National HealthCare Corporation — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
NHC provides senior healthcare services, including skilled nursing, assisted and independent living, behavioral health, homecare, hospice, insurance, management and accounting services, and property leasing. At quarter-end, it operated or managed 68 skilled nursing facilities, 26 assisted living facilities, five independent living facilities, three behavioral health hospitals, 35 homecare agencies and 30 hospice agencies across eight states.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net operating revenues and grant income | $288.5 | $270.8 | $840.6 | $821.2 |
| Operating income | $13.0 | $4.1 | $37.0 | $22.8 |
| Operating margin | 4.5% | 1.5% | 4.4% | 2.8% |
| Net income attributable to NHC | $10.4 | $(2.4) | $38.4 | $16.1 |
| Diluted EPS | $0.68 | $(0.16) | $2.50 | $1.04 |
| Operating cash flow | Not provided separately | Not provided separately | $85.5 | $(3.2) |
- Q3 net patient revenue rose 6.4% to $277.0 million; total operating revenue rose 6.5%. Nine-month net patient revenue increased 3.6%. The prior-year nine-month total included $10.9 million of Provider Relief Fund income, versus none in 2023.
- Q3 salaries, wages and benefits were $182.7 million, or 63.3% of revenue, compared with 63.9% a year earlier. Other operating costs were 25.1% of revenue versus 26.9%. Management reported agency nurse staffing expense fell 48.4% in Q3 and 43.6% year to date.
- At September 30, cash and cash equivalents were $100.3 million; cash including restricted balances was $120.3 million. Current assets were $382.6 million and current liabilities $204.7 million, a current ratio of approximately 1.9x.
- NHC had no balance outstanding on its $50 million unsecured credit facility, entered into in May 2023, with a 364-day maturity. Interest is at one-month SOFR plus 1.10% or 1.25%, subject to deposit levels. The filing reports no outstanding conventional borrowings; lease obligations included $99.4 million of operating lease liabilities and $2.1 million of current finance lease liabilities.
- Nine-month investing cash outflow was $7.4 million, including $19.3 million of property and equipment purchases and a $2.7 million skilled nursing facility acquisition. Financing cash outflow was $32.7 million, including $26.5 million in dividends. Dividends declared were $0.59 per share in Q3 and $1.75 per share year to date.
Changes versus the prior comparable periods
- Q3 attributable earnings improved from a loss of $2.4 million to income of $10.4 million. Nine-month attributable earnings increased from $16.1 million to $38.4 million. Results include changes in unrealized equity-security values: a $3.1 million Q3 loss in 2023 versus an $11.1 million loss in Q3 2022; year-to-date gains of $2.9 million in 2023 versus losses of $11.5 million in 2022.
- Management’s non-GAAP net income was $13.3 million for Q3 2023 versus $7.8 million, and $39.0 million for the first nine months versus $29.0 million. These measures exclude specified items, including unrealized equity-security gains or losses, certain start-up operations and share-based compensation; they are not GAAP results.
- Skilled nursing occupancy at owned and leased facilities averaged 88.1% in Q3 versus 83.7% and 87.8% year to date versus 83.4%. Q3 composite skilled nursing per diem increased 7.6%; year-to-date it increased 6.0%.
- New operations contributed to revenue, while NHC’s transfer of seven Massachusetts and New Hampshire skilled nursing facilities in September 2022 reduced the year-over-year comparison base. Management reported same-facility revenue growth, excluding specified factors, of 11.8% for Q3 and 10.3% year to date.
- Operating cash flow improved sharply from the prior-year use of cash. The company attributed the change in part to working capital providing $20.6 million in 2023, compared with a $63.0 million working-capital use in 2022.
Outlook, commentary and risks
- NHC provided no company-wide earnings or revenue guidance. Management said cash flows, cash on hand, marketable securities and the undrawn credit facility should cover near-term liquidity, contractual obligations and growth plans; future performance remains subject to reimbursement, demand, labor and economic conditions.
- Management highlighted occupancy, quality of care, workforce recruitment and retention, and reducing reliance on costly agency nursing as operating priorities. It also reported 39 of 68 skilled nursing facilities had CMS ratings of four or five stars, versus 36% of industry facilities.
- Management estimates Tennessee, South Carolina and Missouri skilled nursing Medicaid rate changes will add approximately $15 million, $9 million and $5 million annually, respectively, for fiscal 2024. Supplemental COVID-related Medicaid payments were $15.4 million year to date, approximately flat with 2022; the temporary enhanced federal Medicaid match phases out by the end of 2023.
- CMS’s finalized FY2024 skilled nursing rule provides a stated net payment increase of 4.0%; hospice rates increased 3.1% effective October 1, 2023. CMS’s proposed home-health FY2024 changes projected a 2.2% payment decrease, including a proposed behavioral adjustment; these proposals are subject to change.
- Professional liability and workers’ compensation reserves totaled $108.1 million, up from $102.5 million at year-end 2022. NHC cautioned that claims could exceed insurance coverage and recorded reserves. A False Claims Act qui tam case involving an NHC affiliate was dismissed with prejudice in March/April 2023, but plaintiffs’ appeal remained pending.
- NHC’s marketable equity portfolio was concentrated: National Health Investors stock represented approximately 66.5% of the $125.8 million portfolio. The filing estimates a 10% market-price movement would change equity portfolio fair value by about $12.6 million. The company also identified labor availability and costs, government reimbursement and regulation, patient-care claims, census levels, inflation and cybersecurity as risks.
Important facts for investors to verify
- Whether occupancy and per-diem improvements continue, and whether agency staffing costs keep declining amid persistent labor shortages.
- The timing and realized impact of state Medicaid rate increases, the phase-out of temporary supplemental funding, and Medicare reimbursement changes.
- The adequacy of the $108.1 million claims reserve and the outcome of the pending appeal in the qui tam matter.
- The value and concentration risk of the NHI equity holding, including the effect of market-price changes on reported earnings and liquidity.
- Lease obligations and renewal or replacement arrangements as the major NHI property lease approaches its stated 2026 expiration.