Pennant Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Pennant provides home health, hospice, home care and senior living services through independent operating subsidiaries. At quarter-end it operated 89 home health, hospice and home care agencies and 48 senior living communities.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $116.3 | $110.3 | $230.2 | $216.0 |
| Operating income (loss) | $(3.1) | $3.6 | $(0.8) | $5.2 |
| Net income (loss) | $(2.6) | $2.5 | $(1.4) | $3.4 |
| Net income (loss) attributable to Pennant | $(2.7) | $2.7 | $(1.7) | $3.6 |
| Diluted earnings (loss) per share | $(0.09) | $0.09 | $(0.06) | $0.12 |
| Operating cash flow | Not stated by quarter | $4.9 | $(11.8) |
Q2 cost of services was 79.7% of revenue, up from 78.5%; six-month cost of services was 79.5%, up from 78.8%. Operating margins were negative 2.7% for Q2 and negative 0.4% year to date, compared with positive 3.2% and 2.4%, respectively, in 2021. Reported results included a $6.6 million loss on asset dispositions and impairment related to the transfer of senior living operations to Ensign, including a $6.5 million post-closing payment for capital expenditures and operating losses at one community.
Cash and current assets were $3.2 million and $74.6 million at June 30; current liabilities were $74.9 million. Revolver borrowings were $55.0 million gross ($53.1 million net of issuance costs), with $90.8 million of available capacity after letters of credit. The $150 million facility matures in 2026; the weighted-average borrowing rate was 4.67%, and the company reported compliance with its financial covenants. Operating lease liabilities totaled $260.3 million, including $15.7 million current. Management said cash, operating cash generation and financing access should meet operating and growth needs for the next 12 months.
Changes versus the prior comparable period
- Revenue increased 5.4% in Q2 and 6.6% for the first half. Home health and hospice revenue rose 9.3% in Q2 and 8.6% year to date; senior living revenue fell 3.9% in Q2 but rose 1.8% for the first half.
- Home health and hospice growth reflected higher admissions and reimbursement per service. Q2 Medicare home health admissions rose 6.3%, and average Medicare revenue per completed 60-day episode rose 7.1%. Hospice admissions rose 3.5%, while average daily census declined 0.5%.
- Senior living occupancy improved to 76.5% in Q2 from 72.7% a year earlier; average monthly revenue per occupied unit increased 9.3%. Revenue was nevertheless affected by the transfer of five communities to Ensign, completed in phases in March and April. The reported community count declined from 54 to 48.
- Higher wages and staffing costs pressured service margins. Q2 general and administrative expense rose 10.9%, reflecting wage and benefit costs, increased headcount and implementation of financial and accounting systems.
- Cash from operations improved by $16.7 million year over year for the first half. Management attributed the improvement to factors including collections and accrued liabilities; reported cash flow also reflected $6.2 million of CARES Act advance-payment recoupments. Management estimated operating cash flow excluding those recoupments at $11.1 million.
- Non-GAAP adjusted EBITDA was $7.6 million in Q2 versus $8.6 million, and $13.8 million for the first half versus $14.9 million. These measures exclude specified items; they are not substitutes for GAAP results or cash flow.
Outlook, commentary and risks
- No company earnings or revenue guidance is provided in the filing. Management described modest improvement in senior living occupancy but said timing of a sustained recovery to pre-pandemic levels is uncertain. It also noted continuing labor shortages, wage increases, overtime, premium pay and temporary staffing costs.
- A proposed 2023 home health Medicare rule would reduce the standard payment rate by 7.7% for assumed PDGM behavior changes and include a temporary adjustment to recover prior overpayments; the filing cites a proposed aggregate payment decrease of 4.2%. The proposal could change before finalization. The 2023 hospice final rule provides a 3.8% payment increase, subject to its provisions.
- Medicare and Medicaid accounted for 62.8% of Q2 revenue and 62.4% of first-half revenue. Government reimbursement changes, audits and recoupments are material risks.
- A Medicare integrity contractor ended a payment suspension of one hospice provider in May 2022. The company reported $4.885 million of suspended payments due to it and an alleged $5.165 million in sampled and extrapolated overpayments. It is contesting the findings; the filing says the outcome and timing are uncertain and that only an immaterial liability had been accrued.
- Other risks include COVID-19 effects, vaccination requirements, staffing and retention, inflation and rising interest rates, regulatory scrutiny, professional and other litigation, and long-term lease commitments. The company also reported $4.129 million of deferred employer Social Security taxes remaining due in 2022.
- After quarter-end, Pennant agreed to operate a senior living community in Boise under a long-term lease and operating service agreement, adding 100 units. It also disclosed a July 2022 equity-award modification and new restricted stock awards.
Most important facts for investors to verify
- Whether the reported operating and net losses are primarily attributable to the senior living transfer charge and what ongoing results look like excluding that unusual item.
- The outcome, potential recoupment and cash-collection timing related to the $5.165 million hospice overpayment allegation and $4.885 million of suspended Medicare payments.
- The final 2023 home health reimbursement rule and its effects on revenue, margins and the company’s service mix.
- Whether staffing costs and senior living occupancy improve enough to support margins, and how much of operating cash flow is recurring rather than driven by working-capital movements.
- Liquidity and covenant headroom, including the floating-rate exposure on revolver borrowings, lease obligations and remaining deferred payroll taxes.