The Pennant (PNTG) - 2023 Q3 - Quarterly Report

Part I. Financial Information This section presents the company's unaudited financial statements, management's discussion, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, equity, cash flows, and detailed notes on business, accounting, segments, and contingencies Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of September 30, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Total Assets | $520,315 | $512,119 | | Total Liabilities | $380,796 | $386,462 | | Total Equity | $139,519 | $125,657 | | Cash | $3,383 | $2,079 | | Accounts receivable—net | $59,353 | $53,420 | | Long-term debt, net | $53,783 | $62,892 | Condensed Consolidated Statements of Income This section outlines the company's financial performance, presenting revenue, expenses, and net income for the periods ended September 30, 2023 Condensed Consolidated Statements of Income Highlights (in thousands, except per-share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $140,192 | $118,350 | $398,937 | $348,576 | | Total expenses | $133,131 | $111,206 | $381,335 | $342,221 | | Income from operations | $7,061 | $7,144 | $17,602 | $6,355 | | Net income attributable to The Pennant Group, Inc. | $4,383 | $4,831 | $9,030 | $3,169 | | Diluted EPS | $0.15 | $0.16 | $0.30 | $0.10 | - Revenue increased by 18.5% for the three months and 14.4% for the nine months ended September 30, 2023, compared to the prior year periods[12] - Net income attributable to The Pennant Group, Inc. decreased by 10.6% for the three-month period but increased by 184.9% for the nine-month period[12] Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity, including additional paid-in capital and retained earnings, from December 31, 2022, to September 30, 2023 Stockholders' Equity Highlights (in thousands) | Metric | Dec 31, 2022 | Sep 30, 2023 | | :--------------------------------------- | :----------- | :----------- | | Additional Paid-In Capital | $99,764 | $104,245 | | Retained Earnings | $21,284 | $30,314 | | Total The Pennant Group, Inc. stockholders' equity | $121,012 | $134,523 | | Noncontrolling interest | $4,645 | $4,996 | | Total equity | $125,657 | $139,519 | - Total equity increased by $13,862k from December 31, 2022, to September 30, 2023, primarily driven by increases in additional paid-in capital and retained earnings[14] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $27,910 | $12,974 | | Net cash used in investing activities | $(17,576) | $(20,176) | | Net cash (used in) provided by financing activities | $(9,030) | $4,967 | | Net increase (decrease) in cash | $1,304 | $(2,235) | | Cash end of period | $3,383 | $2,955 | - Net cash provided by operating activities more than doubled, increasing by $14,936k (+115.1%) for the nine months ended September 30, 2023, compared to the prior year[19] - Net cash used in financing activities shifted from a net inflow to a net outflow[19][209] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, segments, and contingencies 1. Description of Business The Pennant Group, Inc. operates as a holding company providing healthcare services through home health, hospice, home care, and senior living facilities - The Pennant Group, Inc. operates as a holding company, providing healthcare services through 103 home health, hospice, and home care agencies and 51 senior living communities across 14 states as of September 30, 2023[23] 2. Basis of Presentation and Summary of Significant Accounting Policies This section outlines accounting principles and significant estimates used in preparing interim financial statements, including revenue and self-insurance - Interim Financial Statements are prepared in accordance with GAAP and SEC regulations, relying on management's estimates for revenue, intangible assets, goodwill, right-of-use assets, lease liabilities, self-insurance reserves, and income taxes[26][30] State Relief Funding Recognized (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $923 | $734 | | Nine Months Ended September 30 | $3,005 | $1,980 | - The company is evaluating ASU 2023-05 'Business Combinations—Joint Venture Formations,' effective January 1, 2025, which requires joint ventures to measure assets and liabilities at fair value upon formation[35] 3. Transactions with Ensign This section details the company's financial transactions and lease arrangements with Ensign subsidiaries, including shared services and hospice charges Costs Incurred with Ensign (in thousands) | Type of Cost | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Shared services | $254 | $231 | $719 | $1,332 | | Hospice