National HealthCare Corporation (NYSE American: NHC) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Unaudited. NHC provides senior healthcare services, including skilled nursing, assisted and independent living, behavioral health, homecare, and hospice. At quarter-end, it operated or managed facilities and agencies across eight states.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net operating revenue and grant income | $269.6 | $279.0 | Down 3.4%; excludes no grant income in 2023 versus $10.6 million in 2022 |
| Net patient revenue | $258.0 | $256.3 | Up 0.7% |
| Operating income | $10.0 | $14.2 | Operating margin 3.7%, versus 5.1% |
| Net income attributable to NHC | $11.7 | $15.3 | Down 23.5% |
| Diluted EPS | $0.76 | $0.99 | Down $0.23 |
| Company-reported non-GAAP net income | $12.1 | $14.1 | Excludes specified investment gains, start-up operations, and share-based compensation; non-GAAP |
| Cash from operating activities | $13.9 | $(27.5) | Improved $41.3 million |
- Total costs and expenses were $259.6 million, down 2.0%. Salaries, wages, and benefits were $167.8 million, but rose to 62.3% of revenue from 61.2%.
- Q1 net income included $1.4 million in unrealized gains on marketable equity securities, compared with $3.1 million in Q1 2022. Non-operating income was $4.3 million, including $1.5 million of interest income and $1.5 million of equity earnings from unconsolidated investments.
- Cash, cash equivalents, and restricted cash totaled $74.7 million at March 31, 2023. Unrestricted cash was $46.1 million; unrestricted marketable equity and debt securities totaled $118.6 million. Current assets were $337.9 million and current liabilities $183.2 million.
- NHC reported no long-term debt. Finance lease obligations were $4.6 million, all current; operating lease liabilities totaled $113.1 million. Cash dividends paid were $8.7 million, and the declared dividend was $0.57 per share.
Material changes versus Q1 2022
- Revenue and grant income declined primarily because Q1 2023 had no Provider Relief Fund income, versus $10.6 million in Q1 2022, and because NHC transferred seven Massachusetts and New Hampshire skilled nursing facilities in September 2022. Excluding the stimulus income and those facilities, same-facility net operating revenue increased 7.1%.
- Net patient revenue increased modestly despite the facility transfers. Average census at owned and leased skilled nursing facilities improved to 87.4% from 82.7%. Skilled nursing composite per diem increased 3.3%.
- Total costs fell, in part due to the facility transfers. Agency nurse staffing expense declined about 34% ($4.9 million), although labor shortages and wage pressure continued. Salaries and benefits nevertheless represented a higher percentage of revenue.
- Operating cash flow swung to positive $13.9 million from negative $27.5 million, with working-capital cash use of $6.0 million versus $52.3 million a year earlier.
Outlook, management commentary, risks, and contingencies
- Outlook and liquidity: Management expects operating cash flows, cash, and marketable securities to meet near-term obligations and growth plans; it also cites unencumbered real estate as a potential source of future borrowing capacity. The filing provides no specific company earnings or revenue guidance.
- Occupancy and operations: Management identifies skilled nursing occupancy, quality of care, and attracting and retaining qualified personnel as priorities. It reported 40 of 68 skilled nursing facilities rated four or five stars (59%), compared with 37% industry-wide, and an average rating of 3.6 versus 2.9.
- Reimbursement: NHC cites the CMS FY2024 proposed skilled nursing payment update of 3.7% overall, including a negative 2.3% parity adjustment; this was a proposal, not a final rate. The filing also states the temporary Medicare three-day hospital-stay waiver was scheduled to end May 11, 2023. State Medicaid funding and payment rates remain a risk.
- Cost and care risks: Labor shortages, agency staffing, wage pressure, and inflation in food and pharmaceutical supplies may weigh on results. Professional liability and workers’ compensation reserves were $105.6 million; actual claims could exceed reserves or insurance coverage.
- Investments: The equity portfolio had a $124.2 million fair value, of which NHI stock represented $84.1 million (67.7%). A hypothetical 10% market-price movement would change the portfolio value by about $12.4 million. Available-for-sale debt securities had $9.2 million in gross unrealized losses, which NHC characterized as non-credit-related.
- Legal matter: A qui tam case involving an NHC affiliate was dismissed with prejudice in March 2023, with an amended dismissal order in April; plaintiffs appealed to the Eleventh Circuit on April 20, 2023. The filing states other incidental litigation was not expected to be material based on information available.
- Other items: NHC repurchased 44,349 shares for $2.5 million in the quarter. Management reported effective disclosure controls and no material changes in internal control over financial reporting; it also reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher occupancy and per diem rates can sustain same-facility growth as pandemic-related stimulus income has ended and the seven facilities have left the portfolio.
- Whether labor and agency-staffing costs continue to improve without compromising staffing levels, patient care, or census.
- The final CMS FY2024 skilled nursing payment rule, Medicaid rate developments, and the impact of the scheduled end of the Medicare waiver.
- Developments in professional liability claims and the qui tam appeal, including potential effects on reserves, insurance coverage, and cash flows.
- The impact of NHI share-price movements and interest-rate changes on investment values and reported earnings; distinguish unrestricted from restricted cash and securities when assessing liquidity.