National Healthcare Corporation (NYSE American: NHC) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions of dollars unless otherwise noted. NHC provides skilled nursing, assisted and independent living, behavioral health, homecare and hospice services, alongside insurance, management, accounting and property leasing services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenues and grant income | $276.7 | $250.6 | $790.9 | $768.4 |
| Net patient revenue | $254.8 | $227.4 | $708.6 | $697.1 |
| Operating income | $12.8 | $7.0 | $41.8 | $35.4 |
| Net income (loss) attributable to NHC | ($3.3) | $12.8 | $122.8 | $14.3 |
| Diluted earnings (loss) per share | ($0.22) | $0.84 | $7.97 | $0.93 |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $46.9 | $183.9 |
- Q3: Revenue and grant income rose 10.4%, while operating income increased 81.7%. Operating margin was 4.6%, compared with 2.8% a year earlier. The reported net loss primarily reflected a $23.8 million unrealized loss on marketable equity securities.
- Nine months: Revenue and grant income increased 2.9%, and operating income rose 18.1%. Reported net income included a $95.2 million gain from the Caris acquisition and was also affected by $23.2 million of unrealized equity-security losses. NHC’s non-GAAP net income was $46.8 million versus $44.7 million in 2020; this company-defined measure excludes specified items and is not a substitute for GAAP results.
- Government stimulus income was $10.4 million in Q3 and $48.3 million year to date, versus $12.1 million and $36.8 million in the comparable 2020 periods. The nine-month net patient revenue comparison also reflects $16.1 million of supplemental Medicaid payments, up from $10.4 million.
- Q3 net patient revenue increased 12.1%. Homecare and hospice revenue was $31.9 million versus $13.2 million, largely reflecting consolidation of Caris; inpatient revenue was $222.9 million versus $214.2 million.
Liquidity, cash flow and obligations
- At September 30, 2021, cash and cash equivalents were $112.5 million; total cash, including restricted cash, was $126.8 million, down from $158.5 million at year-end 2020. Current assets were $424.8 million and current liabilities were $257.7 million.
- Management cited $142.5 million of marketable equity and debt securities, in addition to cash, as expected sources for liquidity and obligations. Some cash and investments are restricted, including assets set aside for insurance liabilities.
- Nine-month operating cash flow fell to $46.9 million from $183.9 million. Management attributed much of the decline to 2020 CARES Act and Provider Relief Fund cash receipts, Medicare advance-payment recoupments beginning in 2021, and lower working-capital benefits. Investing cash outflow was $52.8 million, including $28.7 million for Caris and $25.8 million of property and equipment purchases. Financing cash outflow was $25.8 million, including $24.0 million of dividends.
- NHC reported no long-term debt. Finance lease liabilities were $11.7 million and operating lease liabilities were $162.6 million. The company declared $0.52 per share in quarterly dividends, or $1.56 per share for the nine-month period.
- At quarter-end, $27.0 million of Medicare accelerated payments remained subject to recoupment. NHC had also deferred $21.2 million of employer Social Security taxes, payable in installments by December 2021 and December 2022.
Material changes, outlook and risks
- In June 2021, NHC acquired Caris HealthCare’s remaining 24.9% interest for approximately $28.7 million, bringing the previously held investment into consolidation. The step acquisition generated a $95.2 million remeasurement gain and added $147.0 million of preliminary goodwill. Purchase accounting remained preliminary at quarter-end.
- Skilled nursing occupancy averaged 82.0% in Q3 versus 81.3% a year earlier, but was 80.0% for the first nine months versus 85.7% in the prior-year period. Management said the Delta-variant surge slowed the occupancy recovery.
- Management reported persistent workforce shortages, wage pressure and greater use of agency nurses. Agency nurse staffing expense increased $8.2 million in Q3 and $13.1 million year to date versus the respective 2020 periods. COVID-related costs and stimulus support also continued to affect results.
- Management stated that overall liquidity remained strong, but could not quantify the pandemic’s future financial impact. No company-specific earnings or revenue guidance was provided. External reimbursement developments cited include an estimated 1.2% FY2022 Medicare skilled-nursing payment increase, and estimated annual Medicaid rate increases of $3.5 million in Tennessee and $2.0 million in Missouri. Management expected an approximately 26% 2021 corporate income tax rate excluding certain items.
- Key risks include COVID-19 effects, census and labor availability, changes in Medicare and Medicaid payments, regulatory compliance, and professional liability claims. Accrued risk reserves were $103.8 million. NHC affiliate NHC Healthcare/Moulton denies and is defending a qui tam action alleging False Claims Act and Anti-Kickback Statute violations; the filing does not state a quantified potential exposure.
Important facts for investors to verify
- Caris’s final purchase-price allocation, goodwill and ongoing contribution to consolidated results, and the extent to which reported earnings depend on the one-time $95.2 million gain.
- Underlying earnings and cash generation excluding stimulus income, securities fair-value movements and acquisition accounting effects; reconcile the company’s non-GAAP measures to GAAP.
- Whether occupancy continues to recover and whether agency staffing, labor costs and other operating expenses stabilize.
- Availability of cash and investments for operations after considering restricted assets, Medicare advance-payment recoupments, deferred payroll taxes and lease obligations.
- Changes in professional liability reserves, the outcome or development of the qui tam litigation, and NHI equity concentration: NHI represented 66.9% of NHC’s marketable equity portfolio at quarter-end.