Exhibit 99.1
Unaudited Pro Forma Condensed Consolidated Financial Information
On October 1, 2019, The Ensign Group, Inc. (“Ensign” or "the Company") completed the separation of its home health and hospice operations and substantially all of its senior living operations into a separate, publicly traded company through pro rata distribution of all of the outstanding shares of common stock of The Pennant Group, Inc. (“Pennant”) to Ensign stockholders (the “Spin-Off”). Beginning in the fourth quarter of 2019, Pennant's historical financial results for periods prior to the Spin-Off will be reflected in Ensign's consolidated financial statements as discontinued operations.
The following unaudited pro forma consolidated financial statements present Ensign’s unaudited pro forma consolidated income statements for each of the years ended December 31, 2016, 2017 and 2018 and for the six months ended June 30, 2019, and Ensign’s unaudited pro forma consolidated balance sheet as of June 30, 2019, which have been derived from Ensign’s audited financial statements for the years ended December 31, 2016, 2017 and 2018 and Ensign’s unaudited financial statements for the six months ended June 30, 2019.
The following unaudited pro forma consolidated financial statements give effect to the Spin-Off and the related transactions, including: (i) the transfer to Pennant of Ensign’s assets and liabilities that are specifically identifiable to Pennant; (ii) the elimination of Ensign’s equity interest in Pennant; (iii) rental income generated from the leases with Pennant; (iv) the reduction of rental expense related to the amendment of third party leases; (v) changes in right-of-use (ROU) assets and lease liabilities related to the modification of lease agreements; and (vi) the amendment of the credit facility in connection with the Spin-Off. The unaudited pro forma consolidated income statements for the six months ended June 30, 2019 and the years ended December 31, 2018, 2017 and 2016 assume the Spin-Off and the related transactions occurred on January 1, 2016. The unaudited pro forma consolidated balance sheet assumes the Spin-Off and the related transactions occurred on June 30, 2019.
The historical financial data has been adjusted to give pro forma effect to events that are directly attributable to the transactions described above, have an ongoing effect on Ensign’s statement of operations and are factually supportable. Ensign’s unaudited pro forma consolidated financial statements and explanatory notes present how Ensign’s financial statements based on the inclusion of the pro forma adjustments related to the above transactions occurred as of the dates noted above.
Ensign’s unaudited pro forma consolidated financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma consolidated financial statements. The following unaudited pro forma consolidated financial statements are presented for: (i) illustrative purposes only; (ii) are not necessarily indicative of and do not purport to reflect the results Ensign may achieve in future periods or the historical results that would have been obtained had the above transactions been completed on January 1, 2016 or as of June 30, 2019; and (iii) do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.
Ensign’s unaudited pro forma consolidated financial statements are derived from and should be read in conjunction with Ensign’s historical financial statements and accompanying notes that are included in Ensign’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the Securities Exchange Commission.
• | The information in the “Historical Ensign” columns in the unaudited pro forma consolidated statements of operations and the unaudited pro forma consolidated balance sheet were derived from Ensign’s historical consolidated financial statements for the periods and as of the date presented and does not reflect any adjustments related to the Spin-Off. |
