The Ensign Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; quarterly results are unaudited. Dollar amounts below are in U.S. dollars.
Business context
Ensign is a holding company whose subsidiaries provide skilled nursing, rehabilitation, assisted living, home health and hospice services. At year-end, it operated 102 facilities with 11,702 operational beds across 10 states; 77 facilities were owned and 25 leased. Growth relies on acquiring and improving facilities, increasing higher-acuity patient mix, and developing local leadership. The company also announced a $4.0 million urgent-care joint venture in January 2012.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $758.3 million | $649.5 million | +16.7% |
| Operating income | $90.7 million | $75.7 million | +19.9% |
| Net income | $47.7 million | $40.5 million | +17.6% |
| Diluted EPS | $2.21 | $1.92 | +15.1% |
| Operating margin | 12.0% | 11.7% | +0.3 percentage points |
| Net margin | 6.3% | 6.2% | +0.1 percentage points |
| Cash from operations | $72.7 million | $60.5 million | +$12.2 million |
- Revenue growth reflected acquisitions and improved same-facility results. Same-facility revenue rose 6.5%; skilled mix by nursing days increased to 29.0% from 27.9%. Overall operational-bed occupancy eased to 79.2% from 79.9%, partly reflecting the larger acquired-facility base.
- Payor mix remained government-heavy: Medicare and Medicaid together supplied 75.2% of revenue, versus 76.4% in 2010. Medicare was 35.9%; Medicaid was 39.3%.
- Cost of services was 79.2% of revenue versus 79.5%; depreciation and amortization increased to $23.3 million from $16.6 million. Net interest expense rose to $13.5 million from $8.9 million; FY 2011 included $2.5 million of debt-extinguishment and exit fees.
- Investing cash use was $156.1 million, chiefly reflecting acquisitions and $40.8 million of property and equipment spending. Cash declined to $29.6 million from $72.1 million. Working capital was $40.3 million, down from $76.6 million.
- Debt outstanding was $187.9 million, including $181.6 million long-term debt net of current maturities; operating lease obligations totaled $129.9 million. The new credit facility provides a $75 million revolver, of which $15 million was drawn at year-end. The company reported compliance with its debt covenants. Cash and operating cash flow, together with the revolver, were expected to cover operating needs for at least 12 months.
Material changes and quarterly results
- Revenue increased 16.7% year over year, while acquisitions added 20 facilities during 2011 and contributed substantially to growth. Cash paid for business acquisitions was $106.7 million, compared with $21.1 million in 2010.
- FY 2011 diluted EPS increased to $2.21 from $1.92. The company declared dividends of $0.225 per share, up from $0.205.
- In fourth-quarter 2011, revenue was $192.7 million versus $172.8 million in fourth-quarter 2010; net income was $10.4 million versus $11.7 million, and diluted EPS was $0.48 versus $0.55. The filing does not clearly explain the year-over-year quarterly net-income decline.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management budgeted $33.0 million of capital expenditures for 2012 and described continued acquisition, organic-growth and operating-efficiency plans. Management noted that acquired facilities often have lower initial occupancy and margins, and historically may take 12 to 18 months to become accretive.
- Medicare skilled-nursing PPS payments were reduced by a net 11.1% for federal fiscal 2012, effective October 1, 2011, creating reimbursement pressure. California legislation also imposed a temporary 10% skilled-nursing payment reduction/deferral for services from June 2011 through July 2012, with repayment promised by December 31, 2012; implementation details remained unsettled.
- A long-running government investigation remained unresolved: the DOJ confirmed closure of its criminal investigation in December 2011, but the civil investigation continued. HHS issued subpoenas in January 2012 seeking records concerning six Southern California facilities. The company could not estimate potential loss and recorded no related accrual.
- An internal review identified assessment and recordkeeping deficiencies at one facility. Ensign accrued a $0.5 million revenue adjustment for actual and estimated Medicare overpayments, reducing quarterly net income by approximately $0.2 million, and planned repayment in first-quarter 2012. Management said the issue appeared isolated and reported corrective measures.
- Other key risks include reliance on government reimbursement, labor costs and staffing availability, audits and potential recoupments, clinical quality and litigation exposure, self-insurance reserve estimates, acquisition integration, and debt and lease obligations. Medicare therapy-cap exceptions were authorized only through February 29, 2012, creating potential further reimbursement risk if not extended.
- The company reported an unqualified audit opinion and effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- How the Medicare payment reduction and California payment deferral affect rates, cash collections and margins in 2012.
- Progress and potential financial exposure from the remaining government investigation and the facility-level overpayment matter.
- Acquisition integration, occupancy and skilled-mix trends, particularly at recently acquired facilities.
- Cash usage, acquisition and capital-spending plans, revolver availability, debt covenants and lease commitments.
- Whether therapy-cap exceptions are extended and whether further reimbursement or regulatory changes are adopted.