Pennant Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are to Q1 2021 unless noted. Figures below are in millions of dollars unless stated otherwise. Pennant provides home health, hospice, home care and senior living services through subsidiaries; at quarter-end it operated 88 agencies and 52 senior living communities.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Revenue | $113.9 | $105.7 |
| Income from operations | $2.3; 2.1% margin | $1.6; 1.5% margin |
| Net income | $1.2 consolidated; $1.0 attributable to Pennant | $0.9 consolidated; $1.0 attributable to Pennant |
| Diluted earnings per share | $0.03 | $0.03 |
| Operating cash flow | $(4.1) | $(7.3) |
| Investing cash flow | $(2.6), including $2.4 of capital expenditures | $(4.0) |
| Financing cash flow | $5.1 | $16.8 |
| Cash | $3.6 at March 31 | $5.2 at December 31, 2021 |
| Revolver borrowings, net of issuance costs | $56.5; $58.5 gross drawn | $51.4 net at December 31, 2021 |
Revenue rose 7.8%. Cost of services increased 8.0% to $90.4, or 79.3% of revenue versus 79.1%; rent expense was $10.1, and general and administrative expense was $10.0. Net interest expense increased to $0.6 from $0.4. The effective tax rate rose to 31.9% from 27.1%.
Cash used in operations improved year over year but remained negative. CMS recouped $4.7 of CARES Act advance payments in the quarter; management stated operating cash flow would have been $0.7 positive excluding that repayment. The company had $87.3 of available revolving capacity, net of letters of credit, under its $150.0 facility, maturing in 2026. Its weighted-average borrowing rate was 3.04%, and it reported compliance with financial covenants. Management believes cash, operating cash generation and financing access will be adequate for operating and growth needs for the next 12 months.
Business trends and changes versus prior year
- Home health and hospice revenue increased 7.9% to $80.5. Home health admissions rose 11.9%, hospice admissions 11.8%, and Medicare home health revenue per completed 60-day episode 4.2%. Hospice average daily census declined 3.3% to 2,232, despite higher admissions.
- Senior living revenue increased 7.7% to $33.4. Occupancy was 72.6% versus 72.1%, and average monthly revenue per occupied unit rose 5.8% to $3,371. The company described occupancy improvement as modest and said pre-pandemic levels may not return soon.
- Home health and hospice segment Adjusted EBITDA from Operations was $12.7 versus $12.8; senior living was $1.6 versus a loss of $0.1. Consolidated Adjusted EBITDA was $6.1 versus $6.3. These are non-GAAP measures; the company cautions they are not substitutes for GAAP results and may not be comparable across companies.
- Staffing shortages, higher wage rates, overtime, premium pay and temporary labor continued to pressure home health and hospice costs. Senior living cost management improved as a share of revenue, partly offsetting wage and utility inflation.
- In January, Pennant agreed to transfer five senior living operations to Ensign. Two transferred March 1 and the remaining operations transferred April 1; the company reported 52 communities at quarter-end versus 54 a year earlier. The transfers reduced lease assets and liabilities, with additional lease terminations and modifications after quarter-end.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management noted results may fluctuate with the maturity of acquired and start-up operations and that such operations can carry lower census or occupancy and higher costs.
- COVID-19, senior living occupancy recovery, healthcare labor availability and cost, vaccination requirements, reimbursement policy changes, and inflation remain risks. The company cited planned expirations of federal COVID-19 emergency waivers in May and June 2022, which could affect reimbursement, operations and expenses.
- Medicare and Medicaid generated 61.9% of Q1 revenue. Government reimbursement is subject to audits and retroactive adjustment; the company also disclosed eight operating subsidiaries with Medicare or Medicaid reviews scheduled, on appeal or in dispute resolution.
- Medicare review: One hospice provider had $4.3 of Medicare payments suspended and recorded in receivables as of March 31. In May, the suspension ended and the UPIC completed its review, alleging sampled and extrapolated overpayments consistent with the suspended amount. Pennant had not received a formal demand and was evaluating the findings; any recovery would first be withheld from the suspended funds.
- Other obligations and exposures include $4.1 of deferred employer Social Security taxes due by the end of 2022, approximately $275.5 of operating lease liabilities, self-insurance claims, and ordinary-course litigation and regulatory matters. The filing says outcomes of reviews and claims cannot be predicted.
- After quarter-end, Pennant acquired a Bozeman, Montana home health provider for approximately $0.8. On April 29, it also acquired real and personal property for $2.0 at a facility it will continue to operate.
Key facts for investors to verify
- Whether hospice Medicare review findings result in a formal repayment demand, and the final amount and timing of any recoupment or release of suspended payments.
- Whether operating cash flow improves as CARES Act recoupments, working-capital changes and deferred payroll tax payments affect cash needs.
- Whether labor costs and staffing availability constrain service capacity or margins, and whether senior living occupancy continues to recover.
- The effect of Ensign transfers and related lease terminations or modifications on future revenue, rent expense and lease liabilities.
- Future Medicare, Medicaid and managed-care reimbursement changes, audit outcomes, and the impact of emergency-waiver expirations.