National HealthCare Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; compared with Q1 2021. Dollar amounts are USD millions unless stated otherwise. NHC operates senior-care facilities and homecare and hospice services, primarily in the southeastern United States.
Business context and results
At quarter-end, NHC operated or managed 75 skilled nursing facilities, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, 35 homecare agencies and 29 hospice agencies across 10 states.
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net operating revenues and grant income | $279.0 | $251.0 | Up 11.2% |
| Net patient revenues | $256.3 | $216.9 | Up 18.2%; includes acquired Caris operations |
| Government stimulus income | $10.6 | $22.7 | Down $12.1 |
| Income from operations | $14.2 | $15.2 | Down 6.6%; operating margin 5.1% vs. 6.1% |
| Net income attributable to NHC | $15.3 | $21.3 | Down 28.0% |
| Diluted EPS | $0.99 | $1.38 | Down $0.39 |
| Non-GAAP diluted EPS | $0.91 | $1.08 | Company-adjusted measure |
| Operating cash flow | $(27.5) | $12.6 | Working-capital cash use was $52.3 |
Financial position, liquidity and capital
- Cash and cash equivalents were $57.0 at March 31, down from $107.6 at year-end. Cash plus restricted cash was $75.9, down from $119.7. The company also reported $149.0 of marketable equity and debt securities available as described in its liquidity discussion.
- Current assets were $384.0 and current liabilities $216.5. Total assets were $1,357.0; total liabilities were $446.0.
- NHC reported no long-term debt. Lease obligations remained: $9.4 finance-lease liabilities and $150.2 operating-lease liabilities, including current portions.
- Investing cash use was $5.9, including $9.0 of property and equipment purchases. Financing cash use was $10.5, including $8.5 of dividends paid. The declared dividend was $0.55 per share, versus $0.52 a year earlier.
- Unrestricted marketable equity securities were $118.0 and debt securities $31.0 at quarter-end. The NHI common-stock position was valued at $96.2; NHC disclosed that it represented 67.2% of its equity portfolio.
Material changes and management commentary
- Net patient revenue growth reflected higher skilled-nursing census and rates, as well as $17.8 of incremental revenue from consolidation of Caris, acquired in June 2021. Skilled-nursing census averaged 82.7%, up from 76.8% a year earlier.
- Labor costs increased 14.4% to $170.7, with salaries and benefits rising to 61.2% of operating revenue and grant income from 59.4%. Management cited labor shortages, inflation and a $12.4 increase in agency nurse staffing expense. Total costs and expenses rose 12.3%.
- Management said COVID-related disruption and elevated costs persisted and expected developments related to COVID-19 to adversely affect 2022 financial performance, but said the impact could not be quantified. It described liquidity as strong.
- Management estimated a 2022 corporate income tax rate of approximately 26%, excluding certain items; the Q1 effective rate was 25.3%. No full-year earnings or revenue guidance was provided.
Outlook, risks and unusual items
- CMS’s proposed FY2023 skilled-nursing Medicare rule would reduce aggregate Part A payments by an estimated 0.7% versus FY2022, according to the filing. NHC also noted Medicare sequestration reductions resumed at 1% from April 1, 2022, with 2% scheduled from July 1.
- On May 3, 2022, NHC signed agreements to transfer operations of seven Massachusetts and New Hampshire skilled-nursing facilities to a third party, expected in Q3 2022 subject to completion conditions. Those facilities reported Q1 revenue of $17.8 and a pretax loss of $0.6.
- Accrued risk reserves for reported and estimated claims were $101.4. NHC warned that claims could exceed insurance coverage and reserves; professional-liability claims and legal costs are significant industry risks.
- A qui tam lawsuit alleges violations of the False Claims Act and Anti-Kickback Statute involving an NHC-affiliated facility. NHC denies the allegations; the case was stayed pending a U.S. Supreme Court matter, with no expected timeline for lifting the stay.
- Q1 included $3.1 of unrealized gains on marketable equity securities, while available-for-sale debt securities had $6.3 of net-of-tax unrealized losses in other comprehensive income. Results are exposed to equity-market movements, including the concentrated NHI investment.
- Provider Relief Fund income fell to $10.6 from $22.7. Medicare accelerated payments received earlier totaled approximately $51.3; $5.0 remained in contract liabilities at quarter-end. Deferred employer Social Security taxes of $10.5 were included in current liabilities.
Most important facts for investors to verify
- Whether improved occupancy and patient revenue can offset persistent wage inflation, agency staffing costs and lower government stimulus support.
- The sustainability and composition of operating cash flow, given the $27.5 Q1 use of cash and substantial working-capital outflows.
- Liquidity and investment exposure, especially the concentrated NHI equity holding and market-value volatility.
- The timing and financial effects of the seven-facility transfer, including lease termination and master-lease amendment conditions.
- Developments in professional-liability reserves, the qui tam case, Medicare payment policy and sequestration reductions.