Pennant Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this annual filing does not provide standalone fourth-quarter results. Pennant operates home health, hospice and home care agencies, plus assisted, independent and memory-care communities. At year-end it had 76 agencies and 54 senior living communities with 4,127 units across 14 states.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $391.0 million | $338.5 million |
| Income from operations | $18.9 million (4.8% of revenue) | $5.7 million (1.7%) |
| Net income attributable to Pennant | $15.7 million | $2.5 million |
| Diluted EPS | $0.52 | $0.11 |
| Operating cash flow | $50.2 million | $9.6 million |
- Revenue grew 15.5%: $33.2 million from organic growth and $19.2 million from acquired operations. Home health and hospice revenue rose 22.8% to $253.7 million; senior living revenue increased 4.1% to $137.3 million.
- Home health and hospice segment adjusted EBITDAR was $49.5 million, versus $33.4 million; senior living was $48.3 million, versus $47.3 million. These are non-GAAP segment measures and exclude specified costs.
- Senior living occupancy fell to 77.7% from 80.2%; average monthly revenue per occupied unit rose 2.2% to $3,188. Home health and hospice admissions and census increased year over year.
- Operating cash flow included $28.0 million in Medicare advance payments that must be repaid through future claim offsets. Cash at year-end was $43,000. Investing cash outflow was $41.6 million, including $33.2 million of acquisition payments; financing cash outflow was $8.9 million.
- Year-end revolving-credit borrowings were $9.5 million gross ($8.3 million net of unamortized financing costs); availability was $62.2 million under the then-existing $75 million facility. On February 23, 2021, the facility was increased to $150 million, with maturity in 2026. Pennant reported covenant compliance at year-end.
- Operating lease liabilities totaled $310.7 million; undiscounted operating lease payments were $541.6 million, including $356.8 million thereafter. The company leases all senior living communities, generally under triple-net arrangements.
Material changes, outlook and risks
- COVID-19 reduced home health volumes early in 2020 and continued to weigh on senior living occupancy as move-outs exceeded move-ins. Home health and hospice metrics improved in the second half, while management could not say when senior living occupancy would stabilize. Higher labor, PPE, testing and infection-control costs were partly offset by discretionary spending reductions and delayed capital projects.
- The CARES Act sequestration suspension added approximately $2.8 million of 2020 revenue. Pennant returned the $9.9 million of Provider Relief Funds it received. It deferred $8.4 million of employer Social Security taxes, due in two installments in 2021 and 2022.
- Management expects to repay the $28.0 million Medicare advance within the permitted recoupment periods and said existing cash, operating cash flow and financing access should fund operations and growth needs for the next 12 months. No quantitative earnings or revenue guidance is provided.
- Pennant acquired six home health agencies, six hospice agencies and two senior living communities in 2020 for an aggregate $39.2 million; it also formed majority-owned San Diego joint ventures with Scripps Health. Two home health agencies and two hospice agencies were acquired after year-end for $3.6 million.
- Key risks include Medicare and Medicaid reimbursement changes, audits and recoupments, staffing shortages and wage pressure, pandemic-related occupancy and cost effects, regulatory compliance, acquisition integration, and substantial lease obligations. Seven operating subsidiaries had Medicare reviews scheduled, on appeal or in dispute resolution at year-end; the company reported no probable or estimable contingency for these reviews. Management said ordinary-course legal matters were not expected to materially affect results, but outcomes are uncertain.
- The board reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. Pennant does not intend to pay dividends for the foreseeable future.
Important facts for investors to verify
- How senior living occupancy, move-ins and costs have trended since year-end, and the resulting effect on segment profitability.
- Actual repayment timing and cash-flow impact of the Medicare advance and deferred payroll taxes, particularly as Medicare offsets began in 2021.
- Whether home health and hospice volume and margin growth persists after acquisitions and the temporary sequestration relief.
- Outcomes of the pending Medicare reviews, other audits and any changes in estimated repayment or legal exposure.
- Current borrowing, facility availability, covenant headroom and lease commitments, including the effect of the expanded credit facility.