Business context and reporting period
The Ensign Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. It operates skilled nursing, assisted living, home health and hospice businesses through subsidiaries. At quarter-end, it operated 99 facilities and four home health and three hospice operations across 10 states; it owned 72 facilities and leased 27.
Financial performance and condition
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $196.3 | $164.7 | $565.6 | $476.8 |
| Operating income | $23.9 | $18.6 | $71.7 | $54.4 |
| Net income | $11.6 | $9.9 | $37.3 | $28.9 |
| Diluted EPS | $0.54 | $0.47 | $1.73 | $1.37 |
| Operating margin | 12.2% | 11.3% | 12.7% | 11.4% |
| Net margin | 5.9% | 6.0% | 6.6% | 6.1% |
- Q3 revenue grew 19.2% and net income grew 17.3%; nine-month revenue grew 18.6% and net income grew 29.3%. Nine-month diluted EPS increased 26.3%.
- For the nine months, operating cash flow was $53.2 million, versus $34.5 million a year earlier. Investing cash outflow was $126.9 million, principally reflecting $86.5 million of business acquisitions, $16.6 million of asset acquisitions and $29.1 million of property and equipment purchases. Financing provided $27.2 million.
- Cash and cash equivalents were $25.7 million at September 30, down from $72.1 million at year-end 2010. The company also held approximately $12.2 million in debt-security investments.
- Long-term debt was $175.4 million before unamortized debt discount, or $174.4 million net of discount; total debt at year-end 2010 was $143.6 million net of discount. The company entered a new $150 million credit facility in July, comprising a $75 million term loan and a $75 million revolver. The revolver remained undrawn as of November 1, 2011. A swap fixes the term loan’s effective interest rate at approximately 4.3%, excluding fees.
- Management said cash, operating cash flow and the revolver should cover operating needs for at least the next 12 months. The company budgeted $30 million for 2011 renovations. Capital expenditures for the first nine months were $29.1 million.
Material changes versus the prior comparable period
- Growth reflected both acquisitions and improved same-facility performance. Q3 same-facility revenue rose 8.2%; nine-month same-facility revenue rose 9.6%. Acquisitions contributed approximately $18.5 million of Q3 revenue growth and $43.3 million of nine-month growth.
- During the nine months, the company acquired 21 businesses for approximately $86.5 million and purchased the underlying assets of three leased facilities for $16.6 million. Facility count increased from 81 to 99 year over year.
- Skilled mix by nursing revenue rose to 51.3% in Q3 from 47.9%, and to 52.2% for the nine months from 48.6%. Overall occupancy was 78.7% in Q3 versus 80.1%; nine-month occupancy was 79.5% versus 79.6%.
- Medicare and Medicaid accounted for approximately 75% of revenue in 2011. Higher Medicare acuity and rates contributed to growth; same-facility Medicare revenue per patient day increased 16.7% in Q3 and 16.6% for the nine months.
- Interest expense increased, and Q3 included a one-time $2.5 million charge for termination and early extinguishment fees on refinancing. Depreciation and amortization also rose, reflecting acquisitions, renovations and facility purchases.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects occupancy to vary with the maturity of acquired facilities and says newer acquisitions typically have lower occupancy and skilled mix.
- CMS finalized an estimated 11.1% reduction in Medicare skilled-nursing facility payments for fiscal 2012, after recalibrating case-mix indexes and applying the market-basket update. The company cautions that reimbursement changes may adversely affect results.
- California enacted a 10% provider-payment reduction, with skilled-nursing reductions limited to services from June 1, 2011 through July 31, 2012 and repayment promised by December 31, 2012. Federal approval was obtained October 27, 2011, but implementation details remained under development and the impact was uncertain.
- A Department of Justice investigation into billing and reimbursement remains unresolved. The company is cooperating; it reported that neither the company, its subsidiaries nor employees had been charged. It cannot estimate any potential loss and recorded no related accrual.
- Healthcare reimbursement audits, regulatory enforcement, staffing and labor costs, litigation and clinical/professional liability are material risks. Self-insurance reserves depend on actuarial estimates; management warns actual claims could exceed recorded amounts and materially affect earnings.
- Debt agreements impose financial covenants and restrictions, including limits relating to additional debt, dividends, repurchases and capital expenditures. The company reported compliance with the Ten Project Note covenants at September 30; the filing does not clearly state compliance status for every facility or agreement.
- Subsequent to quarter-end, the board authorized up to $10 million of share repurchases over 12 months; no repurchases had been made. The company also acquired a California skilled nursing facility for approximately $9.8 million on October 1.
Important facts for investors to verify
- How the fiscal 2012 Medicare payment reduction and California payment deferral affect reimbursement, cash receipts and facility-level margins.
- Whether same-facility gains in acuity and Medicare rates can continue, and whether occupancy improves as acquired facilities mature.
- Acquisition integration, renovation spending and returns on the substantial 2011 cash investment.
- Available revolver capacity, covenant headroom, debt-service burden and liquidity after acquisitions and capital expenditures.
- Developments in the DOJ investigation, Medicare reviews and self-insurance claims, including any resulting accruals, repayments or restrictions.
- Whether the authorized share repurchase proceeds and how it interacts with growth investment, dividends and credit-facility covenants.