room and board charges | $1,217 | $812 | $3,171 | $2,035 | - As of September 30, 2023, the Company's independent operating subsidiaries leased 29 communities from subsidiaries of Ensign under a master lease arrangement[38] 4. Net Income Per Common Share This section presents the basic and diluted net income per common share for the three and nine months ended September 30, 2023 Earnings Per Share (EPS) (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to The Pennant Group, Inc. | $4,383 | $4,831 | $9,030 | $3,169 | | Basic net income per common share | $0.15 | $0.16 | $0.30 | $0.11 | | Diluted net income per common share | $0.15 | $0.16 | $0.30 | $0.10 | 5. Revenue and Accounts Receivable This section details revenue sources by payor and segment, along with the composition of accounts receivable, net, as of September 30, 2023 - Combined revenue from Medicare and Medicaid programs accounted for 62.7% and 62.5% of the Company's revenue for the three and nine months ended September 30, 2023, respectively[44] Revenue by Payor (3 Months Ended September 30, 2023, in thousands) | Payor | Home Health Services | Hospice Services | Senior Living Services | Total Revenue | Revenue % | | :------------ | :------------------- | :--------------- | :--------------------- | :------------ | :---------- | | Medicare | $24,076 | $43,849 | $— | $67,925 | 48.5% | | Medicaid | $2,521 | $5,190 | $12,182 | $19,893 | 14.2% | | Managed care | $17,927 | $1,231 | $— | $19,158 | 13.6% | | Private and other | $6,579 | $101 | $26,536 | $33,216 | 23.7% | | Total | $51,103 | $50,371 | $38,718 | $140,192 | 100.0% | Accounts Receivable, Net (in thousands) | Payor | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Medicare | $33,709 | $31,321 | | Medicaid | $12,699 | $10,700 | | Managed care | $11,422 | $9,370 | | Private and other | $2,454 | $2,621 | | Accounts receivable, gross | $60,284 | $54,012 | | Less: allowance for doubtful accounts | $(931) | $(592) | | Accounts receivable, net | $59,353 | $53,420 | 6. Business Segments This section outlines the company's two reportable segments: Home Health and Hospice Services and Senior Living Services, and their performance - The Company operates in two reportable segments: Home Health and Hospice Services (103 agencies) and Senior Living Services (51 communities), with performance evaluated using Segment Adjusted EBITDAR from Operations[62][63][64] Segment Adjusted EBITDAR from Operations (3 Months Ended September 30, 2023, in thousands) | Segment | Revenue | Segment Adjusted EBITDAR from Operations | | :-------------------------- | :-------- | :--------------------------------------- | | Home Health and Hospice Services | $101,474 | $17,271 | | Senior Living Services | $38,718 | $11,473 | | All Other | $— | $(8,097) | | Total | $140,192 | $20,647 | Segment Adjusted EBITDAR from Operations (9 Months Ended September 30, 2023, in thousands) | Segment | Revenue | Segment Adjusted EBITDAR from Operations | | :-------------------------- | :-------- | :--------------------------------------- | | Home Health and Hospice Services | $287,573 | $47,364 | | Senior Living Services | $111,364 | $33,394 | | All Other | $— | $(23,496) | | Total | $398,937 | $57,262 | 7. Acquisitions This section details the company's acquisitions of healthcare agencies and senior living communities during 2023, including purchase prices - During the nine months ended September 30, 2023, the Company acquired three home health agencies, three hospice agencies, two home care agencies, and two senior living communities[70] - The purchase price for 2023 business combinations was $11,662k, primarily consisting of goodwill ($6,635k) and indefinite-lived intangible assets ($3,895k)[71] - Subsequent to September 30, 2023, the Company acquired three hospice agencies for a total purchase price of $6,600k[76] 8. Property and Equipment—Net This section provides details on the company's property and equipment, net, and associated depreciation expense for the periods presented Property and Equipment, Net (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Property and equipment, net | $27,983 | $26,621 | Depreciation Expense (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $1,321 | $1,244 | | Nine Months Ended September 30 | $3,807 | $3,640 | - No impairment was recorded for long-lived assets during the three and nine months ended September 30, 2023 and 2022[78] 9. Goodwill and Other Indefinite-Lived Intangible Assets This section details the composition and changes in goodwill and other indefinite-lived intangible assets by segment, including licenses