ENSG

Business Context and Reporting Period

Company: The Ensign Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: The Company operates 70 skilled nursing and assisted living facilities across seven states (California, Arizona, Texas, Washington, Utah, Colorado, and Idaho) with approximately 8,000 operational beds. As of the reporting date, the Company owned 38 facilities and leased 32. Revenue is derived primarily from Medicare and Medicaid programs, which accounted for approximately 75% of total revenue for the nine months ended September 30, 2009.

Key Financial Metrics

Note: EBITDA and EBITDAR are non-GAAP financial measures. EBITDAR excludes facility rent costs.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 14.5% ($50.0 million) for the nine months ended September 30, 2009, compared to the same period in 2008. This growth was driven by acquisitions (contributing approximately $27.2 million) and higher reimbursement rates at same facilities.
• Profitability: Net income increased 21.1% to $23.8 million for the nine-month period. Operating margins improved slightly, with operating income rising to 10.8% of revenue (from 10.0% in the prior year).
• Acquisitions: The Company acquired seven facilities during the nine months ended September 30, 2009, for an aggregate purchase price of approximately $22.1 million. Additionally, two significant acquisitions occurred in October 2009 (post-period) totaling $40.0 million.
• Cash Flow: Net cash provided by operating activities decreased by $6.9 million to $28.7 million, primarily due to increased accounts receivable balances. Net cash used in investing activities increased significantly to $45.4 million due to business acquisitions and capital expenditures.
• Occupancy: Overall occupancy based on operational beds decreased to 79.6% for the nine months ended September 30, 2009, from 81.1% in the prior year, largely due to lower occupancy rates at recently acquired facilities.

Guidance, Outlook, Risks, and Contingencies

• Government Investigation: The Company is subject to an ongoing investigation by the U.S. Attorney for the Central District of California regarding billing and reimbursement processes at certain facilities. Search warrants were executed in December 2008. The Company has not recorded any accruals related to this investigation as the outcome and potential loss cannot be estimated. This represents a significant contingency that could materially affect financial condition.
• Regulatory Risks: The Company faces risks related to changes in Medicare and Medicaid reimbursement rates, cost-containment measures, and potential recoupments from audits. Two facilities are currently on prepayment review.
• Liquidity: The Company maintains a $50.0 million revolving credit facility (Revolver) with General Electric Capital Corporation. As of September 30, 2009, no borrowings were outstanding under the Revolver, though $6.0 million of capacity is restricted due to a reserve established by the lender related to the ongoing investigation.
• Self-Insurance: The Company is partially self-insured for general liability, professional liability, and workers' compensation. Management believes reserves are adequate, but actual liabilities could exceed estimates, impacting future earnings.
• Outlook: Management expects to continue acquiring facilities to drive growth. The Company anticipates that recently acquired facilities will initially have lower occupancy and skilled mix, which may cause overall occupancy to fluctuate.

Key Facts for Investor Verification

• Investigation Status: Verify the current status of the U.S. Attorney's investigation and any potential financial impact or accruals that may arise from the search warrants and subpoenas served in late 2008 and 2009.
• Acquisition Integration: Monitor the integration performance of the seven facilities acquired in the first nine months of 2009 and the two acquired in October 2009, specifically regarding occupancy rates and reimbursement mix.
• Reimbursement Rates: Track changes in Medicare and Medicaid reimbursement rates, particularly the impact of the Deficit Reduction Act and state-specific budget cuts (e.g., California Medi-Cal).
• Debt Covenants: Confirm continued compliance with debt covenants, specifically regarding occupancy and debt service coverage ratios, given the $59.8 million outstanding indebtedness.
• Cash Position: Observe the trend in cash and cash equivalents, which declined from $41.3 million to $21.4 million during the period, driven by heavy investment in acquisitions.