Pennant Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Dollar amounts are in millions, except per-share data. Pennant provides home health, hospice, home care and senior living services through independent subsidiaries. At quarter-end, it operated 96 agencies and 51 senior living communities.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $126.5 | $113.9 | +11.0% |
| Income from operations | $4.3 | $2.3 | +$2.0 |
| Net income | $2.0 | $1.2 | +$0.8 |
| Net income attributable to Pennant | $1.9 | $1.0 | +$0.8 |
| Diluted EPS | $0.06 | $0.03 | +$0.03 |
| Operating cash flow | $9.0 | $(4.1) | +$13.1 |
Revenue grew in both segments: home health and hospice revenue rose 13.2% to $91.1 million, and senior living revenue rose 5.8% to $35.4 million. Medicare and Medicaid represented 62.0% of revenue. Operating margin increased to 3.4% from 2.1%; net margin was 1.6% versus 1.0%.
Cost of services increased 13.7% to $102.6 million and rose to 81.1% of revenue from 79.3%, reflecting higher wages, benefits and contract labor, as well as higher service volume. General and administrative expense declined 13.2% to $8.7 million, primarily due to lower share-based compensation. Net interest expense increased to $1.4 million from $0.6 million. Consolidated Adjusted EBITDA, a non-GAAP measure, was $7.9 million versus $6.1 million; the company cautions that this measure has limitations and should not replace GAAP results.
Cash, debt and liquidity
- Cash was $3.0 million at March 31, 2023, compared with $2.1 million at year-end 2022.
- Operating cash flow was $9.0 million; investing cash use was $2.3 million, including $2.3 million of property and equipment purchases. Financing cash use was $5.8 million, mainly reflecting a net $6.0 million reduction in revolving-credit borrowings.
- Revolving-credit debt was $58.5 million gross and $57.0 million net of issuance costs. The facility has $150 million of capacity, matures in 2026, and had $87.3 million of available borrowing capacity after letters of credit. The weighted average interest rate was 7.53%; Pennant reported compliance with its financial covenants.
- Operating lease liabilities totaled $266.9 million, including $250.0 million long-term. The company reported a 12.5-year weighted-average remaining lease term.
Changes, outlook and risks
Operating indicators improved year over year: home health admissions increased 7.1%, hospice average daily census rose 9.3%, and senior living occupancy improved to 78.1% from 72.6%. Average monthly revenue per occupied senior living unit increased 14.1%. Management noted occupancy recovery remains uncertain and said recently acquired or start-up operations can have lower occupancy, higher costs and fluctuating margins. Pennant added one home health agency and two senior living communities during the quarter; it also completed a home health agency acquisition on May 1, 2023 for $0.9 million.
The filing provides no specific earnings or revenue guidance. Management said cash, operating cash generation and available credit should support operating needs and acquisition opportunities for the next 12 months. CMS’s proposed fiscal 2024 hospice payment update was 2.8%, subject to final rulemaking. The 2023 home health final rule includes a 3.9% reduction to the standard 30-day payment rate, alongside a 2.9% market-basket increase; future payment policy remains uncertain.
Key risks include reimbursement and regulatory changes, labor availability and cost, lease commitments, acquisition integration, and litigation or government audits. Nine subsidiaries had Medicare or Medicaid reviews scheduled, on appeal or in dispute resolution. A hospice provider is contesting an alleged $5.1 million extrapolated Medicare overpayment; the amount is recorded as a long-term asset, while the related accrued liability was described as immaterial. Pennant cannot predict the appeal’s outcome. The company also disclosed ordinary-course legal matters and potential exposure from professional liability and self-insurance.
Investor verification points
- Track whether revenue growth converts into margin improvement as labor and contract costs rise.
- Monitor senior living occupancy recovery and performance of acquired, start-up and transitioning operations.
- Follow the $5.1 million Medicare recoupment appeal, the other ongoing program reviews, and any resulting cash or earnings effects.
- Assess floating-rate debt costs, covenant headroom, available credit and substantial long-term lease obligations.
- Check final CMS hospice and future home health payment rules and their implications for Pennant’s reimbursement.