Pennant Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Pennant provides home health, hospice, home care and senior living services through subsidiaries. At quarter-end it operated 72 agencies and 54 senior living communities. Pennant became independent on October 1, 2019, so the 2019 comparative period includes pre-spin-off combined financial information.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $98.4 | $88.4 | $283.0 | $249.0 |
| Income from operations | $4.5 | $1.9 | $14.8 | $7.1 |
| Operating margin | 4.6% | 2.2% | 5.2% | 2.8% |
| Net income | $4.4 | $1.8 | $11.7 | $7.0 |
| Basic / diluted EPS | $0.16 / $0.15 | $0.06 / $0.06 | $0.42 / $0.39 | $0.25 / $0.25 |
| Adjusted EBITDA (non-GAAP) | $8.6 | $6.5 | $27.3 | $19.7 |
| Adjusted EBITDAR (non-GAAP) | $18.2 | $15.0 | $56.4 | $45.1 |
- Revenue and segments: Q3 revenue rose 11.3%; nine-month revenue rose 13.6%. Q3 home health and hospice revenue increased 16.7% to $64.4 million; senior living revenue increased 2.4% to $34.0 million. Management attributed growth to operating performance, acquisitions and, in home health and hospice, the Medicare sequestration suspension.
- Margins and costs: Nine-month cost of services declined to 75.6% of revenue from 76.3%; general and administrative expense fell to 7.7% from 9.5%, partly reflecting $8.0 million of prior-year spin-off transaction costs. Senior living cost of services as a share of revenue increased, which management attributed to lower occupancy and COVID-19 costs. Share-based compensation rose to $6.0 million for the first nine months from $1.4 million.
- Cash flow: Operating cash flow was $53.1 million versus $12.2 million for the first nine months. The increase included $28.0 million of Medicare advance payments under the CARES Act. Investing cash outflow was $27.6 million, including $14.1 million for acquisitions and $7.7 million for property and equipment. Financing cash outflow was $17.6 million, including net revolver repayments.
- Liquidity and debt: Cash was $8.3 million at September 30, versus $0.4 million at year-end 2019. Revolver borrowings were $2.0 million gross ($0.7 million net of unamortized financing costs), with $70.0 million available under the $75.0 million facility after outstanding letters of credit. The facility matures in 2024; Pennant reported covenant compliance. Operating lease liabilities totaled $311.8 million.
- Other key metrics: Q3 home health admissions increased 21.9%, hospice admissions 25.4%, and hospice average daily census 21.8% year over year. Senior living occupancy was 76.8%, down from 79.6%.
Material changes, outlook and risks
- COVID-19: Management said home health and hospice indicators improved during Q3, while senior living occupancy remained pressured as move-outs exceeded move-ins. COVID-related costs included PPE, testing and labor; reported net COVID-19 costs were $0.9 million for the first nine months. Management cautioned that the pandemic’s duration and financial effects remained uncertain and said reported results might not indicate future performance.
- CARES Act amounts: Pennant received $28.0 million in Medicare advance payments, recorded as a contract liability. Following an October 1, 2020 law change, Medicare recoupment was scheduled to begin one year after payment, at 25% of claims for 11 months, then 50% for six months; any remaining balance would bear 4% interest. Management expected repayment within those periods. The company also deferred $5.3 million of employer Social Security taxes, payable in 2021 and 2022. It returned $9.9 million of Provider Relief Fund payments received in Q2. The temporary Medicare sequestration suspension contributed $1.7 million of revenue through September.
- Regulation and reimbursement: Medicare and Medicaid represented 60.4% of Q3 revenue and 59.3% of nine-month revenue. Home health reimbursement shifted to the PDGM model in 2020. Management identified reimbursement changes, audits, staffing availability and regulatory compliance as ongoing risks.
- Leases and contingencies: The business has substantial long-term lease commitments, including master leases; a breach at one community may affect other communities under a master lease. Five operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution; Pennant reported no material probable or estimable contingency from these reviews. The filing also describes ordinary-course litigation, regulatory audits and potential professional liability claims.
- Acquisitions and subsequent events: During the first nine months Pennant added four home health agencies, five hospice agencies and two senior living communities for an aggregate $14.5 million. After quarter-end it closed a majority-owned Scripps Health home health and hospice joint venture, paying $6.2 million, and acquired a home health agency in Oregon and a hospice agency in Nevada for a combined $13.9 million. It also announced two hospice start-ups. Management stated that existing cash, operating cash flow and financing access were expected to cover operating and growth needs for the next 12 months. No formal earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether senior living occupancy stabilizes or improves, and whether the home health and hospice recovery continues.
- The timing and cash-flow effect of Medicare advance-payment recoupments beginning in 2021, alongside deferred payroll tax obligations.
- How much reported operating cash flow reflects recurring operations versus CARES Act advances and other timing effects.
- Acquisition integration, new joint-venture performance and the effect of start-up or acquired operations on margins.
- Medicare and Medicaid reimbursement, audit outcomes and evolving COVID-19 rules; also monitor staffing, infection-control costs, lease obligations and covenant compliance.
- Non-GAAP adjusted EBITDA and EBITDAR are supplemental measures with company-defined adjustments; assess them alongside GAAP results, rent, capital spending and debt service.