The Ensign Group, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Ensign provides skilled nursing and rehabilitative care, assisted living, home health, hospice, home care, urgent care, and mobile diagnostic services. At year-end it operated 136 facilities, 12 home health agencies, 11 hospice agencies, 14 urgent care centers, and related businesses across 12 states.
On June 1, 2014, Ensign spun off its real estate business into CareTrust REIT. Ensign transferred 97 facilities to CareTrust and continued operating 94 under triple-net leases. This materially changed Ensign’s cost structure and asset ownership.
Financial performance
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Revenue | $1,027.4 million | $904.6 million | Up 13.6% |
| Income from operations | $72.9 million | $57.9 million | Operating margin 7.1%, versus 6.4% |
| Income before taxes | $60.5 million | $45.7 million | Up 32.6% |
| Net income attributable to Ensign | $36.0 million | $24.0 million | Diluted EPS was $1.56, versus $1.07 |
| Operating cash flow | $84.9 million | $37.4 million | Increase mainly reflected tax-payment timing and accounts-payable timing |
| Cash and cash equivalents | $50.4 million | $65.8 million | Year-end working capital was $83.2 million |
| Long-term debt, including current maturities | $68.4 million | $259.3 million | Debt reduction followed the spin-off and repayment of prior borrowings |
| Future operating lease obligations | $1,126.7 million | — | Includes substantial CareTrust triple-net lease commitments |
Revenue from Medicare and Medicaid represented 70.4% of total revenue, down from 72.2%. The company’s total skilled-nursing occupancy was 78.0%, versus 77.5%; skilled mix by patient days rose to 27.6% from 26.4%. Cost of services was 80.1% of revenue, broadly unchanged. Facility rent rose to $48.5 million from $13.6 million, primarily due to the CareTrust leases; depreciation and amortization fell to $26.4 million from $33.9 million.
Cash used in investing was $172.9 million, including $92.7 million for business acquisitions and $53.7 million of capital expenditures. Cash provided by financing was $72.6 million. The company declared dividends of $0.29 per share for 2014.
Fourth-quarter and year-over-year comparison
In Q4 2014, revenue was $276.9 million, income from operations was $19.6 million, and net income attributable to Ensign was $11.5 million, or diluted EPS of $0.49. Q4 2013 revenue was $237.0 million and Ensign reported a net loss attributable to the company of $12.1 million, including a $33.0 million charge related to the DOJ investigation. The quarterly results are unaudited.
For the full year, home health and hospice revenue grew 37.1% to $54.5 million; urgent care and mobile diagnostic revenue in “all other” increased to $22.6 million from $11.5 million. Same-facility transitional, skilled, and assisted-living revenue rose 5.3%. Growth also reflected acquisitions and expanded operations.
Outlook, risks, contingencies, and unusual items
- Management said cash, operating cash flow, and available capacity under its $150 million credit facility were expected to cover operating needs for at least 12 months. It budgeted approximately $45 million for 2015 renovations; it did not provide formal earnings or revenue guidance.
- Management planned continued growth through acquisitions, occupancy and operating improvements, higher-acuity care, and new construction. It expected its first build-to-suit facilities with Mainstreet Property Group to open in Q2 2015. Subsequent to year-end, it acquired businesses for approximately $38.6 million.
- At December 31, the new credit facility had $65 million outstanding; the company reported compliance with its covenants. Outstanding borrowings were approximately $94 million as of February 5, 2015. The facility has variable-rate exposure and restrictive covenants.
- Medicare and Medicaid reimbursement, audits and recoupments, staffing costs and availability, clinical quality and licensing, litigation, self-insurance reserves, and integration of acquisitions are significant risks. Government payors accounted for 70.4% of revenue.
- The 2014 results include approximately $9.0 million of spin-off transaction costs and $5.8 million of debt-retirement and hedge-termination losses. The spin-off also increased rent expense and reduced depreciation. The prior-year comparison includes the $33.0 million DOJ-related charge in 2013; the overall $48.0 million DOJ settlement was paid in October 2013.
- Ensign remains subject to a five-year Corporate Integrity Agreement effective October 1, 2013, including annual independent reviews. The company said it passed its first-year reviews and that participation in federal healthcare programs was unaffected; an uncured material breach could result in exclusion or prosecution.
- Triple-net leases require Ensign to pay property taxes, insurance, maintenance, and other property costs. The CareTrust master leases have cross-default provisions and approximately $56 million of annual rent during each of their first two years. Management reported compliance with lease covenants and no known defaults at year-end.
Important facts for investors to verify
- Review the audited statements and notes for the spin-off accounting, lease commitments, and debt balances; the filing’s selected financial data table reports a different 2013 total-assets figure than the audited balance sheet.
- Assess recurring profitability and cash generation after separating unusual spin-off costs, debt-extinguishment losses, and the prior-year DOJ charge from reported results.
- Track rent and other obligations under the CareTrust triple-net leases, including coverage covenants and cross-default exposure.
- Monitor acquisition integration, occupancy, skilled mix, and margins, especially as newly acquired facilities may initially operate below mature-facility levels.
- Follow reimbursement policy changes, billing reviews, the Corporate Integrity Agreement, and the adequacy of self-insurance reserves.