Pennant Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unless otherwise stated, dollar amounts below are in millions. These are unaudited combined, pre-spin-off financial statements for businesses that were part of Ensign Group; they may not represent Pennant’s results as a standalone company.
Business context
Pennant operated home health, hospice and home care agencies, as well as senior living communities. At September 30, 2019, it had 63 agencies and 52 communities across 13 states. Ensign completed the spin-off on October 1, 2019, and Pennant began trading as PNTG.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $88.4 | $73.0 | $249.0 | $210.7 |
| Income from operations | $1.9 | $5.8 | $7.1 | $15.9 |
| Net income | $1.8 | $4.4 | $7.0 | $12.3 |
| Net income attributable to Pennant | $1.5 | $4.4 | $6.3 | $11.9 |
| Operating margin | 2.2% | 8.0% | 2.8% | 7.6% |
| Adjusted EBITDAR from Operations | $15.0 | $14.9 | $45.1 | $42.6 |
Revenue increased 21.2% in Q3 and 18.2% for the nine-month period. Growth reflected acquisitions and higher home health admissions and hospice census. Operating income and attributable net income declined, partly because general and administrative expense included spin-off costs of $3.4 million in Q3 and $8.0 million year to date. Adjusted EBITDAR is a non-GAAP measure and excludes items including rent, share-based compensation, acquisition costs and spin-off transaction costs.
Q3 cost of services rose to 77.2% of revenue from 74.2%; the nine-month ratio rose to 76.3% from 74.1%. General and administrative expense was 9.7% of revenue in Q3 versus 6.1%, and 9.5% year to date versus 6.4%, reflecting spin-off costs and the emerging standalone-company cost structure. The reported tax provision was $0.1 million for the first nine months, affected by share-based compensation tax benefits and spin-off cost treatment.
Cash flow, liquidity and obligations
- Operating cash flow was $12.2 million for the first nine months, down from $16.2 million. Investing cash use was $22.5 million, mainly for $18.8 million of acquisitions and $4.6 million of property and equipment purchases. Financing provided $10.3 million, including net investment from Ensign.
- At September 30, cash was $47,000, current assets were $33.9 million and current liabilities were $50.6 million. The filing says cash reflects funds at operations; the business participated in Ensign’s cash-management program, and no parent cash was allocated to the combined statements.
- No Ensign external debt or interest expense was allocated to Pennant in the pre-spin-off statements. Operating lease liabilities were $241.0 million, including $13.6 million current. The leases had a 12.4-year weighted-average remaining term and an 8.6% weighted-average discount rate.
- On October 1, Pennant entered a $75 million revolving credit facility and borrowed $30 million. Proceeds funded an $11.6 million dividend to Ensign, spin-off costs and working capital. The facility matures in 2024 and bears variable rates; the filing describes pricing margins of 2.5%–3.5% over LIBOR or 1.5%–2.5% over the base rate.
Outlook, risks and unusual items
- No specific company revenue or earnings guidance is provided. Management said acquired and startup operations may depress margins, as acquisitions often have lower initial occupancy or census and higher costs.
- CMS’s October 31, 2019 home health final rule implements the Patient-Driven Groupings Model (PDGM) beginning January 1, 2020. CMS estimated a 1.3% industry payment increase, including a negative 4.36% behavioral assumption; management anticipated potential revenue headwinds and payment disruption, which it aims to offset through operational changes and cost control. Requests for Anticipated Payment are phased out in 2020 and eliminated in 2021.
- Medicare and Medicaid represented 55.1% of nine-month revenue; government-program audits, reimbursement changes and recoupments are material risks. Seven operating subsidiaries had Medicare-related reviews scheduled, on appeal or in dispute resolution as of September 30.
- Other risks include labor availability and wage costs, regulation, clinical and professional liability claims, acquisition integration, and lease obligations. Fifteen communities are under two master leases where a default at one location may affect other locations. The October lease amendments were expected to increase initial annual minimum payments by about $3.6 million.
- The filing warns that spin-off costs deductible before separation may become nondeductible afterward, potentially increasing the fourth-quarter effective tax rate by 15–25%. The first standalone reporting periods will also reflect new credit, insurance, transition-services and related-party arrangements.
Important facts for investors to verify
- Standalone operating costs and cash generation after transition services and Ensign cost allocations end or change.
- Post-spin-off debt, facility borrowing, interest expense, covenants and cash available after the dividend and transaction costs.
- Lease liability and payment effects after the October 1 lease modifications, including master-lease cross-default exposure.
- Actual operational and reimbursement effects of PDGM, including admission, census, payment and cash-collection trends.
- Acquisition contribution, integration progress and margins, given the filing’s warning that acquired operations may be underperforming.
- Changes in receivables and allowance for doubtful accounts, and outcomes of the Medicare and Medicaid reviews.