Goodwill by Segment (in thousands) | Segment | Dec 31, 2022 | Additions | Sep 30, 2023 | | :-------------------------- | :----------- | :-------- | :----------- | | Home Health and Hospice Services | $75,855 | $6,635 | $82,490 | | Senior Living Services | $3,642 | $— | $3,642 | | Total | $79,497 | $6,635 | $86,132 | Other Indefinite-Lived Intangible Assets (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Trade name | $1,571 | $1,385 | | Medicare and Medicaid licenses | $61,337 | $57,232 | | Total | $62,908 | $58,617 | - No goodwill or intangible asset impairments were recorded during the three and nine months ended September 30, 2023 and 2022[80] 10. Other Accrued Liabilities This section itemizes the company's other accrued liabilities, including refunds payable, deferred revenue, resident deposits, and self-insurance Other Accrued Liabilities (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Refunds payable | $1,754 | $2,244 | | Deferred revenue | $1,786 | $1,592 | | Resident deposits | $2,657 | $4,315 | | Deferred state relief funds | $872 | $1,479 | | Accrued self-insurance liabilities | $4,590 | $3,546 | | Total Other accrued liabilities | $15,577 | $16,684 | 11. Debt This section details the company's long-term debt, primarily the Revolving Credit Facility, its terms, interest rates, and covenant compliance Long-Term Debt, Net (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Revolving Credit Facility | $55,000 | $64,500 | | Less: unamortized debt issuance costs | $(1,217) | $(1,608) | | Long-term debt, net | $53,783 | $62,892 | - The Revolving Credit Facility has a borrowing capacity of $150,000k, matures in 2026, and its reference rate was modified from LIBOR to SOFR on June 12, 2023[83] - As of September 30, 2023, the weighted average interest rate on outstanding debt was 8.17%, with $90,814k available borrowing capacity[84] - The Company was compliant with all financial covenants under the Credit Agreement as of September 30, 2023[86] 12. Options and Awards This section outlines share-based compensation expense, including RSU modifications and unrecognized compensation for unvested stock options Total Share-Based Compensation Expense (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $1,341 | $(2,747) | | Nine Months Ended September 30 | $4,011 | $2,073 | - A modification of RSUs for the former CEO in Q3 2022 resulted in a net reduction of share-based compensation expense of $3,812k[89] Unrecognized Share-Based Compensation Expense (as of Sep 30, 2023, in thousands) | Category | Unrecognized Compensation Expense | Weighted Average Recognition Period (in years) | | :-------------------------- | :-------------------------------- | :--------------------------------------------- | | Unvested Stock Options | $12,492 | 3.4 | | Unvested Restricted Stock | $2,573 | 3.7 | | Total | $15,065 | | 13. Leases This section describes the company's operating lease arrangements for senior living communities and administrative offices, including modifications - The Company leases 51 senior living communities and administrative offices under non-cancelable operating leases, with 29 communities leased from Ensign subsidiaries[96] - A master lease for nine locations was modified on July 7, 2023, extending its term to March 31, 2038, resulting in a $5,195k net increase to lease liability and ROU asset[99] Lease Maturity Analysis (as of Sep 30, 2023, in thousands) | Year | Amount | | :-------------------------- | :----------- | | 2023 (Remainder) | $9,287 | | 2024 | $36,549 | | 2025 | $35,195 | | 2026 | $34,032 | | 2027 | $33,268 | | Thereafter | $281,565 | | Total lease payments | $429,896 | - As of September 30, 2023, the weighted average remaining lease term is 12.8 years, and the weighted average discount rate is 8.1%[101] 14. Income Taxes This section presents the company's income tax expense and effective tax rates, highlighting factors influencing changes between periods Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense (in thousands) | Effective Tax Rate | | :-------------------------------- | :-------------------------------- | :----------------- | | Three Months Ended September 30, 2023 | $1,066 | 19.3% | | Three Months Ended September 30, 2022 | $1,074 | 17.7% | | Nine Months Ended September 30, 2023 | $3,894 | 29.3% | | Nine Months Ended September 30, 2022 | $241 | 6.3% | - The increase in the effective tax rate for both periods is primarily due to the absence of the impact of the Ensign Transaction in the current year[103][104] 15. Commitments and Contingencies This section details the company's exposure to regulatory