Pennant Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 11, 2020. Amounts below are in millions of dollars unless noted. Pennant provides home health, hospice, home care and senior living services through subsidiaries. At quarter-end it operated 67 agencies and 54 senior living communities. The 2019 comparative period predates the October 2019 spin-off, so some corporate costs and financial presentation differ.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue | $92.7 | $82.7 | +12.1% |
| Income from operations | $6.1 | $3.3 | +83% |
| Net income attributable to Pennant | $4.3 | $3.5 | +24% |
| Diluted EPS | $0.15 | $0.13 | +$0.02 |
| Operating margin | 6.6% | 4.0% | +2.6 percentage points |
| Adjusted EBITDAR from operations | $20.6 | $15.4 | +34% |
For the six months, revenue was $184.6 million (+14.9%), operating income $10.3 million (versus $5.1 million), net income $7.3 million (versus $5.2 million), and diluted EPS $0.25 (versus $0.19). Six-month adjusted EBITDAR from operations was $38.1 million, compared with $30.0 million. Adjusted EBITDAR is a non-GAAP measure; it excludes rent and specified costs, among other items, and should not be read as cash flow or GAAP earnings.
- Revenue mix and operating trends: Q2 home health and hospice revenue rose 15.5% to $58.0 million, led by hospice (+29.4%); home health admissions fell 8.2%, while average Medicare revenue per completed episode rose 7.9%. Hospice admissions increased 20.7% and average daily census 18.3%. Senior living revenue rose 6.9% to $34.8 million, but occupancy declined to 78.5% from 80.3%.
- Profitability: Q2 cost of services increased 8.1%, slower than revenue growth, and fell to 73.5% of revenue from 76.2%. COVID-related costs and supplies were $1.4 million in Q2. Six-month general and administrative expense declined to $14.2 million from $15.1 million, mainly because the 2019 period included $4.6 million of spin-off transaction costs; increased share-based compensation partly offset the reduction.
- Cash flow: Operating cash flow was $43.4 million for the first half, versus $4.0 million. This included $28.0 million in CARES Act Medicare advance payments, which are repayable through claim offsets; therefore the increase does not represent recurring operating cash generation alone. Investing cash outflow was $13.8 million, including $6.9 million for acquisitions and $6.0 million for property and equipment. Cash increased by $11.7 million to $12.1 million.
- Debt and liquidity: The company had $2.0 million outstanding on its $75 million revolving facility at June 30 (debt net of issuance costs was $0.6 million), with approximately $70.0 million available after letters of credit. It reported compliance with facility covenants. The facility matures in 2024; its weighted-average interest rate was 4.8%. Operating lease liabilities totaled $314.0 million, including $13.4 million current and $300.6 million long-term.
Material changes, outlook and risks
- COVID-19: Home health admissions weakened in late March and more sharply in April as elective procedures were delayed, then stabilized and improved in May and June; management said census had not returned to pre-pandemic levels. Senior living occupancy also softened as move-ins lagged move-outs. Management described continued uncertainty and said the pandemic could adversely affect results beyond Q2. No quantitative earnings guidance was provided.
- CARES Act support: Pennant returned $9.9 million of Provider Relief Fund payments. Separately, it received $28.0 million in Medicare advance payments and used the proceeds, together with operating cash, to reduce revolver borrowings. Recoupment through claims offsets began in August, with full repayment expected by November 2020. The temporary 2% Medicare sequestration suspension contributed $0.6 million of revenue through June 30; employer payroll taxes of $2.5 million were deferred.
- Costs and reimbursement: Management cited higher overtime, premium and temporary staffing costs and greater PPE needs, while also reducing discretionary spending and delaying nonessential capital projects. Medicare and Medicaid accounted for 59.4% of Q2 revenue. The new home health PDGM payment model began in 2020; future reimbursement changes, audits and claim adjustments may affect results.
- Expansion: First-half acquisitions added one home health agency, three hospice agencies and two senior living communities for $7.3 million. After quarter-end, Pennant closed on four agencies for $6.25 million and expected to close a separately signed $7.4 million Nevada hospice acquisition in 2020, subject to customary conditions. A Scripps Health home health joint venture was expected to finalize in Q4 2020, subject to closing conditions.
- Other exposures: Risks include changing COVID-related regulations, staffing and supply constraints, liability and potential COVID-related litigation, government reimbursement reviews, and lease obligations. Six operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution; Pennant reported no probable or estimable contingency for those reviews. No goodwill or intangible impairment was recorded.
Important facts for investors to verify
- Whether home health admissions and senior living occupancy recover, and whether hospice growth continues.
- Timing and cash-flow impact of the $28.0 million Medicare advance-payment recoupment; distinguish it from the returned $9.9 million Provider Relief Fund payment.
- Whether COVID-related labor, PPE and other costs persist or increase, and how they compare with the company’s adjusted measures.
- Effects of PDGM and other Medicare/Medicaid rate, audit and recoupment changes on revenue and collections.
- Liquidity and covenant headroom after acquisition spending, alongside substantial long-term lease commitments.
- Completion and integration of announced acquisitions and the Scripps joint venture, including their effect on margins and cash requirements.