Pennant Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unless noted otherwise, amounts are in thousands. Pennant operates home health, hospice, home care and senior living businesses through subsidiaries. At quarter-end it had 65 agencies and 53 senior living communities. The company completed its spin-off from Ensign on October 1, 2019, so 2019 comparative results are combined pre-spin-off results and may not be fully comparable.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $91,849 | $77,907 |
| Income from operations | $4,272 | $1,827 |
| Net income | $2,980 | $1,484 |
| Net income attributable to Pennant | $2,980 | $1,334 |
| Basic / diluted EPS | $0.11 / $0.10 | $0.05 / $0.05 |
| Operating cash flow | $2,090 | $(1,413) |
- Revenue increased 17.9%; management attributed $7.8 million of growth to acquired operations and $6.1 million to improved operational performance.
- Operating margin rose to 4.7% from 2.3%; net margin was 3.2% versus 1.9%. Cost of services increased to 76.4% of revenue from 75.4%.
- Home health and hospice revenue grew 23.1% to $56.8 million; senior living revenue grew 10.4% to $35.1 million. Home health and hospice segment Adjusted EBITDAR was $9.7 million versus $7.3 million; senior living was $12.4 million versus $12.1 million. These are non-GAAP measures and exclude specified costs; segment figures do not include corporate G&A allocation.
- Cash was $4.8 million, up from $0.4 million at year-end. Investing activities used $6.8 million, including $3.0 million for acquisitions and $2.9 million for property and equipment. Financing activities provided $9.1 million, primarily from revolver borrowings.
- Revolver borrowings were $29.0 million gross ($27.6 million net of issuance costs), up from $20.0 million gross at year-end. The $75 million facility had $43.0 million availability, net of letters of credit, and matures in 2024. Pennant reported compliance with covenants. Operating lease liabilities totaled $316.4 million, including current obligations.
- Accounts receivable, net, rose to $35.5 million from $32.2 million. Medicare and Medicaid represented 57.9% of quarterly revenue; government-program receivables were 77.6% of gross receivables at quarter-end.
Material changes and unusual items
- Home health and hospice growth reflected higher admissions and hospice census, as well as acquisitions. Senior living occupancy was 80.2%, compared with 79.8%; average monthly revenue per occupied unit increased to $3,206 from $3,121.
- General and administrative expense declined to $6.7 million from $8.2 million, principally because Q1 2019 included $3.0 million of spin-off transaction costs. Q1 2020 share-based compensation increased to $2.0 million from $0.6 million.
- Q1 2020 included $0.3 million of COVID-19-related costs and supplies. No goodwill or intangible impairment was recorded; management concluded the pandemic and market volatility had not triggered a quantitative impairment test as of March 31.
- During the quarter, Pennant acquired one home health agency, one hospice agency and one senior living community, adding 164 senior living units; purchase price was approximately $3.0 million. It also agreed to form a home health joint venture with Scripps Health, subject to closing conditions and then expected to close in Q3 2020.
Outlook, risks and contingencies
- Management said COVID-19 had not materially disrupted Q1 operations but expected a more significant adverse effect in Q2 and potentially later periods. It reported lower home health census beginning in late March and a more significant decline in April, alongside slightly lower senior living occupancy; hospice census remained relatively flat through March. Management could not predict when activity would stabilize.
- Potential pressures include reduced admissions and occupancy, higher labor and PPE costs, supply constraints and evolving regulatory requirements. Pennant reduced discretionary spending and delayed non-essential capital projects. It stated that available cash, operating cash flow and financing were expected to cover operating and growth needs for the next 12 months.
- Through May 13, Pennant had received $28.0 million in Medicare advance payments, subject to claims offsets beginning 120 days after issuance and repayment within 210 days. The company said it used $19.0 million to reduce revolver borrowings. It also received $9.9 million from the Provider Relief Fund, held separately while evaluating the terms; funds may need to be returned if terms are not accepted.
- The CARES Act temporarily suspends the 2% Medicare sequestration adjustment for services from May 1 through December 31, 2020; management expected a corresponding 2% payment increase. These and other relief measures do not resolve uncertainty about the pandemic’s overall effect.
- Six operating subsidiaries had Medicare or Medicaid reviews scheduled, on appeal or in dispute resolution. The company reported no probable or estimable contingencies from those reviews. It also faces ordinary-course healthcare, employment and regulatory claims; management did not expect current legal proceedings to materially affect results, but outcomes are uncertain.
- Other notable risks include reimbursement changes, labor availability and costs, lease obligations, government audits, acquisition integration, and potential COVID-19-related litigation. A 1% interest-rate change was estimated to change annual interest expense by approximately $0.3 million.
Important facts for investors to verify
- Whether home health census, senior living occupancy and staffing costs developed in line with management’s expectations after March 31.
- The conditions, allowable uses and any return or repayment obligations associated with the $9.9 million Provider Relief Fund receipt and $28.0 million in Medicare advances.
- Cash generation, receivable collections and revolver balances as advance-payment recoupments begin.
- Exposure to government reimbursement and audit adjustments, including the status and outcomes of the six reviews.
- Lease commitments, covenant headroom and the economics and closing status of the Scripps joint venture and announced acquisitions.