risks, litigation, and self-insurance liabilities within its highly regulated operations - The Company operates in highly regulated industries and is subject to governmental reviews, audits, and investigations, with potential for significant regulatory action, sanctions, and penalties[105] - Litigation risks include professional liability claims (personal injury, elder abuse, wrongful death) and potential lawsuits under the False Claims Act (FCA) for fraudulent claims to governmental healthcare programs[108][110] - One hospice provider number was subject to a Medicare payment suspension from June 2021 to May 2022, with $1,915k still in the appeals process as of September 30, 2023[114][116] - The Company retains risk for a substantial portion of potential claims for general and professional liability ($150k per claim with a $500k corridor), workers' compensation ($250k per claim), and is self-insured for employee health, dental, and vision care with stop-loss coverage exceeding $350k per person[117][118] 16. Common Stock Repurchase Program This section outlines the Board-approved common stock repurchase program and reports on the absence of repurchases during the specified periods - The Board of Directors approved a $1,000k share repurchase program on December 12, 2022, set to expire on December 12, 2023[119] - No shares were repurchased under the program during the three and nine months ended September 30, 2023[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting revenue growth across segments, changes in expenses, and liquidity Overview This section provides a high-level summary of the company's operations, including agencies, communities, recent expansions, and occupancy trends - As of September 30, 2023, the Company operated 103 home health, hospice, and home care agencies and 51 senior living communities across 14 states[126] - Total number of home health, hospice, and senior living operations increased from 144 at December 31, 2022, to 154 at September 30, 2023[127] - During the nine months ended September 30, 2023, the Company expanded operations by adding three home health agencies, three hospice agencies, two home care agencies, and two senior living communities[128] - The Company experienced modest senior living occupancy improvement through the nine months ended September 30, 2023, but occupancy levels have not yet returned to pre-pandemic levels[129] Government Regulation This section details recent regulatory updates from CMS regarding hospice and home health payment rates, new programs, and climate disclosure laws - CMS issued the Hospice Payment Rate Update final rule for fiscal year 2024, with a 3.1% payment update percentage, an estimated increase of $780 million in payments[132] - CMS finalized rules for a Hospice Special Focus Program (HSFP) beginning in CY 2024, mandating semiannual surveys over 18 months for selected hospices[133] - The CY 2024 Home Health Prospective Payment System Final Rule estimates a 0.8% aggregate increase to all home health agencies, totaling $140.0 million[134] - California enacted SB 253 and SB 261, requiring new climate disclosures from companies with annual revenues of $1 billion or more (GHG emissions) and $500 million or more (climate-related risks), with first reports due in 2026[135] Segments This section defines the company's two reportable segments: home health and hospice services, and senior living services, with an 'all other' category - The Company has two reportable segments: home health and hospice services, and senior living services, with a separate 'all other' category for general and administrative expenses from the Service Center[136] Common Stock Repurchase Program This section reiterates the Board-approved $1.0 million share repurchase program and confirms no shares were repurchased during the period - The Board of Directors approved a share repurchase program of up to $1.0 million of common stock on December 12, 2022, expiring on December 12, 2023[137] - No shares were repurchased under this program during the three and nine months ended September 30, 2023[137] Key Performance Indicators This section presents key operational statistics for home health, hospice, and senior living segments, including admissions, census, and occupancy Home Health and Hospice Statistics (3 Months Ended September 30) | Metric | 2023 | 2022 | Change | % Change | | :-------------------------------------- | :----- | :----- | :----- | :--------- | | Total home health admissions | 10,829 | 10,152 | 677 | 6.7% | | Total Medicare home health admissions | 4,640 | 4,637 | 3 | 0.1% | | Average