Pennant Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; amounts below are in millions except per-share data and operating statistics. Pennant provides home health, hospice, home care, and senior living services through independent subsidiaries. At quarter-end it operated 86 agencies and 54 senior living communities.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $110.3 | $92.7 | $216.0 | $184.6 |
| Income from operations | $3.6 | $6.1 | $5.2 | $10.3 |
| Net income attributable to Pennant | $2.7 | $4.3 | $3.6 | $7.3 |
| Diluted EPS | $0.09 | $0.15 | $0.12 | $0.25 |
- Revenue grew 19.0% in Q2 and 17.0% in the first half. Operating income and Pennant-attributable net income declined in both comparisons.
- Operating margin was 3.2% in Q2 versus 6.6% a year earlier, and 2.4% for the first half versus 5.7%. Cost of services rose to 78.5% of revenue in Q2 from 73.5%, and to 78.8% for the first half from 74.9%.
- Q2 Segment Adjusted EBITDAR from Operations, a non-GAAP measure before rent and certain adjustments, was $18.6 million versus $20.7 million. Home health and hospice increased to $14.9 million from $11.2 million; senior living declined to $9.8 million from $13.5 million. The measure is not a substitute for GAAP results.
- First-half operating cash flow was negative $11.8 million versus positive $43.4 million. Investing cash outflow was $15.5 million, including $12.8 million of acquisition payments. Financing provided $30.1 million, largely reflecting revolver borrowing.
- At June 30, cash was $2.9 million. Revolver borrowings were $40.5 million gross ($38.1 million net of financing costs); available capacity was $106.2 million after letters of credit. The facility capacity is $150 million, matures in 2026, and carried a 2.91% weighted-average rate. Pennant reported covenant compliance.
- Current assets were $73.5 million and current liabilities $82.8 million. Recorded operating lease liabilities totaled $306.4 million, including $291.2 million long term.
Material changes and operating drivers
- Home health and hospice revenue rose 34.7% in Q2 and 33.1% in the first half. Management attributed growth to acquisitions and stronger operating metrics. The company added five home health, three hospice, and two home care agencies in the first half for an aggregate purchase price of $13.4 million.
- Senior living revenue fell 7.2% in Q2 and 9.4% in the first half. Occupancy was 72.7% in Q2 versus 78.5%, and 72.4% in the first half versus 79.3%; management said occupancy began improving month by month during Q2, but recovery remained uncertain.
- Staffing challenges increased overtime, hourly wages, and temporary labor needs. Home health and hospice cost of services as a share of segment revenue rose to 82.1% in Q2 from 79.5%. Senior living’s comparable ratio rose to 70.0% from 63.4%, mainly because lower occupancy left fixed costs in place.
- Q2 revenue included $0.9 million of Medicare sequestration relief; first-half revenue included $1.8 million. The relief was extended through December 31, 2021.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance. Management said existing cash, operating cash generation, and financing access should fund operations and growth needs and provide adequate liquidity for the next 12 months.
- Management cautioned that COVID-19 and potential variants could affect operations and that senior living occupancy may not return to pre-pandemic levels. Industry discounting, staffing costs, acquisition integration, and fluctuating margins at new or turnaround operations are additional concerns.
- CMS began recouping the $28.0 million in prior-year Medicare advance payments in April 2021 through offsets to new claims. $7.1 million had been recouped by June 30; $20.9 million remained recorded as a contract liability. Pennant expected repayment within the applicable recoupment periods.
- Eight operating subsidiaries had Medicare or Medicaid reviews scheduled, under appeal, or in dispute resolution. The company reported no material probable or estimable contingencies from these reviews as of filing. It also disclosed ordinary-course regulatory matters, litigation, and potential professional-liability and False Claims Act exposure.
- Other cash obligations include approximately $7.8 million of deferred employer Social Security taxes, with $3.9 million classified current and $3.9 million long term. The variable-rate revolver exposes Pennant to interest-rate changes.
Key facts for investors to verify
- Whether home health and hospice organic growth and acquisition integration can offset weaker senior living occupancy.
- Whether labor-cost inflation and senior living fixed costs continue to pressure margins.
- Operating cash generation as Medicare advance-payment recoupments and working-capital movements continue.
- Progress on repayment of the Medicare advances, covenant headroom, and revolver borrowing needs.
- Developments in COVID-19, reimbursement rules, government reviews, and potential claims or litigation.