Pennant Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Dollar figures are in millions unless noted. Pennant provides home health, hospice, home care and senior living services through independent subsidiaries; at quarter-end it operated 101 agencies and 51 senior living communities.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $132.3 | $116.3 | $258.7 | $230.2 |
| Income (loss) from operations | $6.3 | $(3.1) | $10.5 | $(0.8) |
| Net income (loss) attributable to Pennant | $2.8 | $(2.7) | $4.6 | $(1.7) |
| Diluted EPS | $0.09 | $(0.09) | $0.15 | $(0.06) |
| Operating margin | 4.7% | (2.7%) | 4.0% | (0.4%) |
- Q2 revenue increased 13.7%; first-half revenue increased 12.4%. Growth reflected operating volume and rate gains, acquisitions, and higher senior living occupancy and resident revenue.
- Cost of services rose faster than revenue: to 80.4% of revenue in Q2 from 79.7%, and to 80.7% for the first half from 79.5%. Management cited wage and benefit pressure, particularly in home health and hospice.
- Q2 general and administrative expense decreased 9.7% to $8.8 million; first-half expense decreased 11.5% to $17.5 million, primarily due to lower share-based compensation. Prior-year operating results included a $6.6 million loss related to senior living operations transferred to Ensign.
- First-half operating cash flow was $15.5 million, versus $4.9 million a year earlier. Investing used $11.2 million, including $7.3 million of acquisition payments and $4.0 million of capital expenditures. Cash increased $0.8 million to $2.8 million.
- At June 30, long-term debt, net, was $59.2 million; revolving-facility borrowings were $60.5 million. The $150 million facility had $85.3 million available after letters of credit. Weighted-average debt interest rate was 7.97%; all financial covenants were met. The facility matures in 2026 and now references SOFR.
- Operating lease liabilities totaled $263.7 million, including $17.4 million current. Total assets were $515.4 million and current liabilities were $68.5 million. Medicare and Medicaid represented 62.8% of Q2 revenue and 62.4% of first-half revenue.
Operating trends and material changes
- Home health and hospice revenue increased 11.3% in Q2 and 12.2% in the first half. Q2 hospice admissions rose 9.6%, average daily census rose 9.1%, and Medicare revenue per day rose 7.4%. Home health admissions rose 3.8% in Q2.
- Senior living revenue increased 20.3% in Q2 and 12.8% in the first half. Occupancy was 78.0% in Q2 versus 76.5% a year earlier; average monthly revenue per occupied unit was $3,939 versus $3,470.
- First-half acquisitions added three home health agencies, one hospice agency, two home care agencies and two senior living communities. Business-combination purchase price was $7.3 million; acquired goodwill was $4.1 million.
- Senior living occupancy improved, but management said it could not determine when occupancy would return to pre-pandemic levels. Newly acquired, start-up and turnaround operations may have lower occupancy or census, higher costs, and fluctuating margins.
Outlook, risks and unusual items
- The filing provides no quantified company earnings or revenue guidance. Management said cash, operating cash generation and available revolver capacity should cover operating needs and acquisition opportunities for the next 12 months.
- CMS’s July 2023 final hospice rule set a 3.1% FY2024 payment update, subject to quality-reporting requirements. A proposed 2024 home health rule estimated an aggregate Medicare payment decrease of 2.2%; it was not final at the filing date and was subject to industry litigation and comment.
- Ten operating subsidiaries had Medicare or Medicaid reviews scheduled, on appeal or in dispute resolution. One hospice provider’s Medicare payments remain subject to a disputed $5.1 million extrapolated overpayment recoupment; Pennant is appealing and cannot predict timing or outcome.
- Key risks include reimbursement and cost-containment changes, regulatory audits and possible payment recoupments, staffing and wage costs, senior living occupancy, long-term leases, acquisition integration, and professional liability and other litigation. A 1 percentage-point interest-rate change would alter annual interest expense by about $0.6 million at period-end debt levels.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No shares were repurchased under the $1.0 million authorization, which expires December 12, 2023.
Investor verification points
- Track final CMS home health reimbursement policy and the potential effect on Medicare revenue; verify hospice quality-reporting compliance.
- Review the status and financial exposure of the $5.1 million hospice recoupment appeal and other provider reviews.
- Assess whether revenue growth can outpace wage and service-cost inflation, especially in home health and hospice.
- Monitor senior living occupancy, acquisition performance, cash generation, variable-rate debt costs and substantial lease commitments.