National HealthCare Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 9, 2024. NHC provides senior healthcare services across eight states. At quarter-end, it operated or managed 65 skilled nursing facilities, 24 assisted living facilities, five independent living facilities, three behavioral health hospitals, 35 homecare agencies and 30 hospice agencies.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net operating revenue | $297.2 million | $269.6 million | +10.2% |
| Operating income | $15.6 million | $10.0 million | +56.1% |
| Operating margin | 5.3% | 3.7% | +1.6 percentage points |
| Net income attributable to NHC | $26.2 million | $11.7 million | +123.6% |
| Diluted EPS | $1.69 | $0.76 | +$0.93 |
| Operating cash flow | $9.6 million | $13.9 million | -$4.2 million |
- Revenue growth was led by net patient revenue, up 10.8% to $285.8 million. Inpatient services revenue was $252.3 million; homecare and hospice revenue was $33.6 million. Other revenue was $11.4 million.
- Operating costs rose 8.5% to $281.5 million. Salaries, wages and benefits were $183.1 million; agency staffing expense fell approximately 51% year over year. Salaries and benefits were 61.6% of revenue versus 62.3%.
- GAAP net income included $14.4 million of unrealized gains on marketable equity securities, versus $1.4 million in Q1 2023. NHC’s non-GAAP net income was $15.0 million, compared with $12.1 million; non-GAAP diluted EPS was $0.97 versus $0.79. These company-defined non-GAAP measures exclude specified items and are not a substitute for GAAP results.
- Cash, cash equivalents and restricted cash totaled $121.1 million at quarter-end, including $94.0 million unrestricted cash. Current marketable equity and debt securities totaled $123.5 million. Total assets were $1.32 billion and total liabilities were $393.1 million.
- Borrowings under the $50 million unsecured credit facility were zero at March 31. The company said it did not expect to renew the facility at maturity. Operating lease liabilities totaled $85.7 million; finance lease obligations were $0 at quarter-end.
- Cash used for dividends was $9.1 million, and NHC repurchased $9.9 million of shares. The declared dividend was $0.59 per share, up from $0.57.
Changes, operating trends and outlook
- Skilled nursing census averaged 88.5%, up from 87.4%. Composite skilled nursing per diem rates increased 8.8%; Medicare, managed care, Medicaid and private-pay rates rose 4.7%, 5.8%, 12.0% and 10.5%, respectively.
- Management attributed improved adjusted earnings principally to higher occupancy, government-payor per diem increases and reduced agency staffing costs. New operations contributed $7.7 million of patient revenue year over year. Exiting operations at two Missouri skilled nursing facilities and one memory care facility reduced quarterly patient revenue by $2.0 million.
- Operating cash flow decreased as working-capital needs rose. A February 21 Change Healthcare ransomware incident disrupted claims processing; NHC manually billed many skilled nursing claims and reported receivables approximately $15 million above year-end. Management expected receivables and operating cash flow to return to normal over the following months. NHC received $9.9 million through the related accelerated-payment program, of which $7.7 million remained recorded as a contract liability at quarter-end.
- The company reported no formal company earnings guidance. It cited CMS’s proposed FY2025 skilled nursing Medicare payment increase of 4.1% and proposed hospice payment increase of 2.6%; these are proposals, not finalized company outlook. Management said cash, current marketable securities and operating cash flow were expected to meet near-term needs and growth plans.
- After quarter-end, on April 22, 2024, CMS issued a long-term-care minimum staffing rule, including 3.48 total nurse hours per resident day and an RN onsite 24/7, with staggered implementation and potential exemptions. Compliance may add staffing and cost pressure.
Risks, contingencies and unusual items
- Professional liability and workers’ compensation reserves were $108.2 million, up from $103.3 million at December 31, 2023. NHC warns claims could exceed insurance coverage and reserves; estimates may change.
- Marketable equity securities were $152.7 million at fair value. NHI stock accounted for approximately $102.5 million, or 67.1%, of that portfolio. A hypothetical 10% price movement would change portfolio fair value by approximately $15.3 million.
- Labor availability and wage inflation, government reimbursement and regulatory changes, occupancy, patient-care litigation, cybersecurity and privacy incidents, and investment-market risks remain significant. Management cited inflation in food and pharmaceutical supplies.
- A qui tam case involving an NHC affiliate was dismissed with prejudice; the Eleventh Circuit affirmed, and the filing says the period to seek Supreme Court review expired. The company reported other ordinary-course litigation but said it did not expect it to be material based on information available.
- NHC reported no material changes to previously disclosed risk factors and stated disclosure controls were effective at March 31, 2024.
Investor verification priorities
- Check subsequent filings for whether Change Healthcare-related claims delays resolved as management expected and whether receivables and operating cash flow normalized.
- Assess the impact, timing and any exemptions under CMS’s minimum staffing rule, including the company’s ability to recruit and retain staff.
- Track agency labor expense, occupancy, per diem rates and the durability of margin improvement.
- Review NHI share-price exposure and the effect of unrealized investment gains on GAAP earnings versus operating performance.
- Monitor professional-liability reserve development, claim severity and insurance coverage, as well as renewal or replacement of the credit facility.