National HealthCare Corporation (NHC) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Financial amounts below are in millions of dollars, except per-share data. NHC operates senior-care facilities and homecare programs, primarily in the southeastern United States.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net patient revenue | $225.7 | $235.3 | $469.8 | $471.4 |
| Government stimulus income | $24.6 | — | $24.6 | — |
| Operating income | $12.5 | $10.2 | $28.4 | $26.0 |
| Net income attributable to NHC | $28.3 | $13.7 | $1.5 | $35.0 |
| Diluted EPS | $1.84 | $0.89 | $0.10 | $2.28 |
- Q2 net operating revenue and grant income rose 5.9% to $261.6 million, but excluding stimulus income, operating revenue declined 4.1%. Operating margin was 4.8%, versus 4.1% in Q2 2019.
- Six-month net operating revenue and grant income increased 4.5%; excluding stimulus income, it declined 0.5%. Management’s non-GAAP net income, excluding specified items including securities valuation changes, was $14.2 million in Q2 versus $12.9 million, and $31.2 million for six months versus $29.8 million. These are non-GAAP measures, not substitutes for GAAP results.
- Quarterly GAAP earnings included a $20.1 million unrealized gain on marketable equity securities. The six-month period included a $40.3 million unrealized loss; this was a major reason six-month GAAP net income fell sharply year over year.
- Cash from operations was $154.7 million for six months, versus $39.2 million a year earlier. The increase included substantial working-capital inflows, notably $51.0 million in Medicare advance payments, $19.3 million in unrecognized provider-relief funds, and $7.7 million in deferred employer payroll taxes.
- Cash and cash equivalents were $149.5 million at June 30, 2020, up from $50.3 million at December 31, 2019. Total current assets were $390.2 million and current liabilities $262.1 million. Marketable equity securities were $112.1 million; restricted cash and investments should not be treated as freely available liquidity.
- No balance was outstanding on the credit facility at quarter-end; $60 million remained available. The facility matures October 7, 2020. Finance lease liabilities totaled $17.1 million and operating lease liabilities $191.0 million; lease liabilities are distinct from funded debt.
- Dividends declared were $0.52 per share in the quarter. Six-month capital expenditures were $12.5 million; dividends paid were $15.9 million.
Material changes and operating drivers
- COVID-19 reduced skilled-nursing census to 84.3% in Q2 from 90.5% a year earlier; six-month census was 87.9% versus 90.4%. Management attributed declines to fewer admissions from hospitals and referral partners.
- Q2 net patient revenue fell 4.1%. Homecare revenue declined about $3.1 million in the quarter and $4.5 million for six months, primarily from COVID-related volume reductions. Higher per-diem rates partly offset lower volumes.
- Costs rose: Q2 salaries, wages and benefits increased 6.1% to $156.9 million, including $5.9 million of COVID-related incentive compensation. COVID-related supplies and other costs were about $5.7 million in Q2. Six-month totals were $6.7 million of incentive compensation and $6.6 million of COVID-related operating expenses.
- Q2 results also included $24.6 million of Provider Relief Fund income. NHC received $43.9 million in total relief-fund disbursements; $19.3 million remained a liability pending qualifying expense or lost-revenue recognition.
- In February, NHC acquired the remaining interest in a 166-bed Knoxville skilled-nursing facility, consolidating its operations and recording a $1.7 million gain from remeasuring its previously held interest.
Outlook, risks and contingencies
- NHC said it could not quantify the pandemic’s full financial impact, expected COVID-19 to adversely affect 2020 performance, and cited uncertainty around duration, severity, admissions, costs, government actions and future relief.
- Management stated that liquidity and low debt provided flexibility and expected available cash, operating cash flow, investments and borrowing capacity to meet near-term needs. The company was evaluating options for the October 2020 credit-facility maturity and believed liquidity was sufficient with or without an extension.
- Management estimated approximately $2.6 million of 2020 revenue benefit from temporary Medicare sequestration suspension, approximately $11 million from supplemental Medicaid payments, and $21–$26 million of 2020 liquidity benefit from deferred payroll taxes. These are estimates, not guaranteed outcomes. The Medicare advance payments are to be recouped against claims beginning around August 2020, with remaining unapplied amounts repayable within 210 days of receipt.
- CMS’s fiscal 2021 skilled-nursing payment rule, released July 31, 2020, provided an estimated 2.2% increase from fiscal 2020 levels. NHC estimated Tennessee Medicaid rate changes would add about $2.0 million in fiscal 2021 revenue. Neither represents company-wide earnings guidance.
- Key risks include pandemic-driven census and staffing pressures, higher PPE and supply costs, government reimbursement and regulatory changes, labor availability, and professional-liability claims. Accrued risk reserves were $105.0 million; actual claims could exceed insurance and reserves. NHC also disclosed concentration in its NHI stock investment: $99.0 million, or 88.3% of its marketable equity portfolio.
- A False Claims Act case against subsidiary Nutritional Support Services was dismissed, with final judgment entered May 6, 2020. The filing reports other ordinary-course claims and litigation, but none considered material based on information then available.
Most important facts for investors to verify
- Whether census and admissions recover, and whether COVID-related staffing, incentive-pay and supply costs persist.
- How much of the $43.9 million in provider relief funds qualifies for recognition, and the timing and cash effects of Medicare advance-payment recoupment and deferred payroll taxes.
- The outcome of the credit facility’s October 2020 maturity and any refinancing or extension terms.
- The sustainability of cash from operations after removing temporary government-related working-capital inflows.
- The sensitivity of earnings and equity to NHI share-price changes, and the adequacy of professional-liability and workers’ compensation reserves.