Pennant Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in millions of dollars unless stated otherwise. Pennant provides home health, hospice, home care, and senior living services through independent operating subsidiaries. At quarter-end it operated 103 agencies and 51 senior living communities.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $140.2 | $118.4 | $398.9 | $348.6 |
| Income from operations | $7.1 | $7.1 | $17.6 | $6.4 |
| Net income attributable to Pennant | $4.4 | $4.8 | $9.0 | $3.2 |
| Diluted EPS | $0.15 | $0.16 | $0.30 | $0.10 |
| Operating cash flow | — | — | $27.9 | $13.0 |
Q3 revenue increased 18.5% year over year, while operating income was nearly flat and Pennant-attributable net income declined. Q3 operating margin was 5.0%, compared with 6.0%; diluted EPS was $0.15 versus $0.16. For the first nine months, revenue grew 14.4%, operating margin improved to 4.4% from 1.8%, and Pennant-attributable net income rose. The year-to-date comparison benefited from the absence of the $6.7 million asset disposition and impairment loss recorded in 2022.
- Home health and hospice: Q3 revenue was $101.5 million, up 18.3%. Hospice average daily census increased 17.7%, and hospice Medicare revenue per day rose 4.0%. Home health admissions increased 6.7%; Medicare home health admissions were essentially flat.
- Senior living: Q3 revenue was $38.7 million, up 18.9%. Occupancy increased to 78.9% from 76.5%, and average monthly revenue per occupied unit rose 12.1% to $3,991.
- Cost and margins: Q3 cost of services rose 18.7%, slightly faster than revenue; as a share of revenue it increased to 80.2% from 80.0%. Management attributed pressure in home health and hospice partly to higher wages, benefits, and staffing costs. Senior living cost of services as a share of revenue improved.
- Non-GAAP measures: Consolidated Adjusted EBITDA was $10.9 million in Q3 and $28.9 million year to date; Consolidated Adjusted EBITDAR was $20.6 million and $57.3 million, respectively. These measures exclude or adjust for items and, in the case of EBITDAR, rent; they are not substitutes for GAAP results or cash flow.
Cash, debt, and liquidity
- Cash was $3.4 million at September 30, 2023, versus $2.1 million at December 31, 2022. Nine-month operating cash flow was $27.9 million; investing cash use was $17.6 million and financing cash use was $9.0 million.
- Long-term debt, net of financing costs, was $53.8 million, compared with $62.9 million at year-end. The revolving facility has $150 million of capacity; $90.8 million was available after outstanding letters of credit. The weighted-average debt rate was 8.17%, and maturity is in 2026. Pennant reported compliance with its financial covenants.
- Operating lease liabilities totaled $265.9 million, including $16.3 million current. The company’s long-term leases and rent obligations are significant relative to its debt.
- Management stated existing cash, operating cash generation, and available facility capacity should provide adequate liquidity for the next 12 months, including acquisition opportunities.
Changes, outlook, and risks
- During the first nine months, Pennant added three home health agencies, three hospice agencies, two home care agencies, and two senior living communities. It spent $11.7 million on business acquisitions. After quarter-end, it acquired three hospice agencies for a total purchase price of $6.6 million.
- Management reported improving senior living occupancy but said it is uncertain when occupancy will return to pre-pandemic levels. It also cautioned that newly acquired, start-up, or turnaround operations can have lower census or occupancy and higher costs, leading to fluctuating margins. The filing provides no quantified company earnings or revenue guidance.
- CMS’s FY2024 hospice rule provides a 3.1% payment update, subject to quality-reporting requirements; failure to meet those requirements can reduce the update by 4%. The finalized CY2024 home health rule estimates a 0.8% aggregate payment increase for the sector, reflecting offsetting adjustments.
- Regulatory and reimbursement exposure is material: nine operating subsidiaries had Medicare or Medicaid reviews scheduled, on appeal, or in dispute resolution. A hospice provider’s $5.1 million payment suspension was terminated; $3.2 million had been refunded during the first nine months, with $1.9 million still under appeal. The company said it cannot predict the timing or outcome.
- Other notable risks include government reimbursement changes and audits, staffing costs and shortages, litigation and professional-liability exposure, lease commitments, interest-rate sensitivity, and union activity. A 1 percentage-point interest-rate change would affect annual interest expense by approximately $0.6 million, based on quarter-end debt.
- Q3 G&A expense rose 60.2%, primarily because Q3 2022 included a $3.8 million reduction in share-based compensation expense following an RSU modification. No shares were repurchased under the $1.0 million authorization, which was set to expire December 12, 2023.
Investor verification points
- Assess whether revenue growth and improving occupancy can outpace wage and staffing-cost inflation, especially in home health and hospice.
- Review cash conversion, acquisition spending, and the effect of working-capital movements on operating cash flow.
- Monitor revolving-facility borrowing costs, covenant headroom, and the substantial long-term lease commitments.
- Track Medicare and Medicaid reviews, including the remaining $1.9 million hospice recoupment appeal and any wider effects from audit findings.
- Confirm acquisition integration, preliminary purchase-price allocations for post-quarter acquisitions, and the performance of newer or transitioning operations.
- Verify the implementation and financial implications of CMS’s 2024 payment and hospice quality rules.