The Ensign Group, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 13, 2013. The filing reports annual results and unaudited quarterly data, including Q4 2012.
Business context
Ensign is a holding company whose independent subsidiaries operate skilled nursing, assisted living, home health, hospice and urgent care businesses. At year-end it operated 108 facilities with 12,198 operational beds across 11 states; it owned 86 facilities and leased 22. Growth emphasizes acquisitions, local operating leadership, occupancy and higher-acuity care. During 2012 it acquired care operations and facilities, launched urgent care operations, and bought an 80% interest in a mobile diagnostics business.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $824.7 million | $758.3 million | +8.8% |
| Operating income | $76.0 million | $90.7 million | -16.2% |
| Net income attributable to Ensign | $40.6 million | $47.7 million | -14.9% |
| Diluted EPS | $1.85 | $2.21 | -16.3% |
| Operating margin | 9.2% | 12.0% | Down 2.8 percentage points |
| Net cash from operations | $82.1 million | $72.7 million | +$9.4 million |
Revenue growth reflected acquisitions and higher private/other-payor revenue; same-facility revenue fell 0.8%. Medicare and Medicaid together supplied 73.5% of revenue, down from 75.2%. Cost of services rose 9.9% and increased to 80.0% of revenue from 79.2%. Reported results included a $15.0 million accrual related to the DOJ inquiry and $2.2 million of goodwill and intangible impairment. Adjusted EBITDA, a non-GAAP measure, was $129.3 million versus $116.0 million; reported EBITDA was $105.3 million versus $114.0 million.
FY 2012 occupancy was 79.0%, compared with 79.2%; skilled nursing patient-day mix improved to 25.9% from 25.5%, while skilled mix by nursing revenue declined to 50.0% from 51.3%. Same-facility occupancy improved to 82.7%, but same-facility revenue declined, in part due to lower Medicare rates.
Cash and cash equivalents were $40.9 million at year-end, versus $29.6 million; working capital was $46.3 million. Investing activities used $84.3 million, including $38.9 million of property and equipment purchases and acquisition spending. Long-term debt was $208.5 million, and operating lease obligations totaled $115.6 million. The company reported compliance with debt covenants at year-end. A February 2013 credit amendment increased revolving capacity by $75 million to $150 million and extended maturity to February 1, 2018; $20 million was drawn.
Material changes and unusual items
- Revenue grew 8.8%, but operating income and attributable net income declined, reflecting higher operating costs and the $15.0 million DOJ-related accrual.
- Same-facility Medicare revenue per patient day fell 8.6%; management attributed pressure primarily to the CMS skilled-nursing payment recalibration and therapy changes. Total Medicare skilled-nursing daily rates declined 9.0%.
- Acquisitions contributed materially to growth, while overall occupancy remained slightly below 2011. Capital spending was $38.9 million; management budgeted $35.0 million for 2013 renovations.
- Q4 revenue was $211.1 million and attributable net income was $1.9 million, or $0.09 diluted EPS. Q4 included the $15.0 million DOJ charge; quarterly results also reflected DRX impairment and changes in noncontrolling interests.
- Ensign declared $0.245 per share in dividends for 2012 and renewed authorization for up to $10 million of repurchases over 12 months; actual 2012 repurchases were $0.2 million.
Outlook, risks and contingencies
Management said cash, operating cash flow and available revolving credit were expected to support operating needs for at least 12 months. The filing provides no numerical earnings or revenue guidance. Management cited growth through leadership development, higher-acuity mix, operating efficiencies, acquisitions and facility improvements; acquisition pace and occupancy may vary.
The principal near-term uncertainty is the continuing civil DOJ investigation into Medicare rehabilitation billing at Southern California facilities. The criminal investigation was closed without action in 2011, but civil settlement discussions continued. The $15.0 million estimate may differ materially from the ultimate resolution, and the company said it could not estimate a possible range of loss. A California staffing class action had a tentative $5.0 million settlement awaiting court approval; $2.6 million was recorded in 2012 and the remainder had been expensed previously.
Other key risks include dependence on government reimbursement and state Medicaid budgets, further Medicare payment reductions and therapy limits, audits and potential recoupments, regulatory sanctions or loss of certification, staffing shortages and wage pressure, professional-liability and employment litigation, self-insurance reserve uncertainty, acquisition integration, and debt, lease and cross-default obligations. Sequestration-related Medicare payment reductions and other reimbursement changes were expected to affect 2013. Management also noted home-health reimbursement uncertainty and potential future rate rebasing.
Investor verification priorities
- Track DOJ settlement developments, the adequacy of the $15.0 million accrual, and any required corporate-integrity or operational obligations.
- Reconcile acquisition-driven revenue growth with same-facility trends, Medicare rates, occupancy and the changing skilled and payor mix.
- Verify cash conversion and capital needs against acquisition spending, renovation plans, debt maturities, lease commitments and revolver availability.
- Monitor litigation outcomes, self-insurance reserves, audit recoupments and facility-level survey, licensing and certification status.
- Confirm the impact of 2013 reimbursement provisions, including sequestration and therapy-payment changes, against management’s operating assumptions.