Medicare revenue per 60-day completed episode | $3,585 | $3,553 | $32 | 0.9% | | Total hospice admissions | 2,433 | 2,392 | 41 | 1.7% | | Average hospice daily census | 2,698 | 2,293 | 405 | 17.7% | | Hospice Medicare revenue per day | $183 | $176 | $7 | 4.0% | Senior Living Statistics (3 Months Ended September 30) | Metric | 2023 | 2022 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :--------- | | Occupancy | 78.9% | 76.5% | 2.4% | | | Average monthly revenue per occupied unit | $3,991 | $3,560 | $431 | 12.1% | Revenue Sources This section describes the primary revenue streams for each segment, including Medicare, managed care, and private pay sources, and their models - Home health revenue is primarily derived from Medicare and managed care, recognized under the Patient Driven Groupings Model (PDGM)[142] - Hospice business revenue is mainly from Medicare reimbursement, calculated as daily rates for four levels of care: Routine Home Care, General Inpatient Care, Continuous Home Care, and Inpatient Respite Care[143][144] - Senior living revenue is primarily generated from private pay sources, with a portion from Medicaid or other state-specific programs[146] Primary Components of Expense This section outlines the main categories of expenses, including cost of services, rent, general and administrative, and depreciation and amortization - Cost of services primarily includes payroll, benefits, supplies, purchased services, ancillary expenses, and general/professional liability insurance[147] - Rent—cost of services consists of base minimum rent for leased operations, excluding taxes, insurance, and other charges[148] - General and administrative expense covers Service Center personnel costs (payroll, benefits, travel), professional fees, information systems, and stock-based compensation[149] - Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets[150] Critical Accounting Policies and Estimates This section details critical accounting estimates, including self-insurance reserves, revenue recognition, leases, acquisition accounting, and income taxes - Critical accounting estimates include self-insurance reserves, revenue recognition (variable consideration, Medicare/Medicaid settlements), leases (incremental borrowing rate), acquisition accounting (purchase price allocation), and income taxes (valuation allowance, uncertain tax positions)[152][154] Results of Operations This section analyzes the company's financial performance, covering consolidated GAAP measures, segment-specific GAAP measures, and non-GAAP metrics Consolidated GAAP Financial Measures This section presents the company's total revenue, expenses, and income from operations under GAAP for the three and nine months ended September 30, 2023 Consolidated GAAP Financial Measures (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenue | $140,192 | $118,350 | $398,937 | $348,576 | | Total expenses | $133,131 | $111,206 | $381,335 | $342,221 | | Income from operations | $7,061 | $7,144 | $17,602 | $6,355 | - Total revenue increased by 18.5% for the three months and 14.4% for the nine months ended September 30, 2023[155] - Income from operations for the nine-month period increased significantly by 177.0%[155] Segment GAAP Financial Measures This section details revenue and Segment Adjusted EBITDAR from Operations for Home Health and Hospice Services and Senior Living Services Segment Revenue (in thousands) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Home Health and Hospice Services | $101,474 | $85,779 | $287,573 | $251,598 | | Senior Living Services | $38,718 | $32,571 | $111,364 | $96,978 | Segment Adjusted EBITDAR from Operations (in thousands) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Home Health and Hospice Services | $17,271 | $15,380 | $47,364 | $45,056 | | Senior Living Services | $11,473 | $9,370 | $33,394 | $27,573 | | All Other | $(8,097) | $(7,779) | $(23,496) | $(23,795) | | Total | $20,647 | $16,971 | $57,262 | $48,834 | Non-GAAP Financial Measures This section presents consolidated non-GAAP financial measures like EBITDA, Adjusted EBITDA, and Adjusted EBITDAR, explaining their use Consolidated Non-GAAP Financial Measures (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Consolidated EBITDA | $8,268 | $8,214 | $21,096 | $9,595 | | Consolidated Adjusted EBITDA | $10,880 | $7,895 | $28,864 | $21,648 | | Consolidated Adjusted EBITDAR | $20,647 | $16,971 | $57,262 | $48,834 | - Consolidated Adjusted EBITDA increased by 37.8% for the three months and 33.3% for the nine months ended September 30, 2023, compared to the prior year periods[158][160] - Non-GAAP