The Ensign Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Financial statement amounts below are in millions of dollars, except per-share data and percentages. The interim financial statements are unaudited.
Business context
Ensign provides skilled nursing, assisted living, rehabilitation, home health, and hospice services. At quarter-end it operated 105 facilities, six home health operations, and four hospice operations across 11 states, with 11,972 operational beds. It owned 80 facilities and leased 25. The company also launched a majority-owned urgent-care venture, Immediate Clinic (IC).
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $204.3 | $186.3 | $406.5 | $369.3 |
| Income from operations | $23.2 | $24.1 | $46.6 | $47.8 |
| Net income | $12.3 | $13.0 | $25.1 | $25.7 |
| Net income attributable to Ensign | $12.5 | $13.0 | $25.4 | $25.7 |
| Diluted EPS | $0.57 | $0.60 | $1.16 | $1.19 |
| Operating margin | 11.3% | 12.9% | 11.5% | 12.9% |
| Net margin | 6.0% | 7.0% | 6.2% | 7.0% |
For the first half, operating cash flow was $25.1 million, compared with $27.4 million a year earlier. Investing activities used $35.8 million, primarily for acquisitions and capital spending; financing activities provided $14.0 million. Cash increased $3.2 million to $32.8 million. First-half capital expenditures were $16.4 million; management reported a $33.0 million renovation budget for 2012.
At June 30, current assets were $154.1 million and current liabilities were $96.9 million. Total debt, before debt discount, was approximately $202.0 million, including $7.1 million of current maturities; the company also reported $128.1 million of operating lease obligations. It had $10.0 million drawn on its $75.0 million revolving facility and said it was compliant with loan covenants. Management believed cash, operating cash flow, and the revolver would cover operating needs for at least 12 months.
Material changes and operating drivers
- Revenue grew 9.7% in Q2 and 10.1% in the first half. Growth was driven chiefly by acquisitions: recently acquired facilities contributed $19.3 million of Q2 revenue growth and $39.0 million of first-half growth. Same-facility revenue fell 1.3% in Q2 and 1.4% in the first half.
- Q2 occupancy was 79.2%, unchanged year over year; first-half occupancy was 79.5%, versus 79.9%. Same-facility occupancy improved, but skilled nursing skilled mix by revenue declined to 50.4% in Q2 from 52.7%.
- Medicare skilled nursing daily rates fell 12.9% in Q2 and 12.5% in the first half, primarily reflecting the CMS 11.1% payment reduction and therapy-related changes effective October 2011. Higher costs also pressured margins: cost of services rose to 79.6% of revenue from 78.2%; depreciation and amortization increased with acquisitions, renovations, and facility purchases.
- Six-month net income attributable to Ensign declined 1.4% despite revenue growth. The filing attributes pressure to higher operating costs, depreciation and amortization, and interest expense.
- First-half acquisitions included three facilities and three home health/hospice businesses. Separately, IC acquired the Doctors Express franchise system and recognized $7.9 million of trade-name intangibles, $3.0 million of franchise relationships, and $2.7 million of goodwill. IC expected its first clinics to open in Q3 2012.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expected overall occupancy to fluctuate as newly acquired facilities typically have lower occupancy and skilled mix. It identified acquisitions and facility renovations as continuing uses of capital.
- Government programs accounted for 73.7% of first-half revenue. Reimbursement reductions, Medicaid funding constraints, audits, delayed payments, therapy-cap changes, and the scheduled 2% Medicare sequestration reduction beginning January 2013 could affect revenue, cash flow, and profitability. The filing discusses a 1.8% FY2013 Medicare SNF payment update, which management noted would be offset by sequestration.
- The DOJ’s criminal investigation was closed in December 2011, but the related civil investigation remained open. The company was cooperating with HHS subpoenas and seeking a resolution; it said a loss was reasonably possible but could not estimate a loss range and recorded no accrual.
- A Los Angeles staffing class-action matter had a tentative settlement awaiting court approval. Estimated costs were $5.0 million, of which $2.6 million was recorded in Q2; management said an approved settlement would not have a material ongoing adverse effect.
- Self-insurance liabilities depend on actuarial estimates; management cautioned that actual claims could materially exceed or fall below reserves. California had opened an income-tax examination of 2008–2009 returns, focused on the captive insurer; no adjustments had been proposed.
- Ensign recorded $11.5 million of redeemable noncontrolling interest related to IC. The maximum potential future purchase obligation was estimated at $13.5 million, with the eventual amount dependent on future results and exercise timing.
- The board authorized up to $10.0 million of share repurchases over 12 months; approximately $0.2 million had been used by June 30. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether acquired-facility growth can offset the Medicare rate decline and weaker same-facility revenue and margins.
- Occupancy, skilled mix, and Medicare/Medicaid reimbursement developments, including sequestration and state-level rate changes.
- Progress and financial contribution from IC, and the potential cost of redeemable noncontrolling-interest rights.
- Developments in the DOJ civil investigation, the staffing settlement’s court approval, and any resulting accruals or cash payments.
- Cash generation, acquisition and renovation spending, debt and lease obligations, revolver availability, and continued covenant compliance.