The Ensign Group, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results; dollar amounts below are in millions except per-share data. Ensign provides skilled nursing, assisted living, rehabilitation, home health and hospice services. At quarter-end it operated 107 facilities and had six home health and four hospice operations across 11 states.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $207.2 | $196.3 | $613.6 | $565.6 |
| Income from operations | $23.6 | $23.9 | $70.2 | $71.7 |
| Net income attributable to Ensign | $13.3 | $11.6 | $38.7 | $37.3 |
| Diluted EPS | $0.60 | $0.54 | $1.77 | $1.73 |
| Operating margin | 11.4% | 12.2% | 11.5% | 12.7% |
- Q3 revenue increased 5.5%; nine-month revenue increased 8.5%. Net income attributable to Ensign rose 14.6% in Q3 and 3.6% year to date, while operating income declined in both comparisons.
- Q3 cost of services rose to 79.6% of revenue from 79.3%; for the nine months it rose to 79.6% from 78.6%. Depreciation and amortization also increased, reflecting acquired facilities, renovations and owned facility assets.
- Management attributed the improvement in Q3 net income partly to lower interest expense versus 2011, which included a $2.5 million debt-extinguishment and exit fee. The lower prior-year comparison does not represent an equivalent improvement in underlying operations.
- Occupancy was 78.7% in Q3, unchanged year over year; nine-month occupancy was 79.2% versus 79.5%. Skilled revenue mix fell to 49.3% in Q3 from 51.3% and to 50.1% year to date from 52.2%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $51.6 million, down from $53.2 million. Investing used $61.8 million, including $26.8 million of property and equipment purchases and $33.8 million of business and asset acquisitions. Financing provided $12.7 million.
- Cash increased by $2.4 million to $32.0 million from year-end 2011. Current assets were $155.7 million and current liabilities $103.7 million. Accounts receivable, net, rose to $98.1 million from $86.3 million.
- Long-term debt, before debt discount, was $200.3 million; the balance-sheet carrying amount, net of current maturities and discount, was $192.3 million. The company also reported $10.0 million outstanding on the revolving credit facility. The $75 million revolver was available as part of a $150 million senior credit facility.
- Ensign reported compliance with its debt covenants. It said cash, operating cash flow and the available revolver should cover operating needs for at least 12 months. Capital expenditure budget for 2012 was $33.0 million for renovations.
Material developments and outlook
- Growth was acquisition-led: recently acquired facilities contributed approximately $13.5 million of Q3 revenue growth and $52.5 million of nine-month growth. Same-facility revenue fell 3.3% in Q3 and 2.0% year to date.
- Management cited the 11.1% CMS reduction in skilled-nursing Medicare PPS payments, effective October 2011, and related therapy changes as key reasons Medicare revenue per patient day declined 12.6% in both Q3 and the nine-month comparison. Medicaid and private-pay rates increased modestly.
- Ensign launched Immediate Clinic, a majority-owned urgent-care venture; its first two centers opened in Q3. A subsequent October 4 commitment to invest another $6.0 million in preferred stock was expected to raise Ensign’s fully diluted ownership to approximately 96%. The venture includes redeemable noncontrolling interests carried at $11.5 million, with a stated maximum potential future payment of $13.5 million.
- No specific company revenue or earnings guidance is provided. Management noted that acquisitions can lower overall occupancy and mix during periods of growth, and that results may vary as facilities mature.
Risks, contingencies and unusual items
- Government investigation: The DOJ’s criminal investigation was reported closed, but a related civil investigation remained ongoing. Ensign had produced records requested by HHS and continued discussions with the government. The company said a loss was reasonably possible but could not estimate a range and recorded no accrual; a settlement, penalties or a corporate integrity arrangement could materially affect results and cash flow.
- Litigation: A staffing-related class action had a tentative settlement awaiting court approval. Estimated total cost was $5.0 million, including $2.6 million recorded in Q2 2012 and the balance expensed in prior periods.
- Reimbursement and regulation: Medicare and Medicaid generated 73.7% of nine-month revenue. The filing discusses the 2% Medicare sequestration reduction scheduled for January 2013, limits on therapy reimbursements, possible rate and funding changes, audits and retroactive recoupments.
- Insurance and operating exposure: Self-insurance reserves depend on actuarial estimates and could prove inadequate. The company also faces professional-liability, staffing, quality-of-care, licensing and cross-default risks under certain leases and debt agreements.
- Other unusual items: The California tax authority began examining 2008 and 2009 returns, focusing on the captive insurer; no adjustments had been proposed. A $21.5 million fixed-rate RBS loan was added in 2012 at 4.75%. The interest-rate swap had a $3.1 million fair-value liability at quarter-end.
Important facts for investors to verify
- Progress and potential financial exposure from the remaining DOJ civil investigation, including whether a loss accrual or settlement becomes estimable.
- Whether same-facility revenue and operating margins stabilize after the Medicare rate reductions, and whether occupancy and skilled mix improve.
- Future Medicare and Medicaid policy changes, including sequestration and therapy-cap exceptions, and their effect on reimbursement and cash collections.
- Acquisition integration, capital spending and urgent-care investment returns, including the terms and effect of the additional $6.0 million commitment.
- Self-insurance reserve adequacy, the staffing settlement’s court approval and final cost, and continued compliance with debt covenants and liquidity needs.