financial measures are used to evaluate operating performance, allocate resources, assess acquisition value, and compare performance to competitors, excluding items like interest, taxes, depreciation, amortization, and certain non-core business items[165][174][179] Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 This section provides a detailed comparative analysis of the company's revenue, cost of services, and other expenses for the three-month periods Revenue Analysis This section analyzes the drivers of revenue growth for both Home Health and Hospice and Senior Living segments during the three months - Total revenue increased by $21.8 million (+18.5%) for the three months ended September 30, 2023[181] - Home Health and Hospice segment revenue grew by $15.7 million (+18.3%), driven by a 6.7% increase in total home health admissions, a 17.7% increase in average daily hospice census, and a 4.0% increase in hospice Medicare revenue per day[182][183] - Senior Living segment revenue increased by $6.1 million (+18.9%), primarily due to a 12.1% increase in average monthly revenue per occupied unit and a 240 basis points increase in occupancy[184] Cost of Services Analysis This section examines the changes in consolidated and segment-specific cost of services, including factors like wages, benefits, and staffing costs - Total consolidated cost of services increased by $17.7 million (+18.7%) and as a percentage of revenue, increased by 20 basis points to 80.2%[185] - Home Health and Hospice Services cost of services increased by $13.7 million (+19.2%), with its percentage of revenue increasing by 70 basis points to 83.6% due to increased wages, benefits, and staffing costs[186] - Senior Living Services cost of services increased by $4.0 million (+17.1%), but decreased by 110 basis points as a percentage of revenue to 71.3%[187] Other Expenses Analysis This section reviews changes in rent, general and administrative expenses, and income tax provision for the three months ended September 30, 2023 - Rent—cost of services increased by 6.5% to $10.0 million, but decreased by 80 basis points as a percentage of total revenue to 7.1%[188] - General and administrative expense increased significantly by $3.5 million (+60.2%) to $9.4 million, primarily due to a $3.7 million increase in share-based compensation[189] - Provision for income taxes was $1.1 million, with an effective tax rate of 19.3%[191] Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 This section provides a detailed comparative analysis of the company's revenue, cost of services, and other expenses for the nine-month periods Revenue Analysis This section analyzes the drivers of revenue growth for both Home Health and Hospice and Senior Living segments during the nine months - Total revenue increased by $50.4 million (+14.4%) for the nine months ended September 30, 2023[193] - Home Health and Hospice revenue increased by $36.0 million (+14.3%), driven by a 12.1% increase in hospice average daily census, a 5.9% increase in home health admissions, and a 4.1% increase in hospice admissions[195] - Acquisitions contributed $5.7 million to Home Health and Hospice revenue[195] - Senior Living revenue increased by $14.4 million (+14.8%), primarily due to a 13.3% increase in average monthly revenue per occupied unit and a 330 basis points increase in occupancy[196] - Acquisitions contributed $1.1 million to Senior Living revenue[196] Cost of Services Analysis This section examines the changes in consolidated and segment-specific cost of services, including factors like wages and benefits, for the nine-month periods - Consolidated cost of services increased by $43.5 million (+15.7%) and as a percentage of revenue, increased by 80 basis points to 80.5%[197] - Home Health and Hospice services cost of services increased by $33.9 million (+16.3%), with its percentage of revenue increasing by 140 basis points to 84.2% due to increased wages and benefits[198] - Senior Living services cost of services increased by $9.6 million (+13.8%), but decreased by 70 basis points as a percentage of revenue to 70.8%[199] Other Expenses Analysis This section reviews changes in rent, general and administrative expenses, asset dispositions, and income tax provision for the nine months - Rent—cost of services increased by 3.2% to $29.4 million, but decreased by 80 basis points as a percentage of revenue due to improved senior living performance[200] - General and administrative expense increased by $1.3 million (+4.9%) to $26.9 million, primarily due to a $1.4 million increase in share-based