• | The information in the “Pennant Financial Separation” column in the unaudited pro forma consolidated financial statements was derived from Ensign’s unaudited consolidated financial statements and the related accounting records, consistent with the guidance for discontinued operations under General Accepted Accounting Principle (GAAP). Ensign's current estimates on a discontinued operations basis are preliminary and could change as it finalizes discontinued operations accounting to be reported in the Annual Report on Form 10-K for the year ending December 31, 2019. |
• | The information in the “Pro Forma” columns in the unaudited pro forma consolidated financial statements reflects additional pro forma adjustments which are further described in the accompanying notes. |
• | The following unaudited pro forma condensed financial statements should be read in conjunction with the historical consolidated financial statements of Ensign, the accompanying notes to those financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Ensign's Annual Report on Form 10-K for the year ended December 31, 2018 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019. |
THE ENSIGN GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2019
(In thousands, except per share data)
(Unaudited)
Historical Ensign (as reported) | Pennant Financial Separation (F) | Pro Forma | Notes | Pro Forma Ensign | |||||||||||||
Revenue | $ | 1,124,865 | $ | (160,641 | ) | $ | 5,884 | (A) | $ | 970,108 | |||||||
Expense | |||||||||||||||||
Cost of services | 887,002 | (120,272 | ) | — | 766,730 | ||||||||||||
Rent—cost of services | 72,846 | (11,443 | ) | (1,378 | ) | (B) | 60,025 | ||||||||||
General and administrative expense | 63,585 | (10,455 | ) | — | 53,130 | ||||||||||||
Depreciation and amortization | 25,782 | (1,487 | ) | — | 24,295 | ||||||||||||
Total expenses | 1,049,215 | (143,657 | ) | (1,378 | ) | 904,180 | |||||||||||
Income from operations | 75,650 | (16,984 | ) | 7,262 | 65,928 | ||||||||||||
Other income (expense): | |||||||||||||||||
Interest expense | (7,613 | ) | — | 145 | (C) | (7,468 | ) | ||||||||||
Interest income | 1,147 | — | — | 1,147 | |||||||||||||
Other expense, net | (6,466 | ) | — | 145 | (6,321 | ) | |||||||||||
Income before provision for income taxes | 69,184 | (16,984 | ) | 7,407 | 59,607 | ||||||||||||
Provision for income taxes | 12,652 | (2,801 | ) | 386 | (D) | 10,237 | |||||||||||
Net income | 56,532 | (14,183 | ) | 7,021 | 49,370 | ||||||||||||
Net income attributable to noncontrolling interests | 551 | (350 | ) | — | 201 | ||||||||||||
Net income attributable to The Ensign Group, Inc. | $ | 55,981 | $ | (13,833 | ) | $ | 7,021 | $ | 49,169 | ||||||||
Net income per share attributable to The Ensign Group, Inc.: | |||||||||||||||||
Basic | $ | 1.05 | $ | 0.92 | |||||||||||||
Diluted | $ | 1.00 | $ | 0.88 | |||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||
Basic | 53,246 | (E) | 53,246 | ||||||||||||||
Diluted | 55,896 | (E) | 55,896 |
THE ENSIGN GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2018
(In thousands, except per share data)
(Unaudited)
Historical Ensign (as reported) | Pennant Financial Separation (F) | Pro Forma | Notes | Pro Forma Ensign | |||||||||||||
Revenue | $ | 2,040,659 | $ | (286,058 | ) | $ | 11,354 | (A) | $ | 1,765,955 | |||||||
Expense | |||||||||||||||||
Cost of services | 1,627,672 | (209,423 | ) | — | 1,418,249 | ||||||||||||
Return of unclaimed class action settlement related to class action lawsuit | (1,664 | ) | — | — | (1,664 | ) | |||||||||||
Rent—cost of services | 138,512 | (20,836 | ) | (2,819 | ) | (B) | 114,857 | ||||||||||
General and administrative expense | 100,307 | (9,689 | ) | — | 90,618 | ||||||||||||
Depreciation and amortization | 47,344 | (2,480 | ) | — | 44,864 | ||||||||||||
Total expenses | 1,912,171 | (242,428 | ) | (2,819 | ) | 1,666,924 | |||||||||||
Income from operations | 128,488 | (43,630 | ) | 14,173 | 99,031 | ||||||||||||
