Pennant Group, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Although the request metadata references 2022 Q4, the supplied filing reports annual results; it does not provide clear standalone fourth-quarter financial figures. Pennant provides home health, hospice, home care and senior living services across 14 states. At year-end it operated 95 agencies and 49 senior living communities with 3,500 units.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $473.2 million | $439.7 million |
| Income from operations | $12.7 million; 2.7% margin | $4.7 million; 1.1% margin |
| Net income | $7.2 million | $2.1 million |
| Net income attributable to Pennant | $6.6 million | $2.7 million |
| Diluted EPS | $0.22 | $0.09 |
| Cash from operating activities | $9.0 million | $(18.2) million |
Revenue increased 7.6%, primarily from organic growth. Home health and hospice revenue rose 10.6% to $342.2 million; senior living revenue was up 0.7% to $131.0 million. Consolidated cost of services was 79.6% of revenue versus 79.7% in 2021. Interest expense increased to $3.8 million from $1.9 million. Adjusted EBITDA, a non-GAAP measure, was $31.5 million versus $26.4 million; adjusted EBITDAR was $68.0 million versus $66.9 million. These adjusted measures exclude specified costs and should not be viewed as substitutes for GAAP results or cash flow.
Cash at year-end was $2.1 million. Revolver borrowings were $64.5 million gross ($62.9 million net of issuance costs), with $81.3 million of available borrowing capacity after letters of credit. The $150 million revolving facility matures in 2026; the weighted-average interest rate was 7.0%, and Pennant reported compliance with covenants. Operating lease liabilities totaled $263.7 million, including $16.6 million current; undiscounted future lease payments were $412.9 million. The company reported no dividends and no 2022 share repurchases.
Changes versus the prior year
- Operating cash flow improved by $27.3 million, from an outflow to an inflow. Cash flow was affected by repayment of Medicare advance payments, deferred payroll taxes and a transfer-related escrow payment.
- Home health and hospice admissions grew: home health admissions rose 8.2%, hospice admissions 6.4%, and hospice average daily census 0.2%. Senior living occupancy improved to 75.7% from 72.7%; monthly revenue per occupied unit rose 9.6% to $3,516.
- General and administrative expense fell 6.3% to $34.0 million, mainly due to lower stock-based compensation. Rent expense declined 7.0% to $38.0 million, primarily following community transfers.
- Pennant transferred five senior living communities to Ensign in March and April 2022; the company recorded $6.5 million for post-closing capital expenditures and operating losses. Total loss on asset dispositions and impairment was $7.0 million, compared with $2.9 million in 2021.
- The company acquired three home health agencies, four hospice agencies and one senior living community. Acquisition revenue contribution was $3.2 million; those acquisitions recorded a $0.05 million operating loss in 2022.
Outlook, risks and unusual items
- Management said existing cash, operating cash generation and revolver capacity should provide adequate liquidity for the next 12 months, including acquisition opportunities. The filing gives no specific revenue, earnings or cash-flow guidance.
- For 2023, CMS rules included a 3.8% hospice payment increase and a home health payment update that includes a 3.9% decrease to the standard 30-day rate, partly offset by a 2.9% basket increase. Management noted its estimate of the company-specific PDGM impact was a reduction of less than 1% based on 2022 case mix; CMS estimated aggregate industry payments would increase 0.7%.
- Key operating risks include dependence on Medicare and Medicaid, staffing shortages and wage inflation, reimbursement and regulatory changes, occupancy recovery, competition, long-term lease commitments, and the ability to integrate acquisitions. Medicare and Medicaid together accounted for 62.3% of revenue in 2022.
- A Medicare contractor alleged $5.1 million in extrapolated hospice overpayments after reviewing 107 patient records. Medicare payments to the affected provider resumed in May 2022; Pennant is appealing the determination and recorded an immaterial liability. The amount remained recorded as a long-term asset at year-end, and the ultimate outcome is uncertain. Eight subsidiaries also had Medicare reviews scheduled, on appeal or in dispute resolution at year-end.
- Inflation and labor pressures continued. Pennant recorded $4.2 million of state relief funds as an offset to COVID-related senior living expenses. The company said senior living occupancy improved modestly but did not indicate when it might return to pre-pandemic levels.
- The auditor issued unqualified opinions on the financial statements and internal controls. The audit identified self-insurance reserves as a critical audit matter; the recorded general/professional liability and workers’ compensation reserve was $7.5 million.
Important facts for investors to verify
- Check the status and potential financial effect of the disputed $5.1 million Medicare overpayment allegation and other ongoing reviews.
- Assess whether the operating cash-flow improvement is repeatable and monitor low cash balances, revolving debt, interest costs and covenant headroom.
- Evaluate lease obligations and senior living occupancy alongside adjusted earnings measures; adjusted EBITDAR excludes rent, a recurring operating cost.
- Track staffing and wage trends, reimbursement rule changes, and whether home health growth and senior living occupancy can sustain margins.
- Review the final impact of the Ensign community transfers, including the $6.5 million payment and related operating results.