The Ensign Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Dollar amounts below are in millions unless stated otherwise. Ensign provides skilled nursing, assisted living, home health, hospice and related services. At quarter-end it operated 118 facilities, nine home health operations and seven hospice operations across 11 states, with approximately 13,135 operational beds.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $220.1 | $203.9 | $438.3 | $406.0 |
| Income from operations | $23.3 | $23.3 | $12.5 | $46.8 |
| Income from continuing operations | $12.4 | $12.4 | $1.7 | $25.3 |
| Net income attributable to Ensign | $12.4 | $12.5 | $0.2 | $25.4 |
| Diluted EPS attributable to Ensign | $0.55 | $0.57 | $0.01 | $1.16 |
| Net cash provided by operating activities | Not separately provided for Q2 | $26.6 | $25.1 |
- Q2 revenue rose 7.9%, largely reflecting recent acquisitions. Income from operations was essentially flat; operating margin was 10.6%, versus 11.4% a year earlier. Cost of services increased to 79.9% of revenue from 79.5%.
- For the first half, revenue increased 8.0%, but the $33.0 DOJ inquiry charge recorded in Q1 drove operating income sharply lower. The six-month results also include a $1.8 after-tax loss from discontinued operations, principally related to the Doctors Express sale.
- Q2 net income attributable to Ensign was approximately flat year over year. Q2 diluted EPS declined to $0.55 from $0.57.
- Medicare and Medicaid together provided 72.7% of Q2 revenue and 72.8% for the first half, compared with 73.8% in both prior-year periods.
- Operational-bed occupancy was 76.6% in Q2, down from 79.2%; actual patient days increased 5.3%. Same-facility revenue decreased 0.9% in Q2, while revenue at recently acquired facilities rose substantially.
- At June 30, cash and equivalents were $27.5, versus $40.7 at year-end 2012. Current assets were $169.4 and current liabilities $145.0. Accounts receivable, net, increased to $107.4 from $94.2.
- Debt outstanding before debt discount was $214.9, including $7.3 of current maturities; long-term debt, net of current maturities and discount, was $206.9. The company reported compliance with its debt covenants.
- First-half investing cash outflow was $46.9, including $39.3 for acquisitions and $13.4 for property and equipment. Financing cash inflow was $7.1. Cash decreased by $13.2 during the period. Operating cash flow less capital expenditures was approximately $13.2, a simple calculation and not a company-reported measure.
Material changes and unusual items
- DOJ inquiry: Ensign accrued a total $48.0 reserve—$15.0 in Q4 2012 and an additional $33.0 in Q1 2013—for an agreement in principle concerning a civil investigation of Medicare rehabilitation claims. The criminal investigation had been closed without action in 2011. The proposed resolution was subject to final documentation and government and court approval; the company expected to pay the reserve and finalize a corporate integrity agreement in Q3 2013.
- Doctors Express divestiture: The urgent-care franchise asset sale became effective April 15, 2013, for approximately $8.0, subject to adjustments. Ensign recorded a $2.8 pretax loss on the sale, including goodwill and intangible-asset write-downs, and classified the business as discontinued operations. It also recorded a $4.0 note receivable from the sale.
- Acquisitions and expansion: During the first half, Ensign acquired seven skilled nursing facilities, three assisted living facilities, three home health operations and three hospice operations for approximately $39.3. A further skilled nursing facility acquisition closed July 1 for approximately $4.4.
- Other items: Ensign recorded a $0.38 gain from the redemption of an equity-method investment. A California staffing class-action settlement had projected total costs of approximately $5.6; $0.6 was recorded in Q2, with the balance expensed previously.
Outlook, commentary and key risks
- Management stated that cash, operating cash flow and the expanded revolving facility were expected to cover operating needs for at least the next 12 months. The filing does not provide formal earnings guidance.
- The revolving portion of the senior credit facility was increased to $150.0; $30.0 was drawn at June 30. Borrowing availability remains subject to credit agreement terms and covenants.
- Management attributed growth principally to acquisitions and noted that newer facilities generally have lower occupancy and payer mix, which can weigh on consolidated occupancy during growth periods. Ensign budgeted $30.0 for 2013 renovation projects.
- Key exposures include reliance on Medicare and Medicaid reimbursement, possible payment-rate changes and audits or recoupments, the pending DOJ resolution and corporate integrity agreement, regulatory and care-quality compliance, staffing and labor costs, self-insurance estimate volatility, and litigation.
- CMS’s 2% Medicare sequestration reduction took effect April 1, 2013. The filing also discusses prospective reimbursement changes and therapy-payment limits that could affect future revenue. The company cautions that cost inflation may outpace reimbursement increases.
Important facts for investors to verify
- Whether the $48.0 DOJ settlement was finalized and paid, and the final terms and obligations of the corporate integrity agreement.
- Whether receivables and cash conversion improve, given higher accounts receivable and the first-half decline in cash.
- Whether acquisitions can raise occupancy and margins without materially increasing integration, compliance and capital needs.
- How reimbursement updates, sequestration, audits and therapy-payment rules affect payer mix, patient days and realized rates.
- Whether self-insurance reserves, litigation exposure and the staffing settlement ultimately differ materially from recorded estimates.