Other income (expense): | |||||||||||||||||
Interest expense | (15,182 | ) | — | 626 | (C) | (14,556 | ) | ||||||||||
Interest income | 2,063 | — | — | 2,063 | |||||||||||||
Other expense, net | (13,119 | ) | — | 626 | (12,493 | ) | |||||||||||
Income before provision for income taxes | 115,369 | (43,630 | ) | 14,799 | 86,538 | ||||||||||||
Provision for income taxes | 22,841 | (10,156 | ) | 2,886 | (D) | 15,571 | |||||||||||
Net income | 92,528 | (33,474 | ) | 11,913 | 70,967 | ||||||||||||
Net income (loss) attributable to noncontrolling interests | 164 | (595 | ) | — | (431 | ) | |||||||||||
Net income attributable to The Ensign Group, Inc. | $ | 92,364 | $ | (32,879 | ) | $ | 11,913 | $ | 71,398 | ||||||||
Net income per share attributable to The Ensign Group, Inc.: | |||||||||||||||||
Basic | $ | 1.78 | $ | 1.37 | |||||||||||||
Diluted | $ | 1.70 | $ | 1.31 | |||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||
Basic | 52,016 | (E) | 52,016 | ||||||||||||||
Diluted | 54,397 | (E) | 54,397 |
THE ENSIGN GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2017
(In thousands, except per share data)
(Unaudited)
Historical Ensign (as reported) | Pennant Financial Separation (F) | Pro Forma | Notes | Pro Forma Ensign | |||||||||||||
Revenue | $ | 1,849,317 | $ | (250,991 | ) | $ | 10,492 | (A) | $ | 1,608,818 | |||||||
Expense | |||||||||||||||||
Cost of services | 1,497,703 | (184,252 | ) | — | 1,313,451 | ||||||||||||
Return of unclaimed class action settlement | 11,000 | — | — | 11,000 | |||||||||||||
Losses related to divestitures | 2,321 | — | — | 2,321 | |||||||||||||
Rent—cost of services | 131,919 | (19,939 | ) | (2,947 | ) | (B) | 109,033 | ||||||||||
General and administrative expense | 80,617 | (6,497 | ) | — | 74,120 | ||||||||||||
Depreciation and amortization | 44,472 | (2,204 | ) | — | 42,268 | ||||||||||||
Total expenses | 1,768,032 | (212,892 | ) | (2,947 | ) | 1,552,193 | |||||||||||
Income from operations | 81,285 | (38,099 | ) | 13,439 | 56,625 | ||||||||||||
Other income (expense): | |||||||||||||||||
Interest expense | (13,616 | ) | — | 857 | (C) | (12,759 | ) | ||||||||||
Interest income | 1,609 | — | — | 1,609 | |||||||||||||
Other expense, net | (12,007 | ) | — | 857 | (11,150 | ) | |||||||||||
Income before provision for income taxes | 69,278 | (38,099 | ) | 14,296 | 45,475 | ||||||||||||
Provision for income taxes | 28,445 | (14,239 | ) | 5,094 | (D) | 19,300 | |||||||||||
Net income | 40,833 | (23,860 | ) | 9,202 | 26,175 | ||||||||||||
Net income attributable to noncontrolling interests | 358 | (160 | ) | — | 198 | ||||||||||||
Net income attributable to The Ensign Group, Inc. | $ | 40,475 | $ | (23,700 | ) | $ | 9,202 | $ | 25,977 | ||||||||
Net income per share attributable to The Ensign Group, Inc.: | |||||||||||||||||
Basic | $ | 0.79 | $ | 0.51 | |||||||||||||
Diluted | $ | 0.77 | $ | 0.49 | |||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||
Basic | 50,932 | (E) | 50,932 | ||||||||||||||
Diluted | 52,829 | (E) | 52,829 |
THE ENSIGN GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2016
(In thousands, except per share data)
(Unaudited)
Historical Ensign (as reported) | Pennant Financial Separation (F) | Pro Forma | Notes | Pro Forma Ensign | |||||||||||||
Revenue | $ | 1,654,864 | $ | (217,225 | ) | $ | 2,338 | (A) | $ | 1,439,977 | |||||||
Expense | |||||||||||||||||
Cost of services | 1,341,814 | (157,057 | ) | — | 1,184,757 | ||||||||||||
(Gains) losses related to divestitures | (11,225 | ) | — | — | (11,225 | ) | |||||||||||
Rent—cost of services | 124,581 | (18,447 | ) | (3,021 | ) | (B) | 103,113 | ||||||||||
General and administrative expense | 69,165 | (5,078 | ) | — | 64,087 | ||||||||||||
Depreciation and amortization | 38,682 | (2,613 | ) | — | 36,069 | ||||||||||||
Total expenses | 1,563,017 | (183,195 | ) | (3,021 | ) | 1,376,801 | |||||||||||
Income from operations | 91,847 | (34,030 | ) | 5,359 | 63,176 | ||||||||||||
