Pennant Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Pennant provides home health, hospice, home care and senior living services through subsidiaries. At quarter-end it operated 88 agencies and 54 senior living communities in 14 states. Unless noted otherwise, amounts below are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $111.9 | $98.4 | $327.9 | $283.0 |
| Income from operations | $1.7 | $4.5 | $6.9 | $14.8 |
| Net income | $1.1 | $4.4 | $4.5 | $11.7 |
| Net income attributable to Pennant | $1.2 | $4.4 | $4.8 | $11.7 |
| Diluted EPS | $0.04 | $0.15 | $0.16 | $0.39 |
| Operating margin | 1.5% | 4.6% | 2.1% | 5.2% |
Revenue rose 13.7% in Q3 and 15.9% year to date. Higher home health and hospice revenue—partly from acquisitions—was offset in part by lower senior living revenue. Profitability weakened as service costs, especially wages and staffing, grew faster than revenue. Cost of services increased to 80.1% of revenue in Q3 from 76.7%, and to 79.3% year to date from 75.6%. Segment Adjusted EBITDAR from Operations, a company-defined non-GAAP measure, was $16.7 million for Q3 versus $18.4 million and $51.6 million year to date versus $56.7 million.
Segments and operating trends
- Home health and hospice: Q3 revenue increased 22.7% to $79.0 million; year-to-date revenue increased 29.4% to $231.7 million. Q3 home health admissions rose 36.1%, hospice average daily census rose 7.3%, and hospice Medicare revenue per day rose 6.1%. Management cited acquisitions and operating growth, but also staffing shortages, overtime, premium wages and COVID-related disruption.
- Senior living: Q3 revenue declined 3.2% to $32.9 million; year-to-date revenue declined 7.4% to $96.2 million. Occupancy was 73.7% in Q3 versus 76.8% a year earlier and 72.8% year to date versus 78.5%. Management reported some occupancy improvement during much of Q3, followed by a decline in September.
- Acquisitions: Pennant added five home health, four hospice and two home care agencies in the first nine months; aggregate purchase price was approximately $14.1 million. Management cautioned that acquired and start-up operations can weigh on margins.
Cash flow, balance sheet and liquidity
- Cash flow: Operating activities used $13.1 million in the first nine months, compared with $53.1 million provided in 2020. Management attributed much of the change to CARES Act advance-payment recoupments: excluding those repayments, operating cash flow would have been $1.6 million positive. Investing activities used $18.1 million, including $13.6 million for acquisitions and $4.1 million for property and equipment. Financing activities provided $34.8 million.
- Cash and liquidity: Cash was $3.7 million at September 30, 2021. The revolving facility had $45.0 million drawn and $101.7 million available, net of letters of credit. Management said cash, operating cash generation and financing access should support operations and growth needs for the next 12 months.
- Debt: Net long-term debt was $42.7 million, versus $8.3 million at December 31, 2020. The revolving facility’s borrowing capacity was increased to $150 million; it matures in 2026. The weighted average interest rate was 2.97%, and Pennant reported compliance with financial covenants.
- Leases: Operating lease liabilities totaled $302.6 million, including $287.2 million long term. The company leases its communities and offices; 31 communities are leased from Ensign subsidiaries.
- Other balance-sheet items: Total assets were $529.2 million and equity was $113.8 million. Accounts receivable, net, was $53.4 million. Medicare and Medicaid accounted for 62.2% of Q3 revenue and 62.6% year to date.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management described continued uncertainty from COVID-19 and noted that results may not indicate full-year or future performance.
- Management identified labor availability and cost, employee turnover, COVID-19 variants, vaccine mandates, and senior living occupancy as significant operating uncertainties. Staffing pressure and reduced elective procedures affected home health admissions; occupancy remained below prior-year levels.
- CMS had recouped $14.6 million of the $28.0 million in prior-year accelerated/advance payments by September 30, 2021. Pennant expected repayment to finish within the applicable recoupment periods. The filing also reports $7.8 million of deferred employer Social Security taxes, with portions due in 2021 and 2022.
- One hospice provider number remained subject to a Medicare payment suspension while a UPIC reviewed 42 patient records. Suspended payments totaled $2.7 million at September 30; the filing says this is not an overpayment finding and the timing of the review’s conclusion was unknown. Eight subsidiaries had Medicare or Medicaid reviews scheduled, on appeal or in dispute resolution.
- Additional risks include government reimbursement and regulatory changes, ordinary-course litigation and claims, lease obligations, and exposure to variable interest rates. Pennant reported no material impairment of goodwill or indefinite-lived intangibles.
Key facts for investors to verify
- Whether wage, overtime and temporary-staffing costs continue to compress margins, and whether senior living occupancy recovers.
- Progress and final outcome of the hospice payment suspension and other government reviews, including any resulting recoupments.
- Operating cash flow after CARES Act advance-payment offsets and the company’s ability to fund acquisitions while servicing debt and lease commitments.
- Acquisition contribution to organic growth and profitability, and the performance of recently acquired and start-up operations.
- Developments in federal and state vaccination rules, workforce retention, Medicare/Medicaid reimbursement and COVID-related waivers.