The Ensign Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
Ensign provides skilled nursing, rehabilitation, assisted living, home health and hospice services. At June 30, it operated 87 facilities and two home health and hospice operations, with approximately 10,461 operational beds. It owned 58 facilities and leased 29. Medicare and Medicaid together generated approximately 75% of revenue.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $186.3 | $157.9 | $369.3 | $312.1 |
| Income from operations | $24.1 | $18.1 | $47.8 | $35.8 |
| Net income | $13.0 | $9.6 | $25.7 | $19.0 |
| Diluted EPS | $0.60 | $0.46 | $1.19 | $0.90 |
| Operating margin | 12.9% | 11.5% | 12.9% | 11.5% |
| Net margin | 7.0% | 6.1% | 7.0% | 6.1% |
- Revenue grew 18.0% in Q2 and 18.3% in the first half. Management attributed growth to acquisitions, higher Medicare and managed-care revenue, increased skilled mix and improved same-facility results.
- Same-facility revenue increased 10.1% in Q2 and 10.3% for the first half. First-half same-facility occupancy was 83.0%, up from 82.1%; company-wide occupancy was 79.9%, up from 79.4%.
- Skilled mix by nursing revenue increased to 52.7% in Q2 from 48.2%; the six-month figure rose to 52.8% from 49.0%. Medicare daily rates increased 17.2% in Q2 and 16.4% for the first half, which management linked to acuity and rate changes.
- Cost of services declined as a share of revenue to 78.2% from 79.7% in Q2 and 79.8% for the first half. Depreciation and amortization rose, reflecting acquisitions, renovations and acquired property.
- Reported non-GAAP EBITDA was $29.7 in Q2 versus $22.1, and $58.4 for the first half versus $43.8. EBITDAR was $33.1 versus $25.7 in Q2 and $65.5 versus $51.0 for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $27.4, versus $14.9 a year earlier. Investing cash outflow was $58.2, primarily reflecting $45.0 of business acquisitions, $7.3 of asset acquisitions and $18.7 of property and equipment purchases. Financing cash outflow was $3.2.
- Cash declined by $34.0 during the first half, from $72.1 to $38.1. Accounts receivable, net, was $77.7 at June 30, compared with $69.4 at year-end.
- At June 30, total debt was approximately $140.2 net of discount, including $3.0 of current maturities; this compares with $142.5 at December 31, 2010. The company reported covenant compliance at June 30.
- On July 15, Ensign closed a new credit facility with up to $150.0 of capacity: a $75.0 term loan, which was drawn, and a $75.0 revolver. It used the term loan to repay the Six Project Loan; the new revolver replaced the prior GECC facility. As of August 1, the new revolver was undrawn.
- The new facility bears an initial rate of LIBOR plus 2.5% or base rate plus 1.5%, subject to leverage-based adjustments, and matures in 2016. A $75.0 interest-rate swap is intended to fix the term-loan rate at approximately 4.3%, excluding fees. Ensign incurred about $2.5 of financing costs and expected a separate $2.5 one-time termination and debt-extinguishment charge in Q3.
- Management stated that cash, operating cash flow and the new revolver should cover operating needs for at least 12 months. The company had budgeted $30.0 for 2011 renovations.
Material developments, outlook and risks
- Six business acquisitions were completed in the first half for approximately $45.0, alongside a $7.3 asset acquisition. After quarter-end, Ensign reported further acquisitions; by August 1 it had 99 facilities and approximately 11,431 operational beds. Management cautioned that newly acquired facilities generally have lower occupancy and skilled mix, and that portfolio occupancy may vary as the company grows.
- CMS announced a fiscal 2012 skilled-nursing payment rule that Ensign described as an 11.1% net reduction in industry Medicare PPS payments. The filing also discusses California legislation that could reduce skilled-nursing provider payments by 10%, subject to federal approval, potentially retroactive to June 1, 2011. The company said the impact was uncertain.
- The DOJ investigation into billing and reimbursement practices remained ongoing. Ensign said it was cooperating, that no company, subsidiary or employee had been charged, and that it could not estimate a possible loss; no related accrual was recorded. Separately, the company reported one operation under probe review and none on prepayment or targeted review. Two facilities had been identified in an OIG report concerning certain billing patterns.
- Self-insurance liabilities depend on actuarial estimates; management warned actual claims could materially exceed estimates and affect future earnings. General and professional liability reserves were $27.9 at June 30. The filing also describes ordinary-course patient-care, employment and other litigation risks, including possible punitive damages that may not be insured.
- Other significant exposures include reliance on government reimbursement, audits and potential recoupments, staffing costs and shortages, acquisition integration, regulatory compliance, and cross-default provisions in leases and debt. No specific full-year revenue or earnings guidance is provided.
Most important facts for investors to verify
- Whether CMS implements the Medicare payment reductions as described, and the resulting effect on Ensign’s reimbursement and margins.
- Federal approval, timing and financial impact of California’s potential provider-payment reduction.
- Progress and potential outcomes of the DOJ investigation, including whether any claims, proceedings or loss estimates emerge.
- Post-quarter acquisition funding, integration results, occupancy and skilled mix at acquired facilities, and compliance with the new credit facility’s covenants.
- Whether operating cash flow and collections can support acquisition and renovation spending while maintaining liquidity and managing self-insurance claims.