Other income (expense): | |||||||||||||||||
Interest expense | (7,136 | ) | — | 667 | (C) | (6,469 | ) | ||||||||||
Interest income | 1,107 | — | — | 1,107 | |||||||||||||
Other expense, net | (6,029 | ) | — | 667 | (5,362 | ) | |||||||||||
Income before provision for income taxes | 85,818 | (34,030 | ) | 6,026 | 57,814 | ||||||||||||
Provision for income taxes | 32,975 | (13,297 | ) | 2,530 | (D) | 22,208 | |||||||||||
Net income | 52,843 | (20,733 | ) | 3,496 | 35,606 | ||||||||||||
Net income attributable to noncontrolling interests | 2,853 | (26 | ) | — | 2,827 | ||||||||||||
Net income attributable to The Ensign Group, Inc. | $ | 49,990 | $ | (20,707 | ) | $ | 3,496 | $ | 32,779 | ||||||||
Net income per share attributable to The Ensign Group, Inc.: | |||||||||||||||||
Basic | $ | 0.99 | $ | 0.65 | |||||||||||||
Diluted | $ | 0.96 | $ | 0.63 | |||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||
Basic | 50,555 | (E) | 50,555 | ||||||||||||||
Diluted | 52,133 | (E) | 52,133 |
THE ENSIGN GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019
(In thousands)
(Unaudited)
Historical Ensign | Pennant Financial Separation (F) | Pro Forma | Notes | Pro Forma Ensign | |||||||||||||
Assets | |||||||||||||||||
Current assets: | |||||||||||||||||
Cash and cash equivalents | $ | 39,042 | $ | (43 | ) | $ | — | $ | 38,999 | ||||||||
Restricted cash | — | — | 11,600 | (G) | 11,600 | ||||||||||||
Accounts receivable—less allowance for doubtful accounts | 296,935 | (27,442 | ) | — | 269,493 | ||||||||||||
Investments—current | 8,003 | — | — | 8,003 | |||||||||||||
Prepaid income taxes | 5,934 | — | — | 5,934 | |||||||||||||
Prepaid expenses and other current assets | 25,632 | (3,798 | ) | — | 21,834 | ||||||||||||
Total current assets | 375,546 | (31,283 | ) | 11,600 | 355,863 | ||||||||||||
Property and equipment, net | 674,892 | (13,158 | ) | — | 661,734 | ||||||||||||
Right-of-use assets | 1,074,449 | (151,114 | ) | 116,238 | (H) | 1,039,573 | |||||||||||
Insurance subsidiary deposits and investments | 38,929 | — | — | 38,929 | |||||||||||||
Deferred tax assets | 8,603 | 99 | — | 8,702 | |||||||||||||
Restricted and other assets | 16,943 | (2,532 | ) | 2,078 | (I) | 16,489 | |||||||||||
Intangible assets, net | 3,829 | (62 | ) | — | 3,767 | ||||||||||||
Goodwill | 97,408 | (42,392 | ) | — | 55,016 | ||||||||||||
Other indefinite-lived intangibles | 30,922 | (28,286 | ) | — | 2,636 | ||||||||||||
Total assets | $ | 2,321,521 | $ | (268,728 | ) | $ | 129,916 | $ | 2,182,709 | ||||||||
Liabilities and equity | |||||||||||||||||
Current liabilities: | |||||||||||||||||
Accounts payable | $ | 44,694 | $ | (4,902 | ) | $ | — | $ | 39,792 | ||||||||
Accrued wages and related liabilities | 116,018 | (12,458 | ) | — | 103,560 | ||||||||||||
Lease liabilities—current | 59,686 | (9,388 | ) | 7,053 | (H) | 57,351 | |||||||||||
Accrued self-insurance liabilities—current | 26,981 | — | — | 26,981 | |||||||||||||
Other accrued liabilities | 69,816 | (15,096 | ) | — | 54,720 | ||||||||||||
Current maturities of long-term debt | 10,153 | — | (7,500 | ) | (J) | 2,653 | |||||||||||
Total current liabilities | 327,348 | (41,844 | ) | (447 | ) | 285,057 | |||||||||||
Long-term debt—less current maturities | 268,179 | — | 7,710 | (I), (J) | 275,889 | ||||||||||||
Long-term lease liabilities—less current portion | 988,145 | (143,382 | ) | 109,185 | (H) | 953,948 | |||||||||||
Accrued self-insurance liabilities—less current portion | 57,565 | — | — | 57,565 | |||||||||||||
Other long-term liabilities | 2,977 | — | — | 2,977 | |||||||||||||
Total liabilities | 1,644,214 | (185,226 | ) | 116,448 | 1,575,436 | ||||||||||||
Commitments and contingencies | |||||||||||||||||
Equity: | |||||||||||||||||
Total Ensign Group, Inc. stockholders' equity | 662,052 | (70,329 | ) | 13,468 | (K) | 605,191 | |||||||||||
Non-controlling interest | 15,255 | (13,173 | ) | — | 2,082 | ||||||||||||
Total equity | 677,307 | (83,502 | ) | 13,468 | 607,273 | ||||||||||||
