Pennant Group, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY 2022. This is an annual report, not a standalone fourth-quarter report.
Business context
Pennant is a holding company whose subsidiaries provide home health, hospice, home care and senior living services. At year-end, it operated 111 agencies and 51 senior living communities with 3,588 units across 13 states. FY 2023 included acquisitions of three home health agencies, eight hospice agencies, two home care agencies and two senior living communities.
Financial and operating performance
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Revenue | $544.9 million | $473.2 million |
| Income from operations | $25.2 million | $12.7 million |
| Net income attributable to Pennant | $13.4 million | $6.6 million |
| Diluted earnings per share | $0.44 | $0.22 |
| Net cash from operating activities | $33.1 million | $9.0 million |
- Revenue increased 15.1%, reflecting reported organic growth of $58.4 million and acquisition-related growth of $13.3 million. Home health and hospice revenue rose 15.3% to $394.5 million; senior living revenue rose 14.8% to $150.4 million.
- Operating margin increased to 4.7% from 2.7%; net income attributable to Pennant was 2.5% of revenue versus 1.4%. Management cited higher service volumes and lower prior-year asset disposition and impairment losses as contributors to improved results.
- Cost of services rose 16.3% to $438.1 million, and increased to 80.4% of revenue from 79.6%, primarily due to higher wages and benefits. Home health and hospice cost of services increased to 84.1% of segment revenue from 82.7%. Senior living cost of services improved to 70.6% from 71.5% of segment revenue.
- Reported segment Adjusted EBITDAR from Operations was $65.6 million for home health and hospice and $45.3 million for senior living, compared with $61.8 million and $37.6 million, respectively. These are non-GAAP measures; corporate general and administrative expense is presented separately.
- Home health admissions increased 7.6%; hospice admissions increased 6.3% and average daily census increased 13.5%. Senior living occupancy was 78.5% versus 75.7%, and average monthly revenue per occupied unit was $3,969 versus $3,516.
- Operating cash flow was $33.1 million; investing cash outflow was $30.2 million, including $21.4 million of acquisition payments; financing cash inflow was $1.1 million. Year-end cash was $6.1 million.
- Year-end long-term debt, net of issuance costs, was $63.9 million; revolving-credit borrowings were $65.0 million. The $150 million facility had $80.8 million available after outstanding letters of credit. The weighted-average debt rate was 7.9%. Pennant reported compliance with its financial covenants.
- Current assets were $80.1 million and current liabilities were $71.5 million. Recorded operating lease liabilities totaled $265.7 million; future undiscounted lease payments were $425.1 million.
Material changes, outlook and notable items
- Growth was broad-based, but senior living occupancy remained below pre-pandemic levels. Management reported steady improvement and said competitive conditions and inflation could affect the pace of recovery.
- Management expects existing cash, operating cash flow and available revolver capacity to provide adequate liquidity for the next 12 months, including acquisition opportunities. The filing provides no specific company revenue, earnings or margin guidance.
- Management’s strategy emphasizes organic growth, leadership development, disciplined acquisitions and local partnerships. It cautions that acquired or start-up operations can initially have lower occupancy or census, higher costs and fluctuating margins.
- Interest expense rose to $5.9 million from $3.8 million. The credit facility was amended to use SOFR-based rates; management estimates a 1 percentage-point rate change would affect annual interest expense by about $0.7 million, based on year-end debt.
- FY 2023 included $2.6 million of unusual or non-recurring charges and $0.6 million of costs associated with transitioning operations. The latter included the operating impact of memory care units placed in transition while Pennant sought a sublease. State relief funding reduced cost of services by $4.7 million.
- A Medicare contractor dispute remains outstanding for one hospice provider number. After a payment suspension and appeals, $3.2 million of withheld amounts was refunded during 2023; $1.9 million remained in dispute at year-end and was recorded as a long-term asset. Pennant said it expects to prevail, but the timing and outcome are uncertain. Ten subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution as of year-end.
- Key risks include Medicare and Medicaid reimbursement changes, wage and staffing pressures, regulatory audits and possible recoupments, litigation and self-insurance exposure, cyber threats, acquisition integration, and significant long-term lease commitments. Medicare and Medicaid together represented 62.6% of FY 2023 revenue.
- The company reported no material cybersecurity incidents in 2023. Management and Deloitte concluded internal control over financial reporting was effective; Deloitte issued unqualified opinions on the financial statements and internal controls. The audit identified self-insurance reserves as a critical audit matter because of the estimation involved.
Important facts for investors to verify
- Track whether operating cash flow remains strong after working-capital movements and acquisition spending.
- Monitor wage and benefit inflation against reimbursement increases, particularly in home health and hospice.
- Follow senior living occupancy, revenue per occupied unit and progress toward pre-pandemic levels.
- Check the outcome and collection of the remaining $1.9 million hospice audit dispute, and developments in other Medicare reviews.
- Assess debt interest costs, revolver availability and compliance with leverage covenants, alongside the scale of lease obligations.
- Review GAAP results alongside non-GAAP Adjusted EBITDA, EBITDAR and segment measures; the filing notes these measures exclude recurring costs such as rent and are not standardized.