Pennant Group, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited quarterly results, including Q4 2019. Pennant completed its spin-off from The Ensign Group on October 1, 2019; historical results before that date are combined results from operations within Ensign, so standalone comparability is limited.
Business context
Pennant provides home health, hospice, home care and senior living services across 13 states. At year-end it operated 63 home health, hospice and home care agencies and 52 senior living communities with 3,963 units. FY 2019 revenue was 61.0% home health and hospice and 39.0% senior living. Medicare and Medicaid together represented 55.6% of revenue; Medicare alone represented 41.9%.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $338.5 million | $286.1 million |
| Income from operations | $5.7 million; 1.7% margin | $20.6 million; 7.2% margin |
| Net income | $3.2 million; 0.9% margin | $16.3 million; 5.7% margin |
| Net income attributable to Pennant | $2.5 million; $0.11 diluted EPS | $15.7 million; $0.58 diluted EPS |
| Operating cash flow | $9.6 million | $23.3 million |
| Cash at year-end | $0.4 million | $0.04 million |
Revenue grew 18.3%, including $18.6 million from acquired operations. Home health and hospice revenue rose 22.2%; senior living revenue rose 12.7%. Home health admissions increased 24.2%, hospice average daily census increased 26.4%, and senior living occupancy improved to 80.2% from 79.5%.
Profitability weakened despite revenue growth. Cost of services rose 21.9% and increased to 76.5% of revenue from 74.3%. General and administrative expense increased to $35.1 million from $18.8 million, primarily reflecting $13.2 million of spin-off transaction costs. The company also reported a $2.1 million tax provision; approximately $10.3 million of spin-off costs were nondeductible, raising the effective tax rate to 39.6%.
Management’s segment measure, Adjusted EBITDAR from Operations, was $62.1 million versus $57.5 million. This non-GAAP measure excludes rent and other specified items; it should not be treated as a substitute for GAAP operating income or cash flow. Senior living cost of services rose to 64.4% of segment revenue from 59.9%, reflecting acquired communities and added field resources.
Debt, liquidity and cash flows
- Pennant had $20.0 million drawn on its $75.0 million revolving facility at year-end, with $51.987 million of availability after letters of credit. The facility matures in 2024; the weighted-average rate on outstanding debt was 4.7%. Pennant reported compliance with its loan covenants.
- Operating cash flow fell to $9.6 million from $23.3 million. Investing activities used $26.5 million, including $18.8 million for acquisitions and $6.7 million for property and equipment. Financing activities provided $17.3 million.
- Year-end current assets were $38.7 million and current liabilities were $51.2 million. Cash was limited, making operating cash generation and revolver availability relevant to liquidity.
- Operating lease liabilities were $316.3 million, including $12.3 million current; undiscounted minimum lease payments totaled $568.8 million. Pennant leases all senior living communities, with many long-term triple-net leases.
Material changes, outlook and risks
- The October 2019 spin-off established Pennant as an independent public company. The company entered into a two-year transition services agreement with Ensign and continues to rely on specified post-spin-off agreements and relationships.
- CMS’s Patient-Driven Groupings Model (PDGM) took effect January 1, 2020, changing home health payment periods to 30 days and reducing anticipated payments in 2020, with those payments eliminated in 2021. Management said it was preparing for the change and expected to offset potential negative effects through operational adjustments and cost control; it also noted possible revenue headwinds and collection delays.
- Management cited acquisition and organic growth opportunities, including acquisitions of two senior living operations, two home health agencies, five hospice agencies and two home care agencies in 2019. Subsequent to year-end, Pennant acquired three operations and announced a planned home health joint venture with Scripps Health, subject to closing conditions.
- Key risks include dependence on Medicare and Medicaid reimbursement, changing payment rules, staffing shortages and wage pressure, regulatory audits and potential recoupments, acquisition integration, litigation and insurance costs, cyber incidents, and lease and debt obligations. Eight operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution at year-end; the company reported no probable or estimable contingencies for those reviews through the filing date.
- Management stated that existing cash, operating cash generation and financing access should be sufficient for operating needs, anticipated capital expenditures and growth. The filing provides no specific earnings or revenue guidance. Pennant did not intend to pay dividends for the foreseeable future.
Q4 2019 snapshot
Q4 revenue was $89.5 million. The quarter reported a net loss of $3.8 million, or a $0.14 loss per share, compared with net income of $4.0 million and $0.14 earnings per share in Q4 2018. The filing attributes the full-year earnings decline principally to spin-off costs and higher expenses; the text does not isolate a complete explanation of the Q4 loss.
Important facts for investors to verify
- How PDGM affected home health reimbursement, volumes and cash collections after its January 2020 implementation, including the RAP phase-down.
- Whether revenue growth translates into stronger GAAP earnings and operating cash flow after one-time spin-off costs, and how much recurring standalone corporate expense remains.
- Acquisition performance and integration, particularly senior living cost trends, occupancy and returns on acquired businesses.
- Current revolver borrowing, covenant headroom, lease commitments and the company’s ability to fund growth while maintaining liquidity.
- Outcomes of Medicare reviews, any repayment obligations, and other regulatory, litigation or insurance contingencies.
- Effects of Ensign transition and related-party arrangements on costs and operations; also note that the 2019 filing did not include management’s assessment or auditor attestation of internal control over financial reporting due to the newly public company transition period.