The Pennant Group, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; it does not provide standalone fourth-quarter results. Pennant provides home health, hospice, home care and senior living services through independent operating subsidiaries.
Business context and operating scale
At year-end, Pennant operated 88 home health, hospice and home care agencies and 54 senior living communities with 4,127 units across 14 states. Revenue is diversified across Medicare, Medicaid, managed care and private pay, but government programs remain significant. The company reported 49.3% of revenue from Medicare and 13.3% from Medicaid in 2021.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $439.7 million | $391.0 million |
| Income from operations | $4.7 million | $18.9 million |
| Operating margin | 1.1% | 4.8% |
| Consolidated net income | $2.1 million | $15.6 million |
| Net income attributable to Pennant | $2.7 million; $0.09 diluted EPS | $15.7 million; $0.52 diluted EPS |
| Operating cash flow | $(18.2) million | $50.2 million |
| Investing cash flow | $(20.1) million | $(41.6) million |
| Financing cash flow | $43.5 million | $(8.9) million |
Cost of services rose to 80.3% of revenue from 75.9%, contributing to lower operating margin. Segment adjusted EBITDAR from operations was $66.9 million, down from $75.0 million; this non-GAAP measure excludes rent and other items and should not be treated as cash flow or a substitute for GAAP results.
Year-end cash was $5.2 million. Revolver borrowings were $53.5 million gross ($51.4 million net of unamortized issuance costs); the $150 million facility had $92.3 million of available capacity, net of letters of credit. The facility matures in 2026, and Pennant reported covenant compliance. Operating lease liabilities totaled $303.9 million, including $287.8 million long-term.
Changes versus FY2020
- Revenue increased 12.5%, including $36.8 million of reported organic growth and $11.9 million from acquired operations. Home health and hospice revenue rose 22.0%; senior living revenue fell 5.2%.
- Home health admissions increased 40.1%, Medicare home health admissions 33.8%, hospice admissions 5.2%, and average hospice daily census 10.0%. Average Medicare revenue per completed 60-day home health episode rose 3.5% to $3,405; hospice Medicare revenue per day rose 4.8% to $174.
- Senior living occupancy declined to 72.7% from 77.7%. Average monthly revenue per occupied unit increased 0.6% to $3,207.
- Operating cash flow declined by $68.4 million. Pennant repaid $21.8 million of COVID-era Medicare advance payments; management stated operating cash flow would have been $3.6 million positive excluding that repayment.
- Long-term debt, net, rose to $51.4 million from $8.3 million. Revenue growth did not translate into higher profit: higher wages, overtime and temporary staffing, pandemic-related costs, and lower senior living occupancy pressured margins.
Outlook, risks and unusual items
- Outlook: No quantitative earnings or revenue guidance is provided. Management expects existing cash, operating cash generation and financing access to fund operations and growth needs for the next 12 months. It expects continued acquisition activity, while noting acquired and start-up operations can weigh on margins.
- COVID-19 and labor: Management cited staffing shortages, wage inflation, overtime and agency labor, quarantine-related absences, vaccination requirements, supply disruption and continuing uncertainty. Senior living occupancy remained below pre-pandemic levels, with no assurance on timing of recovery.
- Reimbursement and regulation: Medicare and Medicaid accounted for 62.6% of revenue. Payment changes, audits, documentation requirements, the 2022 home health Notice of Admission process, and value-based payment programs could affect revenue, collections and costs.
- Cash and one-time support: Pennant received $28.0 million of Medicare advance payments in 2020 and had $6.2 million remaining to repay at year-end 2021. It also recognized $3.6 million of 2021 revenue from the temporary suspension of Medicare sequestration adjustments. About $4.1 million of deferred employer Social Security taxes remained payable.
- Contingencies: A Medicare integrity contractor suspended payments to one hospice provider number; $3.7 million was withheld at year-end pending review. The filing says this is not an overpayment determination and reports no probable or estimable contingency for reviews generally. The company disclosed ordinary-course legal and regulatory matters; management did not expect the identified claims to materially affect results, but outcomes are uncertain.
- Impairment and transaction: Pennant recorded a non-cash long-lived asset impairment associated with certain senior living communities. The filing reports $2.835 million in its results and reconciliation, while a subsequent-event note cites $2.613 million; investors should verify the amount and presentation. A January 2022 agreement with Ensign affiliates contemplated transfers of certain senior living operations, subject to approvals, with $6.5 million to be placed in escrow for specified costs.
- Other exposures: The company leases all senior living communities, largely under long-term triple-net leases; lease defaults can have cross-default consequences. Other material risks include labor availability and inflation, reimbursement delays, acquisition integration, clinical quality, compliance and cybersecurity. A 1 percentage-point interest-rate change was estimated to change annual interest expense by about $0.5 million.
Most important facts for investors to verify
- Whether home health and hospice growth can offset persistent staffing costs and restore operating profitability.
- Senior living occupancy trends and the pace, if any, of recovery toward pre-pandemic levels.
- Cash conversion after Medicare advance-payment recoupments, deferred payroll taxes and the transition to the Notice of Admission process.
- The outcome and duration of the hospice payment suspension, and whether the withheld $3.7 million is ultimately released or offset.
- The impairment amount and financial effects of the proposed senior living transfers, including escrow, lease obligations and regulatory approvals.
- Debt availability, covenant headroom, interest-rate exposure and substantial long-term lease commitments.