compensation[201] - Loss on asset dispositions and impairment, net decreased by $6.7 million due to senior living communities transferred to Ensign in 2022[202] - Provision for income taxes increased to $3.9 million (29.3% effective tax rate) from $0.2 million (6.3%) in the prior year, primarily due to the absence of the Ensign Transaction impact[203] Liquidity and Capital Resources This section discusses the company's primary sources of liquidity, including operating cash flow and the Revolving Credit Facility - Primary sources of liquidity are net cash provided by operating activities and borrowings under the $150,000k Revolving Credit Facility, which matures in 2026 and had its reference rate modified from LIBOR to SOFR[204][205] - As of September 30, 2023, the Company had $3.4 million in cash and $90.8 million of available borrowing capacity on its Revolving Credit Facility[207] - Net cash flow from operating activities increased by $14.9 million for the nine months ended September 30, 2023, primarily due to a $5.9 million increase in net income and a $4.9 million net increase in cash flows from changes in operating assets and liabilities[209] - Net cash used in financing activities increased by approximately $14.0 million, shifting from a net cash inflow to a net cash outflow, primarily due to a net reduction in the balance on the line of credit[212] Contractual Obligations, Commitments and Contingencies This section addresses the company's ongoing management of debt and lease obligations, noting no other material changes to total obligations - The Company continues to manage draws and payments on its Revolving Credit Facility and has right-of-use assets obtained in exchange for new operating lease obligations[213] - No other material changes to total obligations occurred during the period outside the normal course of business[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk, with a 1.0% change in interest rates estimated to cause an approximate $0.6 million annual change in interest expense based on outstanding long-term debt as of September 30, 2023 - A 1.0% interest rate change would cause interest expense to change by approximately $0.6 million annually based on outstanding long-term debt as of September 30, 2023[215] - The reference rate for the Credit Agreement was modified from LIBOR to SOFR on June 12, 2023[215] Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, and there were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[216] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[217] Part II. Other Information This section covers legal proceedings, updated risk factors, a list of exhibits, and the formal signatures for the report Item 1. Legal Proceedings The company is involved in various legal claims and lawsuits in the ordinary course of business, which management does not expect to have a material adverse effect on its financial condition or results of operations, though outcomes cannot be predicted with certainty - The Company is involved in various claims and lawsuits arising in the ordinary course of business[220] - Management does not expect these legal proceedings to have a material adverse effect on results of operations or financial condition, but outcomes are uncertain[220] Item 1A. Risk Factors This section updates previously disclosed risk factors, emphasizing new concerns such as the potential for reduced government payments due to economic downturns or federal budget issues, and the increasing impact of union activity in the healthcare industry - Economic downturns, continued deficit spending, or state budget pressures may result in reductions or delays in payments from governmentally funded programs like Medicare and Medicaid[222] - Increasing union activity, including strikes and work stoppages in the healthcare industry, could materially impact the Company's operations and increase costs[223] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, Sarbanes-Oxley certifications from the CEO and CFO, and XBRL interactive data files - Exhibits include the Amended and Restated Certificate of Incorporation, Second Amended and Restated Bylaws, and Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[225] - The filing also includes XBRL Instance Document and Taxonomy Extension documents for interactive data[225] Signatures The report is formally signed on behalf of The Pennant Group, Inc. by its Chief Financial Officer, Lynette B. Walbom, confirming its submission as of November 7, 2023 - The report was signed by Lynette B. Walbom, Chief Financial Officer of The Pennant Group, Inc., on November 7, 2023[230]