The Ensign Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited. Amounts below are in millions of dollars, except per-share data and percentages.
Business context
Ensign provides skilled nursing, assisted living, rehabilitation, home health, hospice and related services. At quarter-end it operated 110 facilities, nine home health operations and seven hospice operations across 11 states, with 12,390 operational beds. It owned 87 facilities and leased 23. Medicare and Medicaid together generated 72.8% of quarterly revenue.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $218.2 | $202.0 |
| Operating income (loss) | $(10.8) | $23.5 |
| Net income (loss) attributable to Ensign | $(12.1) | $12.9 |
| Diluted earnings (loss) per share | $(0.56) | $0.59 |
| Cash provided by operating activities | $21.7 | $5.3 |
| Capital expenditures | $5.2 | $7.0 |
- Revenue grew 8.0%. GAAP operating margin was negative 4.9%, versus positive 11.6% a year earlier; the $33.0 DOJ-related charge was the principal unusual expense.
- Cost of services rose to 80.7% of revenue from 79.5%. General and administrative expense was 4.1% of revenue versus 3.8%; depreciation and amortization remained 3.5%.
- Management-reported adjusted EBITDA was $33.9, up from $31.2; adjusted EBITDAR was $37.0 versus $34.4. These are non-GAAP measures and include adjustments for specified items.
- Cash and cash equivalents were $42.5 at March 31, 2013, versus $40.7 at year-end 2012. Current assets were $174.8 and current liabilities $154.0. Long-term debt, net of discount, was $198.7; current maturities were $7.2. The company also reported $22.3 of held-to-maturity debt securities.
- The revolving credit facility was increased to $150.0, with $20.0 drawn at quarter-end; the facility maturity was extended to February 2018. Ensign reported compliance with its debt covenants. Management stated that cash, operating cash flow and available revolver capacity should cover operating needs for at least 12 months.
Material changes versus prior period
- Revenue growth reflected acquisitions and higher revenue across payor categories. Same-facility revenue increased 2.0%; recently acquired facilities contributed $11.6 of the year-over-year increase.
- Skilled mix by nursing days increased to 27.7% from 26.3%, while occupancy based on operational beds declined to 77.8% from 79.8%. Same-facility occupancy was 80.9%, versus 81.7%.
- Operating cash flow increased by $16.4 to $21.7. Investing activities used $19.1, including $10.6 for acquisitions; financing activities used $0.7, compared with $16.0 provided in the prior-year quarter, which included debt proceeds.
- Ensign acquired one skilled nursing facility and several home health and hospice operations during the quarter for approximately $10.6 in aggregate. It subsequently reported additional facility acquisitions completed in April and May.
Outlook, commentary and risks
- DOJ inquiry: Ensign recorded a $33.0 charge in Q1, bringing the total recorded reserve to $48.0, including $15.0 accrued in Q4 2012. In April 2013, the company reached an agreement in principle to resolve the civil investigation, without admitting wrongdoing. Final documentation and government and court approvals remained outstanding; Ensign expected to pay the reserve in Q2 or Q3 and was discussing a potential corporate integrity agreement. The final settlement amount could differ from the estimate.
- Doctors Express divestiture: The urgent-care franchise system sale for approximately $8.0, subject to adjustments, became effective April 15, 2013. Ensign recorded a $2.8 pretax loss and presented the business as discontinued operations.
- Management budgeted $35.0 for 2013 renovation projects. No specific revenue or earnings guidance was provided in the filing.
- Key risks include dependence on government reimbursement and changes to Medicare and Medicaid rates, regulatory audits and possible recoupments, staffing and labor costs, litigation and self-insurance estimates, and the integration and performance of acquired operations. Medicare and Medicaid represented 72.8% of revenue; the filing also notes that the April 1, 2013 Medicare sequestration reduction and other reimbursement changes could pressure results.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the DOJ settlement and corporate integrity agreement received final approvals, and whether the final payment and related obligations matched the $48.0 reserve.
- Whether operating cash flow and available credit were sufficient after settlement payment, acquisitions and planned renovations.
- Whether occupancy, skilled mix and same-facility performance improved or weakened in subsequent quarters.
- How reimbursement reductions, audits and documentation requirements affected revenue, collections and margins.
- Whether acquisitions and the Doctors Express sale produced the expected financial and operational outcomes.