The Ensign Group, Inc. — Q1 2014 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2014, compared with the same period in 2013. Ensign provides skilled nursing, rehabilitation, assisted living, home health, hospice, urgent care, and related services. At quarter-end it operated 120 facilities with 13,396 operational beds; it owned 97 facilities and leased 23.
Financial performance and liquidity
Unless otherwise indicated, figures are in U.S. dollars; financial amounts below are in millions.
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $239.7 | $218.2; up 9.8% |
| Operating income (loss) | $24.3 | $(10.8) |
| Net income (loss) attributable to Ensign | $13.5 | $(12.1) |
| Diluted EPS | $0.60 | $(0.56) |
| Operating margin | 10.2% | (4.9)% |
| Cost of services / revenue | 79.1% | 80.7% |
| Adjusted EBITDA (non-GAAP) | $35.7 | $33.9; up 5.2% |
| Operating cash flow | $21.4 | $21.7 |
| Cash and cash equivalents, quarter-end | $57.5 | $65.8 at Dec. 31, 2013 |
| Total assets / total liabilities, quarter-end | $771.5 / $399.7 | $760.3 / $403.1 at Dec. 31, 2013 |
| Long-term debt, net of discount, quarter-end | $257.5 | $259.3 at Dec. 31, 2013 |
- Current assets were $203.5 million and current liabilities $111.9 million, implying working capital of approximately $91.6 million.
- Investing activities used $28.1 million, including $16.4 million of property and equipment purchases and $9.1 million for acquisitions. Financing activities used $1.6 million, including $1.6 million of dividends paid.
- Revenue from Medicare and Medicaid was 71.1% of total revenue, down from 72.8%. Occupancy based on operational beds improved to 78.1% from 77.8%; skilled mix by revenue eased to 51.1% from 51.5%.
Material changes and drivers
- Revenue increased $21.5 million. Recently acquired facilities contributed approximately $14.3 million of the increase; same-facility revenue rose 2.8% and transitioning-facility revenue rose 6.2%.
- Ensign moved from a prior-year loss to Q1 2014 profitability largely because Q1 2013 included a $33.0 million charge related to the DOJ inquiry. The $48.0 million settlement was paid in October 2013; no related charge was recorded in Q1 2014. The DOJ matter was settled without an admission of wrongdoing.
- General and administrative expense rose 48.7% to $13.2 million, including $1.6 million of REIT spin-off costs, higher wages and benefits, and compliance-related costs. Depreciation and amortization increased 14.6% to $8.9 million, partly due to acquisitions and renovations.
- Same-facility occupancy improved by 1.0 percentage point. Overall Medicare skilled-nursing daily rates declined 0.6%, while Medicaid rates increased 1.9%.
Outlook, risks, and unusual items
- Liquidity and investment: Management said cash, operating cash flow, and the $150 million revolving-credit-facility capacity were expected to fund operating needs for at least 12 months. The company had drawn $78.7 million on the revolver at quarter-end and budgeted $35 million for 2014 renovations. Capital spending in Q1 was higher as the company advanced renovations ahead of the proposed spin-off.
- Proposed REIT separation: Ensign planned to distribute CareTrust REIT shares to its stockholders, subject to board approval and other conditions. CareTrust was expected to hold substantially all owned real estate and lease most properties back to Ensign on a triple-net basis. The filing described potential financing for CareTrust, including $260 million of senior unsecured notes; the transaction and its terms were not assured.
- Regulatory and reimbursement exposure: Medicare and Medicaid provide most revenue, leaving results exposed to reimbursement reductions, audits, recoupments, documentation requirements, and changes in government policy. CMS’s proposed FY2015 skilled-nursing payment update was estimated at 2.0% for the industry, not company-specific guidance. Home-health payment changes and therapy-payment rules also present risks.
- Compliance and legal matters: Ensign is subject to a five-year corporate integrity agreement effective October 2013. An uncured material breach could lead to exclusion from federal healthcare programs or prosecution. One operation was under Medicare probe review; no facilities were on prepayment or targeted review. The company also disclosed ongoing ordinary-course claims and a court-approved staffing class-action settlement with projected total costs of approximately $6.5 million, largely expensed before this quarter.
- Self-insurance: Reserves for professional/general liability, workers’ compensation, and employee health claims rely on actuarial estimates. The company warned that actual losses could materially exceed estimates and adversely affect earnings, cash flows, or financial condition.
- Other reported items: The Doctors Express urgent-care franchise sale was completed in April 2013 and is classified as discontinued operations; Q1 2013 included a $1.7 million after-tax discontinued-operations loss. Ensign reported no impairment charge in either comparison quarter.
Important facts for investors to verify
- Whether the proposed CareTrust spin-off proceeded, its final financing and lease terms, and any resulting change in Ensign’s rent burden and debt.
- Whether same-facility occupancy, skilled mix, and reimbursement rates continue to support revenue and margins as acquisition contributions change.
- Cash conversion and capital needs: Q1 operating cash flow was slightly lower year over year while capital expenditures rose materially.
- Actual borrowing availability and covenant headroom under the credit facility; Ensign reported compliance with its debt covenants at March 31, 2014.
- Developments under the corporate integrity agreement, Medicare reviews, self-insurance estimates, and pending litigation.
- That adjusted EBITDA is a company-defined non-GAAP measure and should be assessed alongside GAAP earnings and cash flow; Q1 comparisons are significantly affected by the prior-year DOJ charge.