Pennant Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted. Pennant provides home health, hospice, home care and senior living services through independent operating subsidiaries. At quarter-end it operated 80 agencies and 54 senior living communities.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $105.7 million | $91.8 million |
| Income from operations | $1.6 million | $4.3 million |
| Net income | $0.9 million | $3.0 million |
| Net income attributable to Pennant | $0.95 million | $2.98 million |
| Basic / diluted EPS | $0.03 / $0.03 | $0.11 / $0.10 |
| Net cash from (used in) operating activities | $(7.3) million | $2.1 million |
- Revenue increased 15.0% year over year, while operating income declined 62% and Pennant-attributable net income fell about 68%.
- Operating margin was 1.5%, versus 4.7%; net margin was 0.9%, versus 3.2%. Cost of services rose to 79.1% of revenue from 76.4%, and general and administrative expense increased to $9.3 million from $6.7 million.
- Segment Adjusted EBITDAR from Operations, a non-GAAP measure, was $16.2 million, down from $17.3 million. Home health and hospice segment Adjusted EBITDAR increased to $13.8 million from $9.7 million; senior living fell to $8.8 million from $12.4 million. Corporate “All Other” costs were $6.4 million, compared with $4.8 million.
- Cash was $5.6 million at March 31, 2021, versus $43,000 at year-end. Current assets were $71.7 million and current liabilities $88.4 million. Operating lease liabilities totaled $308.9 million, including current liabilities.
- Long-term debt, net of unamortized financing costs, was $25.0 million; revolving-credit borrowings were $27.5 million. The amended facility has $150 million of capacity, with $119.2 million available after outstanding letters of credit. The weighted-average interest rate was 3.33%; Pennant reported compliance with its financial covenants.
- Cash used in investing activities was $4.0 million, including $3.1 million for acquisitions; financing activities provided $16.8 million. Pennant reported no material impairment charges.
Material changes and operating trends
- Home health and hospice revenue increased 31.4% to $74.6 million, including growth from acquired operations and improved operating performance. Home health admissions rose 48.3%, Medicare home health admissions 60.1%, hospice admissions 28.5%, and hospice average daily census 23.4%.
- Senior living revenue decreased 11.5% to $31.1 million. Occupancy fell to 72.1% from 80.2%; average monthly revenue per occupied unit was $3,186, compared with $3,206. Lower occupancy reduced revenue without a corresponding reduction in costs.
- Q1 acquisitions added two home health and two hospice agencies for an aggregate purchase price of $3.7 million. After quarter-end, Pennant announced acquisitions of three home health and two home care agencies for $5.0 million.
- Operating cash flow turned negative from positive a year earlier. Management attributed the change primarily to lower net income and timing of prepaid expenses, wage payments and rent payments.
- In February 2021, Pennant amended its revolving credit agreement, increasing capacity from $75 million to $150 million and extending maturity to 2026.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management said existing cash, operating cash generation and access to financing were expected to fund operations and growth needs and provide adequate liquidity for the next 12 months.
- Management cautioned that COVID-19 continued to affect operations and that results may not indicate future performance. Senior living occupancy had declined during the pandemic; timing of stabilization or recovery was uncertain. Staffing pressures, overtime, temporary labor, PPE and testing costs remained concerns.
- Pennant received $28.0 million of Medicare accelerated/advance payments in the prior year, recorded as a contract liability. Automatic recoupment began in April 2021 at 25% of Medicare payments for 11 months, rising to 50% for a further six months if needed; any remaining balance would bear 4% interest. Management expected repayment within the recoupment periods.
- Q1 included $0.9 million of revenue from the suspension of Medicare sequestration reductions. The suspension was extended through December 31, 2021. The company also deferred approximately $7.8 million of employer Social Security taxes, with half due by the end of 2021 and half by the end of 2022.
- Eight operating subsidiaries had Medicare or Medicaid reviews scheduled, on appeal or in dispute resolution. Pennant reported no material probable or estimable contingency from those reviews as of filing. It also cited exposure to regulatory audits, reimbursement changes, professional-liability and other litigation, labor shortages, lease obligations, and acquisition integration risks.
- Medicare and Medicaid represented 64.0% of Q1 revenue, up from 57.9%. This concentration exposes revenue and receivables to government reimbursement policy, audits and collection timing.
Key facts for investors to verify
- Whether home health and hospice growth and operating improvements can offset continued senior living occupancy weakness and lower consolidated margins.
- The pace of senior living occupancy recovery and the related effect on segment profitability.
- Operating cash flow and working-capital trends, particularly receivables, accrued wages and prepaid expenses.
- Medicare advance-payment recoupment progress, alongside deferred payroll-tax obligations and available revolver capacity.
- Acquisition integration, purchase-price allocations, and the impact of new operations on costs and margins.
- Government reimbursement and audit developments, including the outcome of reviews at the eight subsidiaries.