National HealthCare Corporation — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
NHC operates or manages skilled nursing, assisted and independent living, behavioral health, homecare and hospice services in eight states, principally in the Southeast and Midwest. Its two reportable segments are inpatient services and homecare and hospice. At year-end, it operated or managed 68 skilled nursing facilities with 8,726 licensed beds, 23 assisted living facilities, five independent living facilities, three behavioral health hospitals, 35 homecare agencies and 29 hospice agencies.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net patient revenues | $1,029.1 million | $965.5 million |
| Net operating revenues and grant income | $1,085.7 million | $1,074.3 million |
| Income from operations | $31.9 million | $50.9 million |
| Net income attributable to NHC | $22.4 million | $138.6 million |
| Diluted EPS | $1.45 | $8.99 |
| Cash from operating activities | $8.7 million | $62.4 million |
- Net patient revenue rose 6.6%; total operating revenue and grant income increased 1.1%. Skilled nursing occupancy at owned and leased facilities improved to 83.8% from 80.6%. Assisted living occupancy was 71.6%, and independent living occupancy was 89.0%.
- Operating margin, measured against operating revenues and grant income, was approximately 2.9%, down from 4.7%. Salaries, wages and benefits were $686.2 million, or 63.2% of revenue, versus 62.0% in 2021. Agency nurse staffing expense rose to $68.9 million from $36.4 million.
- GAAP earnings fell sharply, chiefly because 2021 included a $95.2 million gain on the Caris acquisition. NHC’s non-GAAP net income was $37.3 million versus $62.6 million; management attributes much of the decrease to $51.9 million less Provider Relief Fund income in 2022. The company also recorded a $15.8 million unrealized loss on marketable equity securities.
- Cash and cash equivalents were $58.7 million; unrestricted marketable securities totaled $123.9 million. Cash, cash equivalents and restricted cash totaled $74.9 million, down from $119.7 million. Operating cash flow was reduced in part by $73.7 million of working-capital use.
- NHC reported no outstanding long-term debt. At year-end, finance lease obligations were $5.8 million and operating lease liabilities were $120.1 million. Capital expenditures were $30.2 million; dividends paid were $34.6 million, and the company repurchased $9.9 million of shares.
- Total assets were $1,275.5 million and total liabilities were $397.9 million at December 31, 2022. Accrued risk reserves were $102.5 million, up from $98.0 million.
Material changes versus the prior year
- Caris hospice, acquired in June 2021, contributed to higher year-over-year patient revenue; its acquisition gain, however, makes the prior-year GAAP earnings comparison unusually high.
- Provider Relief Fund income declined to $11.5 million from $63.4 million. Supplemental COVID-19 Medicaid payments recorded in patient revenue also decreased to $19.4 million from $20.5 million.
- In September 2022, NHC transferred operations of seven skilled nursing facilities in Massachusetts and New Hampshire to a third party and terminated the related lease. Those facilities generated $49.2 million of 2022 patient revenue and reported a $2.5 million pretax loss excluding stimulus funds. The amended NHI master lease increased base rent over the following years.
- Two behavioral health hospitals opened in 2022. NHC reported $5.4 million of operating results from newly opened operations not yet at full capacity in its non-GAAP reconciliation.
Outlook, risks and unusual items
- Management says liquidity remains strong and expects cash from operations, cash on hand and unrestricted marketable securities to meet near-term needs. It did not provide a company-specific earnings or revenue forecast and stated that the future financial impact of COVID-19 could not be quantified.
- Management cited persistent labor shortages, wage inflation and expensive agency staffing. Other cost pressures include inflation in food, dietary supplies and pharmaceuticals. Management is pursuing occupancy, referral and staffing initiatives.
- Management estimated fiscal 2023 annual Medicaid revenue increases of approximately $3.2 million in Tennessee and $3.7 million in South Carolina. The filing also describes Medicare rate updates for fiscal 2023, which are program rules rather than NHC earnings guidance.
- Principal risks include changes to Medicare and Medicaid reimbursement, value-based payment and quality requirements, staffing and occupancy, regulatory compliance, patient-care litigation and self-insurance exposure, and cybersecurity and privacy incidents. Claims reserves depend on significant actuarial estimates; reserve estimation was the auditor’s critical audit matter.
- A False Claims Act and Anti-Kickback Statute qui tam case involving an NHC affiliate remains pending; NHC denies the allegations and is defending the claim. The filing states that other litigation is not expected to be material based on information available.
- NHC’s marketable equity portfolio included $85.2 million of NHI shares, approximately 69.2% of the equity portfolio’s fair value. Management identifies this as a concentration risk. The company also cautions that Provider Relief Fund amounts may be subject to audit and potential repayment if regulators disagree with its compliance or interpretation.
Important facts for investors to verify
- Whether occupancy gains and patient-revenue growth can persist as government stimulus income declines.
- Whether labor costs and agency nurse staffing expense moderate, and how staffing affects admissions, care quality and margins.
- The cash-flow outlook, including the effect of working capital, capital spending, dividends and lease obligations on available liquidity.
- The adequacy and sensitivity of the $102.5 million accrued risk reserves, including potential claims above insurance coverage and reserves.
- The performance and concentration of the investment portfolio, especially the NHI position and the effect of market-value changes.
- Developments in the pending qui tam matter, reimbursement policy and the transfer of the seven facilities, including the amended lease economics.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2022.