The Ensign Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context
Ensign provides skilled nursing and rehabilitative care, assisted living, home health, hospice, urgent care and related services. At quarter-end it operated 119 facilities, nine home health and seven hospice operations, six urgent care centers and a mobile diagnostic business; 96 facilities were owned and 23 leased. The company acquired 17 businesses during the first nine months and sold its Doctors Express urgent-care franchise business in April.
Financial and operating results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $229.3 | $206.7 | $667.5 | $612.7 |
| Income from operations | $20.3 | $23.5 | $32.8 | $70.3 |
| Net income attributable to Ensign | $10.5 | $13.3 | $10.7 | $38.7 |
| Diluted EPS | $0.47 | $0.60 | $0.48 | $1.77 |
| Operating margin | 8.8% | 11.4% | 4.9% | 11.5% |
- Revenue growth: Q3 revenue rose 10.9%; nine-month revenue rose 9.0%. Growth was driven substantially by acquisitions, including $19.3 million of additional Q3 revenue and $47.7 million for the nine-month period from recently acquired facilities.
- Profitability: Q3 operating income declined despite revenue growth, as cost of services rose 13.1% and general and administrative expense rose 30.9%. Nine-month results included a $33 million charge for the U.S. Government inquiry; excluding that charge, operating income would be $65.8 million, based on reported figures.
- Cash flow: Nine-month operating cash flow was $57.1 million, versus $51.6 million. Investing cash outflow was $57.0 million, including $45.4 million of business acquisitions and $21.9 million of property and equipment purchases. Financing cash inflow was $5.2 million. Cash ended the period at $46.0 million.
- Liquidity and debt: Current assets were $185.3 million and current liabilities $150.9 million. Total debt, net of discount, was approximately $212.4 million; long-term debt on the balance sheet was $205.0 million. The $150 million revolving facility had $30 million drawn. Ensign reported compliance with its debt covenants at quarter-end.
- Margins and operations: Cost of services increased to 81.2% of revenue in Q3 from 79.6%. Overall occupancy was 77.4%, down from 78.7%; same-facility occupancy was 80.7%, versus 81.0%. Skilled mix improved to 26.0% of nursing days from 25.2%.
- Supplemental measure: Adjusted EBITDA was $31.9 million in Q3 versus $32.2 million, and $99.5 million for nine months versus $97.4 million. This is a non-GAAP measure and includes adjustments specified by the company.
Material changes and unusual items
- Ensign accrued a total of $48 million for resolution of a long-running Department of Justice investigation: $15 million in Q4 2012 and an additional $33 million in Q1 2013. In October 2013, after quarter-end, it paid the $48 million settlement. The company denied wrongdoing; the agreement resolved the investigation without an admission of liability.
- Effective October 1, 2013, Ensign entered a five-year corporate integrity agreement requiring compliance oversight, training, monitoring and reporting. The company said federal healthcare program participation was not affected; an uncured material breach could lead to exclusion or prosecution.
- The Doctors Express sale generated a $2.8 million pretax loss, classified in discontinued operations. Nine-month discontinued operations reduced attributable earnings by $1.8 million.
- On November 7, 2013, Ensign announced a proposed separation of its healthcare operations and real estate business. The proposed CareTrust REIT would receive substantially all owned real estate, with most properties then leased back to Ensign on a triple-net basis. The transaction remained conditional, including on board approval and tax and REIT-related opinions and rulings. The company anticipated CareTrust could issue up to $350 million of unsecured notes; proceeds were expected to support debt repayment and potentially dividends, subject to conditions and board approval.
Outlook, commentary and principal risks
- Management stated that cash, operating cash flow and revolving-credit availability were expected to cover operating needs for at least 12 months. This outlook predates the October $48 million settlement payment.
- No specific company-wide revenue or earnings guidance is provided in the filing. Management noted that acquisition growth can weigh on occupancy because recently acquired facilities typically have lower occupancy and skilled mix, and that overall occupancy may vary as the portfolio grows.
- Government programs accounted for 72.2% of nine-month revenue, leaving results exposed to Medicare and Medicaid reimbursement changes, audits, recoupments and payment delays. Labor and insurance costs, occupancy, acquisition integration, self-insurance estimates and clinical or regulatory compliance are additional material risks.
- Ensign reported a California tax examination focused on its captive insurer; no adjustments had been proposed. It also described ongoing ordinary-course litigation and regulatory reviews, including one operation subject to a Medicare probe review. No facilities were on prepayment or targeted review at quarter-end.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the October $48 million settlement payment affected post-quarter cash, borrowing and liquidity, and whether additional compliance costs arise under the five-year agreement.
- Whether the proposed CareTrust spin-off satisfies its stated conditions, its final debt and lease structure, and the effect of triple-net rent obligations on Ensign’s margins and cash flow.
- Whether same-facility revenue and occupancy stabilize, and whether acquisition-related growth converts into sustainable operating profit and cash generation.
- Changes in Medicare and Medicaid reimbursement, audit activity, and the company’s exposure to self-insurance claims and staffing-related litigation.
- Reconcile reported earnings with the $33 million inquiry charge, discontinued-operation loss, and the company’s non-GAAP adjusted EBITDA calculations.