The Pennant Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Pennant provides home health, hospice, home care and senior living services through independent subsidiaries. At quarter-end, it operated 94 agencies and 49 senior living communities across 14 states.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $118.4 | $111.9 | $348.6 | $327.9 |
| Income from operations | $7.1 | $1.7 | $6.4 | $6.9 |
| Net income attributable to Pennant | $4.8 | $1.2 | $3.2 | $4.8 |
| Diluted EPS | $0.16 | $0.04 | $0.10 | $0.16 |
| Operating margin | 6.0% | 1.5% | 1.8% | 2.1% |
- Revenue mix and growth: Q3 revenue rose 5.7%; nine-month revenue rose 6.3%. Home health and hospice revenue increased 8.6% in both comparisons. Senior living revenue declined 1.1% in Q3, but increased 0.8% for the nine months.
- Operating drivers: Q3 home health admissions increased 10.2%, hospice admissions 7.8%, senior living occupancy was 76.5% versus 73.7%, and monthly revenue per occupied unit rose 12.2%. Hospice average daily census fell 1.9% to 2,293.
- Costs and unusual items: Q3 G&A expense fell 35.2%, primarily due to a $3.8 million net reduction in stock-based compensation expense following an RSU modification. Nine-month results included a $6.7 million loss on asset dispositions and impairment, including a $6.5 million post-closing payment related to senior living communities transferred to Ensign.
- Cash flow: Nine-month operating cash flow was $13.0 million, versus cash used of $13.1 million in 2021. Investing used $20.2 million, including $10.4 million of capital expenditures and $9.7 million for acquisitions. Financing provided $5.0 million. Cash declined $2.2 million to $3.0 million.
- Debt and liquidity: Revolver borrowings were $57.5 million gross ($55.8 million net of issuance costs); the $150 million facility had $88.3 million available, net of letters of credit. Weighted-average borrowing rate was 5.27%; maturity is 2026. Pennant reported compliance with financial covenants. Operating lease liabilities totaled $265.4 million.
Changes, outlook and risks
- Growth in home health admissions and revenue per episode supported results; wage-rate increases pressured nine-month service costs. Senior living occupancy improved, but remained below pre-pandemic levels. Communities transferred to Ensign reduced the senior living footprint from 54 to 49.
- Pennant acquired two home health agencies, four hospice agencies and one senior living community during the first nine months. It acquired another home health agency in Wisconsin on November 1, 2022, for $0.45 million.
- Management said existing cash, operating cash generation and financing access should be sufficient for operating activities and growth needs over the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management cited continuing labor shortages, higher wages, overtime and temporary staffing, COVID-19 impacts, and uncertainty around senior living occupancy. Risks also include Medicare and Medicaid reimbursement changes, regulatory reviews, acquisition integration, inflation and rising interest rates.
- A UPIC review alleged approximately $5.2 million of hospice Medicare overpayments using sampled and extrapolated claims; Medicare payments had been withheld. Pennant is appealing, and an October 2022 redetermination reversed the allegation for half the claims in one sample. The company stated it could not predict the review’s ultimate outcome.
- CMS’s 2023 hospice rule included a 3.8% payment increase. The filing discusses a proposed home health payment reduction and also references a 3.9% decrease in its risk disclosures; investors should verify the applicable final rule and timing. Waiver expirations and Medicare recoupments could also affect costs and reimbursement.
Important facts to verify
- Progress and financial exposure from the hospice UPIC audit, including the appeal and withheld payments.
- Final home health reimbursement changes, their effective dates and impact on Pennant’s payer mix and revenue.
- Whether senior living occupancy and hospice census continue to recover, and whether labor-cost pressure eases.
- Cash generation, capital spending and revolver usage, given low cash balances and substantial lease commitments.
- The extent to which Q3 earnings improvement depended on the one-time stock-compensation credit and other adjustments.