The Ensign Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report; fourth-quarter figures are unaudited. Amounts are in U.S. dollars.
Business context
Ensign provides skilled nursing, assisted living, rehabilitation, home health, hospice, urgent care and related services through separately managed subsidiaries. At year-end it operated 119 facilities, nine home health and seven hospice operations, seven urgent care centers and a mobile diagnostic business, across 11 states. It owned 96 facilities and leased 23; total capacity was 13,204 operational beds and units. The parent company is a holding company without direct operating assets or revenue.
Financial and operating performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $904.6 million | $823.2 million | +9.9% |
| Operating income | $57.9 million | $78.3 million | -26.0% |
| Operating margin | 6.4% | 9.5% | -3.1 percentage points |
| Income from continuing operations attributable to Ensign | $25.8 million | $41.9 million | Lower |
| Net income attributable to Ensign | $24.0 million | $40.6 million | -40.8% |
| Diluted EPS | $1.07 | $1.85 | Lower |
| Adjusted EBITDA | $136.7 million | $131.4 million | +4.0% |
| Cash from operating activities | $37.4 million | $82.1 million | Down $44.7 million |
Revenue growth reflected acquisitions and higher private/other and Medicaid-skilled revenue. Seventeen businesses were acquired during 2013 for approximately $45.4 million in cash. Same-facility revenue grew 1.3%, while same-facility patient days declined 0.7%. Total occupancy fell to 77.5% from 79.0%, partly reflecting the lower occupancy typical of recently acquired facilities. Skilled mix by days rose to 26.4% from 25.9%; quality mix by days increased to 40.1% from 39.1%.
Medicare and Medicaid together generated 72.2% of revenue, down from 73.6%. Medicaid accounted for 35.8%, Medicare 32.4%, managed care 13.1%, and private and other payors 14.7%. Cost of services rose to 80.3% of revenue from 79.7%. Approximately 60% of 2013 expenses were payroll-related.
Fourth-quarter revenue was $237.0 million versus $210.5 million in Q4 2012. Operating income was $25.1 million versus $8.0 million, and net income attributable to Ensign was $13.4 million versus $1.9 million. Q4 2012 included a $15.0 million charge related to the government inquiry; quarterly results are not necessarily indicative of future performance.
Cash, debt and liquidity
Year-end cash and cash equivalents were $65.8 million, compared with $40.7 million a year earlier. Current assets were $211.0 million and current liabilities $112.5 million. Operating cash flow fell to $37.4 million, principally reflecting the $15.0 million settlement payment against the previously accrued government settlement, a larger increase in accounts receivable, and higher prepaid income taxes. Investing activities used $65.2 million; financing activities provided $52.9 million.
Outstanding long-term debt was approximately $260.0 million, up from $208.5 million, and operating lease obligations totaled $139.6 million. The $150 million revolving credit facility had $78.7 million drawn at year-end; the company reported compliance with its debt covenants. The company said cash, operating cash flow and available revolver capacity should cover operating needs for at least 12 months. It budgeted $30 million for 2014 renovations. Capital expenditures were $29.8 million in 2013.
Material changes, outlook and notable items
- Government settlement: Ensign paid $48.0 million in October 2013 to resolve a DOJ civil investigation concerning Medicare rehabilitation claims. It recorded $15.0 million of expense in 2012 and an additional $33.0 million in 2013. The company denied wrongdoing; the settlement was not an admission of liability. A five-year corporate integrity agreement began October 1, 2013. Federal healthcare program participation was not affected, but an uncured material breach could lead to exclusion or prosecution.
- Proposed real estate separation: Ensign announced a planned pro rata distribution of CareTrust REIT shares to stockholders. CareTrust would hold substantially all company-owned real estate, with most properties leased back to Ensign on a triple-net basis. Completion remained conditional on board approval, tax rulings and legal opinions. The company said the transaction could change or be abandoned; no completed separation is reported here.
- Discontinued operations: The Doctors Express franchise business was sold effective April 15, 2013. The sale produced a $2.8 million pretax loss, and discontinued operations reported an after-tax loss of $1.8 million for 2013.
- Other unusual costs: The company recorded a $0.5 million goodwill impairment at a skilled nursing facility and approximately $1.5 million of 2013 costs for a California staffing class-action settlement, whose projected total cost was approximately $6.5 million. Adjusted EBITDA excludes the DOJ charges and several other items; it is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- Outlook and risks: No specific revenue or earnings guidance is provided. Management described continued growth through acquisitions, higher-acuity services, occupancy improvement and operating efficiencies. Key risks include reliance on government reimbursement, reimbursement changes and audits, staffing costs and availability, care-quality and litigation exposure, acquisition integration, self-insurance estimates, and debt and lease obligations. The proposed REIT spin-off could increase lease-related fixed costs.
Deloitte & Touche issued an unqualified audit opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Investor verification priorities
- Reconcile the $48.0 million DOJ settlement expense, cash payment, tax treatment and ongoing compliance-agreement obligations.
- Assess how much revenue and earnings growth came from acquisitions versus same-facility performance, and track occupancy, skilled mix and labor-cost trends.
- Review operating cash flow and receivables: cash from operations fell materially while accounts receivable increased; evaluate collections and allowance adequacy.
- Examine debt maturities, revolver availability, covenant headroom and lease commitments, including the proposed triple-net leases under the CareTrust separation.
- Confirm the status, final terms and tax treatment of the proposed spin-off, and how any related financing proceeds, debt repayment or dividends would affect Ensign.
- Monitor Medicare/Medicaid reimbursement, audit or recoupment exposure, self-insurance reserve adequacy and unresolved litigation or regulatory matters.