The Ensign Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited results; comparative period is Q1 2011. Amounts below are in millions unless stated otherwise.
Business context
Ensign provides skilled nursing, assisted living, home health and hospice services. At quarter-end it operated 104 facilities, five home health operations and three hospice operations across 11 states, with 11,823 operational beds. It owned 79 facilities and leased 25. The company also began developing an urgent-care business through Immediate Clinic.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $202.2 | $182.9 | +10.5% |
| Income from operations | $23.4 | $23.7 | -1.4% |
| Operating margin | 11.6% | 13.0% | -1.4 percentage points |
| Net income attributable to Ensign | $12.9 | $12.7 | +1.2% |
| Diluted EPS | $0.59 | $0.59 | Flat |
| Cash from operations | $5.3 | $18.7 | Down $13.4 |
- Revenue growth was driven primarily by acquired operations: recently acquired facilities contributed approximately $19.7 million of growth. Same-facility revenue declined 1.4% to $141.3 million.
- Medicare and Medicaid together represented 73.8% of revenue, down from 75.6%. Private and other payor revenue rose 32.7% to $27.2 million.
- Medicare skilled-nursing revenue per patient day fell 12.2%, reflecting the CMS payment reduction and therapy changes effective October 2011. Overall occupancy eased to 79.8% from 80.6%; total skilled mix by revenue declined to 50.5% from 52.8%.
- Cost of services rose 12.3%, faster than revenue, and increased to 79.6% of revenue from 78.2%. Depreciation and amortization rose 36.9% to $6.9 million. Lower effective tax rate (37.5% versus 39.4%) helped offset lower pretax income.
Cash, debt and liquidity
- Cash and cash equivalents were $32.6 million at March 31, versus $29.6 million at year-end. Current assets were $143.0 million and current liabilities $87.1 million; the reported figures imply a current ratio of about 1.64.
- Long-term debt, net of discount, was $202.9 million, compared with $187.9 million at year-end. The company also reported $127.7 million of operating lease obligations. A new $21.5 million RBS loan bears fixed interest at 4.75% and matures in 2019.
- Operating cash flow was $5.3 million; management attributed the year-over-year decline mainly to timing of wage and vendor payments. Investing used $18.3 million, including $7.0 million for acquisitions and $7.0 million for property and equipment. Financing provided $16.0 million, principally including the RBS borrowing.
- Ensign held approximately $16.4 million of held-to-maturity debt securities. Management said cash, operating cash flow and the $75 million revolving facility should cover operating needs for at least 12 months. The company was in compliance with disclosed loan covenants.
Material developments and outlook
- Q1 acquisitions included an assisted-living facility in Nevada, a home-health operation in Oregon and a skilled-nursing facility in Idaho. On April 1, after quarter-end, the company acquired a Utah home-health and hospice operation for approximately $3.0 million.
- Immediate Clinic committed $4.0 million to its urgent-care venture, acquired a $1.4 million software investment and bought Doctors Express Franchising assets. The transaction included $11.6 million of redeemable noncontrolling interest; the maximum potential future payment was estimated at $13.5 million. First clinic openings were expected in Q2 2012.
- No formal earnings or revenue guidance was provided. Management budgeted $33.0 million for 2012 renovation projects and authorized up to $10.0 million of share repurchases over 12 months; none had been made as of the filing.
- California’s temporary 10% skilled-nursing payment reduction was scheduled to apply through July 31, 2012, with repayment promised by December 31, 2012; implementation remained uncertain. Medicare dual-eligible coinsurance reimbursement was also scheduled to phase down beginning October 2012.
Risks, contingencies and unusual items
- A long-running government investigation into billing and reimbursement remained unresolved. The DOJ had closed its criminal investigation in December 2011, but HHS issued new subpoenas in January 2012 and discussions continued. The company said it could not estimate a possible loss and recorded no related accrual.
- The company completed an internal review of recordkeeping deficiencies at one facility and remitted approximately $0.5 million accrued in Q4 2011 for actual and estimated Medicare overpayments. It warned further reviews could lead to additional repayments.
- Healthcare reimbursement changes, audits and recoupments, staffing costs and shortages, clinical and regulatory compliance, litigation, and actuarial uncertainty in self-insurance reserves could adversely affect results and cash flow. Medicare and Medicaid concentration remains substantial.
- Operating cash flow and earnings reflect different trends: earnings attributable to Ensign increased modestly, while operating cash flow fell sharply. Management described the cash-flow decline as payment timing; the filing does not establish whether the timing effects will reverse in subsequent periods.
Important facts for investors to verify
- Whether acquired operations and the urgent-care venture produce returns sufficient to offset integration costs, lower acquired-facility occupancy and added debt or redeemable-interest obligations.
- Subsequent Medicare and Medicaid reimbursement developments, including the California payment deferral and planned coinsurance reductions.
- Developments in the HHS/DOJ investigation, any additional billing adjustments, and the adequacy of self-insurance reserves.
- Whether operating cash flow rebounds as management’s timing explanation implies, while tracking working capital, capital spending and debt service.
- Occupancy, skilled mix, same-facility revenue and cost-of-services trends, especially after the Medicare rate and therapy changes.