Total liabilities and equity | $ | 2,321,521 | $ | (268,728 | ) | $ | 129,916 | $ | 2,182,709 |
Notes to Pro Forma Condensed Consolidated Financial Statements
The unaudited pro form condensed consolidated statements of income for the six months ended June 30, 2019 and for the years ended December 31, 2018, 2017 and 2016 and the unaudited pro forma condensed consolidated balance sheet as of June 30, 2019, include the following adjustments:
(A) | Reflects rental income generated from the leases with Pennant entered into in connection with the Spin-Off. |
(B) | Reflects reduction in rent expenses from Ensign leases with third parties as a result of the amended master lease agreements in connection with the Spin-Off. |
(C) | Represents reduction of interest expense based on the amended terms for the Third Amended Credit Facility. |
(D) | Represents an adjustment to the provision for income tax to our applicable jurisdictional statutory income tax rates for the respective periods presented. |
(E) | Pro forma basic and diluted earnings per share is calculated by dividing pro forma net income available to Ensign common stockholders by our weighted-average number of Ensign common shares outstanding. The actual effect of the basic and dilution on a go-forward basis will depend on various factors, including the employment of our personnel in one company or the other, the value of the equity awards at the time of distribution and the fractional share. |
(F) | Reflects the discontinued operations of Pennant businesses, including the associated assets, liabilities, equity and results of operations and the non-recurring costs, primarily consisting of professional fees, that were directly related to the Spin-Off. Certain general corporate overhead expenses that were not specifically related to the Pennant businesses were excluded as they did not meet the discontinued operations criteria. |
(G) | Reflects the cash dividend received from The Pennant Group, Inc. in connection with the Spin-Off. |
(H) | Represents the adjustments to the ROU assets and lease liabilities as a result of the amended master lease agreements in connection with the Spin-Off. In accordance with Topic 842, Leases, these amended master lease agreements are considered to be modified and subjected to lease modification guidance. The ROU asset and lease liabilities related to these agreements were remeasured based on the change in the lease conditions such as rent payment and lease terms. The incremental borrowing rate has also been adjusted to mirror the revised lease terms which become effective at the date of the modification. As the unaudited pro forma combined balance sheet assumes the Spin-Off and the related transactions occurred on the most recent reporting date. |
(I) | Represents the adjustments to deferred financing fee related to the amendment of our existing debt agreement in connection with the Spin-Off as described in Note (J). |
(J) | We entered into the Third Amended Credit Facility with a syndicate of banks with a revolving credit facility borrowing capacity of $350.0 million. Interest rates applicable to loans under the Third Amended Credit Facility to be, at the Company’s election, either LIBOR plus a margin ranging from 1.50% to 2.50% per annum or Base Rate plus a margin ranging from 0.50% to 1.50% per annum, in each case based on the ratio of Consolidated Total Net Debt to Consolidated EBITDA (each, as defined in the Third Amended Credit Facility). In addition, we expect that we will pay a commitment fee on the undrawn portion of the commitments under the Third Amended Credit Facility that is estimated to be 0.25% per annum. This adjustment represents the reclassification of the short-term portion of the term loan under the existing credit revolver into long-term portion of the new revolving credit facility. |
(K) | Reflects the impact to Pennant total stockholders' equity. |