National HealthCare Corporation (NYSE American: NHC) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 3, 2022. NHC provides senior healthcare services, including skilled nursing, assisted and independent living, behavioral health, homecare, hospice, insurance, management services and property leasing. At quarter-end, it operated or managed 68 skilled nursing facilities and other senior-care operations across eight states.
Financial performance
Amounts below are in millions except per-share data. Operating margin is income from operations divided by operating revenues and grant income.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenues and grant income | $270.8 | $276.7 | $821.2 | $790.9 |
| Net patient revenues | $260.2 | $254.8 | $776.7 | $708.6 |
| Income from operations | $4.1 | $12.8 | $22.8 | $41.8 |
| Operating margin | 1.5% | 4.6% | 2.8% | 5.3% |
| Net income/(loss) attributable to NHC | $(2.4) | $(3.3) | $16.1 | $122.8 |
| Diluted EPS | $(0.16) | $(0.22) | $1.04 | $7.97 |
| Operating cash flow | Not separately reported for quarter | $(3.2) | $46.9 |
- Q3 patient revenue rose 2.1%, while total operating revenues and grant income fell 2.1%, principally because NHC recognized no Provider Relief Fund income versus $10.4 million a year earlier. Same-facility operating revenue increased 3.8%, excluding stimulus income.
- For the first nine months, patient revenue increased 9.6% and total operating revenues and grant income increased 3.8%. Growth reflected the Caris hospice acquisition and improved skilled-nursing occupancy; Provider Relief Fund income declined $37.4 million year over year.
- Nine-month 2021 GAAP earnings included a $95.2 million gain on acquiring the remaining Caris interest. NHC’s non-GAAP adjusted net income was $7.8 million in Q3 2022 versus $14.9 million in Q3 2021, and $29.0 million for nine months versus $46.8 million. These company-defined non-GAAP figures exclude specified items and are not substitutes for GAAP results.
- Labor costs pressured margins: salaries, wages and benefits were 63.9% of revenues and grant income in Q3, versus 61.5% a year earlier; for nine months, 63.2% versus 61.1%. Management cited wage inflation, workforce shortages and expensive agency staffing. Other operating costs also faced inflationary pressure.
- Skilled-nursing occupancy improved: 83.7% in Q3 versus 82.0%, and 83.4% for nine months versus 80.0%. NHC reported that 62% of its skilled-nursing facilities had four- or five-star ratings, compared with 37% industry-wide.
Balance sheet, liquidity and cash flow
- At September 30, cash and cash equivalents were $44.5 million; restricted cash was $27.7 million. Current assets were $344.5 million and current liabilities $210.2 million. Cash, cash equivalents and restricted cash totaled $72.2 million, down from $119.7 million at year-end 2021.
- NHC reported no long-term debt. Finance-lease liabilities totaled $7.0 million and operating-lease liabilities $126.5 million, including current and noncurrent amounts. Total liabilities were $414.2 million.
- Management said available liquidity included $44.5 million cash and $132.2 million of marketable equity and debt securities, which it expected to support obligations, operations and growth plans over the next 12 months. The securities figure is not all cash and includes market-risk exposure.
- Nine-month operating cash flow was negative $3.2 million, versus positive $46.9 million in 2021. Management attributed the current-period result in part to $63.0 million of working-capital cash use. Investing cash use was $8.8 million, including $24.6 million of property and equipment purchases; financing cash use was $35.5 million, including $25.8 million of dividends and $6.9 million of share repurchases.
- Dividends declared were $0.57 per share in Q3 2022 versus $0.52 in Q3 2021; nine-month declarations were $1.69 versus $1.56.
Material changes, outlook and risks
- On September 1, NHC transferred operations of seven Massachusetts and New Hampshire skilled-nursing facilities to a third party and terminated its lease for those facilities. The amended NHI master lease increased specified future base rents by approximately $8.8 million over the next four and one-third years. The facilities had Q3 2022 revenue of $13.2 million and reported pre-tax losses excluding stimulus funds.
- COVID-related government stimulus income was $10.9 million for the first nine months of 2022, compared with $48.3 million in 2021; Q3 2022 had none. Medicare sequestration returned to a full 2% reduction on July 1, 2022; NHC estimated a $1.5 million Q3 patient-revenue impact versus the prior year. The filing says the pandemic’s future financial impact cannot be quantified and expected COVID developments to adversely affect 2022 performance.
- Management estimated a 2022 federal and state effective income tax rate of approximately 26%. CMS’s FY2023 final rules cited approximate payment increases of 2.7% for skilled nursing, 0.7% for home health and 3.8% for hospice; these are program-wide rule updates, not company earnings guidance. No specific company revenue or earnings guidance is provided.
- Marketable equity securities included $92.2 million of NHI stock, about 72% of NHC’s $128.0 million equity portfolio. A hypothetical 10% market-price change would change the portfolio’s fair value by about $12.8 million. Available-for-sale debt securities had $12.1 million of gross unrealized losses, which the company attributed to non-credit factors.
- Accrued risk reserves for reported and estimated unreported claims totaled $103.7 million. NHC warned that claims could exceed insurance coverage and reserves. The filing also describes a pending False Claims Act/Anti-Kickback qui tam case naming an NHC affiliate; the affiliate denies the allegations and is defending the case. Management said it could not predict when the court stay would be lifted.
- Other cited risks include staffing and retention, Medicare and Medicaid reimbursement and regulation, patient-care litigation, occupancy, inflation, cybersecurity and privacy, and market and economic conditions. Management reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether occupancy and patient-revenue growth can offset labor inflation, agency staffing costs and reduced government support.
- How operating cash flow and working capital develop, and whether reported liquidity remains adequate after considering restricted funds and securities volatility.
- The earnings and cash-flow effects of the seven-facility transfer and amended NHI lease, including the increased future rent schedule.
- The fair value and concentration risk of the NHI investment, and the adequacy of accrued risk reserves relative to claims exposure.
- Subsequent developments in the qui tam litigation and changes in Medicare, Medicaid and other regulatory or reimbursement requirements.