National HealthCare Corporation (NHC) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 6, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
NHC provides senior healthcare services, including skilled nursing, assisted and independent living, behavioral health, homecare, insurance, management and accounting services, and property leasing. At quarter-end it operated or managed 75 skilled nursing facilities, 24 assisted living facilities, five independent living facilities, one behavioral health hospital and 35 homecare programs across 10 states.
Financial performance and condition
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net patient revenues | $216.9m | $244.1m |
| Government stimulus income | $22.7m | — |
| Net operating revenues and grant income | $251.0m | $256.1m |
| Operating income | $15.2m | $15.8m |
| Net income attributable to NHC | $21.3m | $(26.9)m |
| Diluted earnings per share | $1.38 | $(1.76) |
| Non-GAAP net income / diluted EPS | $16.6m / $1.08 | $17.1m / $1.11 |
| Operating cash flow | $12.6m | $7.8m |
Net operating revenues and grant income declined 2.0% year over year; operating income declined 3.7%. Operating margin was 6.1% of revenues and grant income, versus 6.2%. The GAAP earnings comparison was strongly affected by marketable equity security valuation: Q1 2021 included a $7.1m unrealized gain, while Q1 2020 included a $60.4m unrealized loss. NHC’s non-GAAP measure, which excludes specified items, showed a 2.8% decline in net income.
Costs and expenses were $235.8m, down 1.9%. Salaries, wages and benefits were $145.1m; other operating costs were $70.2m. Management reported higher COVID-related incentive compensation ($3.3m) and COVID-related supplies and testing costs ($5.2m) in Q1 2021, partly offset by cost controls.
Cash, cash equivalents and restricted cash totaled $156.1m at March 31, 2021, compared with $158.5m at year-end. Unrestricted cash was $134.1m. NHC reported $184.7m of marketable securities available for liquidity in its MD&A; it also held restricted investments. Current assets were $464.6m and current liabilities $265.8m. The company reported no long-term debt, but had finance lease liabilities of $13.9m and operating lease liabilities of $172.8m. It also had $51.3m of Medicare accelerated-payment advances recorded as contract liabilities.
Cash from operations was $12.6m; investing activities used $5.9m and financing activities used $9.1m. Capital spending on property and equipment was $4.3m, and common dividends paid were approximately $8.0m. Dividends declared were $0.52 per share.
Material changes and operating trends
- Skilled nursing census averaged 76.8%, down from 91.4% in Q1 2020, although census rose approximately 3.5% from January through March 2021. Management attributed lower patient revenues principally to pandemic-related occupancy pressure.
- Net patient revenues fell 11.2%. The decline was partly offset by higher per-diem rates: skilled nursing Medicare rates rose 6.3%, Medicaid rates 8.5%, managed care rates 3.1%, and the overall skilled nursing composite rate 6.9%.
- Homecare revenue increased to $13.6m from $13.1m; inpatient revenue declined to $203.2m from $231.0m.
- Provider Relief Fund income of $22.7m supported Q1 2021 reported revenue. NHC received an additional $30.2m of Provider Relief Fund disbursements during the quarter and carried $23.5m of unrecognized funds as a liability.
- Cash from operations increased from $7.8m to $12.6m, while Q1 2020 financing cash flow had included $40.0m of credit-facility borrowings; there were no such borrowings in Q1 2021.
Outlook, risks and unusual items
- NHC said it could not quantify the future financial impact of COVID-19, but expected pandemic developments to adversely affect 2021 performance. Management cited occupancy, labor availability and expense levels, and the duration and severity of the pandemic as key uncertainties.
- Management described liquidity and capital resources as strong and said cash and marketable securities were expected to support operating needs and plans over the next 12 months. No specific company revenue or earnings guidance was provided.
- Management expected an approximately 26% corporate income tax rate for 2021, excluding certain items.
- Medicare advance payments of $51.3m began being recouped in Q2 2021. Repayment is through automatic Medicare payment offsets, with any remaining balance potentially payable on demand and subject to 4% interest under the stated program terms.
- NHC had deferred $21.2m of employer Social Security taxes; half was classified as current and half as noncurrent, with payment deadlines in 2021 and 2022. Congress extended the Medicare sequestration suspension through December 31, 2021 after quarter-end.
- Professional liability and workers’ compensation reserves totaled $101.5m. The company warned that claims could exceed insurance and reserves; healthcare reimbursement rules and compliance are subject to audits, interpretation, penalties and potential exclusion from government programs.
- NHC’s marketable equity portfolio was concentrated in National Health Investors (NHI): NHI shares had a fair value of $117.9m, approximately 84% of the equity portfolio. A hypothetical 10% market-price change in the entire equity portfolio would change fair value by about $14.0m.
- Management reported no goodwill impairment indicators requiring a quantitative test in the quarter. The filing also noted continuing risk of future impairment if assumptions or market conditions change.
Most important facts for investors to verify
- Whether skilled nursing occupancy continues to recover from the 76.8% quarterly average and how that affects patient revenue and margins.
- How much of reported earnings and cash support reflects temporary COVID-19 grants, supplemental Medicaid payments and other relief measures.
- The pace and cash-flow effect of recouping the $51.3m Medicare advance, and the repayment timing for deferred payroll taxes.
- Changes in NHI’s share price and the concentration of NHC’s investment portfolio, given the material unrealized gains and earnings volatility.
- Whether professional liability claims, reserves or regulatory matters change materially, and whether lease obligations and operating cash flows remain manageable.