arrangements. The company reported no known CareTrust master-lease defaults at quarter-end. Its five-year corporate integrity agreement following a 2013 government settlement was still in effect; Ensign reported continued compliance and successful independent reviews.
Important facts for investors to verify
- Compare revenue and margins on a consistent basis, accounting for ASC 606 and its implicit-price-concession presentation.
- Assess how much reported earnings growth reflects recurring operations versus settlement and closure-related items, and review the non-GAAP reconciliations.
- Track occupancy, skilled mix, reimbursement rates and acquisition contributions, particularly as newer facilities mature.
- Review available revolving-credit capacity, debt covenant headroom, lease commitments and the planned renovation spend.
- Monitor Medicare and Medicaid policy, audit outcomes, litigation and the adequacy of self-insurance reserves.