National HealthCare Corporation (NHC) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless otherwise noted, financial amounts below are in millions of dollars. NHC operates senior-care facilities and homecare programs, alongside rental, management, accounting, and insurance services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net patient revenue | $227.4 | $235.1 | $697.1 | $706.5 |
| Operating revenue and grant income | $250.6 | $247.1 | $768.4 | $742.5 |
| Operating income | $7.0 | $6.6 | $35.4 | $32.5 |
| Net income attributable to NHC | $12.8 | $19.5 | $14.3 | $54.4 |
| Diluted EPS | $0.84 | $1.27 | $0.93 | $3.55 |
| Operating margin | 2.8% | 2.7% | 4.6% | 4.4% |
- Q3 revenue including grants increased 1.4%; excluding $12.1 million of stimulus income, revenue declined 3.5%. Nine-month revenue including grants rose 3.5%; excluding $36.8 million of stimulus income, it declined 1.5%.
- Q3 GAAP net income fell despite higher operating income, reflecting lower investment gains: unrealized marketable-equity results were a $0.2 million loss versus a $9.3 million gain a year earlier. For the nine months, those results swung to a $40.6 million loss from a $16.1 million gain.
- Company-reported non-GAAP net income was $13.5 million for Q3, up from $12.9 million, and $44.7 million for the nine months, up from $42.8 million. This measure excludes specified items, including unrealized equity-security gains or losses.
- Q3 net patient revenue declined 3.3%. Skilled-nursing occupancy fell to 81.3% from 90.1%; higher per-diem rates partly offset lower census. Homecare revenue grew slightly in Q3, but declined about $4.1 million for the nine-month period.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $183.9 million, versus $74.9 million. The increase included substantial working-capital cash inflows, notably $51.3 million in Medicare accelerated payments, $21.4 million of Provider Relief Fund cash not yet recognized as income, and $14.9 million of deferred employer payroll taxes.
- Investing cash use was $15.3 million; financing cash use was $33.5 million, including $23.9 million of dividends paid. Cash, cash equivalents, and restricted cash ended at $196.1 million, versus $61.0 million at year-end 2019.
- At September 30, current assets were $422.2 million and current liabilities were $259.7 million. Cash and cash equivalents were $183.8 million; marketable equity securities were $111.9 million.
- NHC had no long-term debt outstanding after repaying its credit-facility balance in Q2 and terminating the facility on August 13. It had no credit facility in place at quarter-end. Lease obligations remained: $16.0 million finance and $185.0 million operating liabilities.
- Dividends declared were $0.52 per share in Q3. The board authorized a stock-repurchase program of up to $25 million, expiring August 31, 2021; repurchases through September totaled $53,000.
Material changes, outlook, and risks
- COVID-19 reduced admissions and census and increased costs for protective equipment, testing, supplies, and frontline incentive pay. Q3 COVID-related expenses included $8.4 million for supplies and testing and $2.5 million in incentive compensation; nine-month totals were $15.0 million and $9.2 million, respectively.
- NHC received $58.2 million from the Provider Relief Fund, recognized $36.8 million as income through September, and reported $21.4 million remaining as a liability. HHS guidance issued October 22, 2020 materially revised the lost-revenue definition used in the company’s estimates. NHC had not updated its September 30 estimate; the effect was still under evaluation and could be material, including possible reversal of previously recognized income.
- The company received $51.3 million in Medicare accelerated payments. Recoupment was expected to begin around April 2021, initially through deductions from Medicare claims; any unpaid balance after 29 months may be due on demand with 4% interest. Deferred employer Social Security taxes are payable in installments in 2021 and 2022.
- Management expected COVID-19 to adversely affect financial performance in 2020 and 2021, but said it could not quantify the ultimate impact. It cited strong liquidity and low debt. Other expected 2020 support included approximately $14 million in supplemental Medicaid payments and $2.6 million from temporary Medicare sequestration relief. CMS’s FY2021 skilled-nursing payment rule provided for an approximate 2.2% increase.
- Management identified census, staffing availability and cost, government reimbursement and regulation, pandemic developments, and patient-care claims as key risks. Accrued risk reserves were $106.0 million; claims could exceed insurance coverage and reserves. NHC’s marketable-equity portfolio was concentrated in National Health Investors: $98.3 million, or 87.8% of the portfolio.
- A sale of a Missouri skilled-nursing facility was under agreement and expected to close in Q4 2020. The disclosed False Claims Act case against a subsidiary was dismissed with final judgment in May 2020. Management reported disclosure controls were effective.
Important facts for investors to verify
- How the October 22 HHS Provider Relief Fund guidance affects grant income already recognized and the remaining $21.4 million.
- Whether occupancy and admissions recover from the pandemic-related decline, and how staffing and COVID-related costs evolve.
- The timing and cash-flow effects of Medicare accelerated-payment recoupments, payroll-tax repayments, and other government support.
- The sensitivity of earnings and equity to NHC’s concentrated NHI investment and its market-value changes.
- Progress on the facility sale and the adequacy of the $106.0 million risk reserves relative to future claims.