National HealthCare Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with Q1 2019. Amounts are in millions except per-share data. NHC operates senior-care facilities and homecare programs, primarily in the southeastern United States.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior balance-sheet date |
|---|---|---|
| Net operating revenues | $256.1 | $248.3 |
| Income from operations | $15.8; 6.2% margin | $15.8; 6.4% margin |
| Net income attributable to NHC | $(26.9); $(1.76) per diluted share | $21.3; $1.39 per diluted share |
| Operating cash flow | $7.8 | $11.6 |
| Cash, cash equivalents and restricted cash | $84.2 | $61.0 at Dec. 31, 2019 |
| Credit-facility borrowings | $50.0; $10.0 available | $10.0 at Dec. 31, 2019 |
| Total assets / total liabilities | $1,256.3 / $513.0 | $1,286.6 / $507.6 at Dec. 31, 2019 |
- Revenue increased 3.2%. Net patient revenue rose 3.4% to $244.1; inpatient revenue increased while homecare revenue declined. Other revenue decreased 1.2% to $12.0.
- Operating costs increased 3.4% to $240.3. Salaries, wages and benefits rose 4.3% to $147.5 and increased to 57.5% of revenue from 56.9%; management cited wage pressure and $0.8 of March frontline incentive compensation. COVID-related PPE, nursing-supply, food and dietary costs were approximately $0.9.
- The reported net loss chiefly reflects a $60.4 unrealized loss on marketable equity securities, versus a $6.8 unrealized gain in Q1 2019. NHC’s non-GAAP net income, which excludes specified items, was $17.1 versus $17.0; non-GAAP diluted EPS was $1.11 in both periods. These company-defined non-GAAP measures are not substitutes for GAAP results.
- Cash flow from operations fell 33.2%; investing used $16.2, including $6.6 for an acquisition and $6.6 in capital additions. Financing provided $31.6, mainly from $40.0 of credit-facility borrowings; dividends paid were $8.0.
- Current assets were $306.7 and current liabilities $218.0 at March 31. Cash and cash equivalents were $69.5; marketable equity securities were $92.1. Operating and finance lease liabilities totaled $215.1 and should be distinguished from funded debt.
- Quarterly dividend declared was $0.52 per share, compared with $0.50 a year earlier.
Material changes, outlook and risks
- In February, NHC acquired the remaining interest in a 166-bed Knoxville skilled nursing facility, bringing it under consolidated operations. The transaction generated a $1.7 remeasurement gain and $0.3 of goodwill.
- Management said Q1 results were not significantly affected by COVID-19 because the pandemic affected operations mainly in the second half of March. Skilled-nursing census averaged 91.4%, versus 90.2% a year earlier, but declined late in March as admissions and referrals fell; management said these trends continued into April and early May.
- Management described liquidity and low debt levels as strong, but the $50.0 credit-facility balance matures in October 2020; refinancing ability and future performance are risks. The facility bears variable interest, and a one-percentage-point rate change would alter annual interest cost by about $0.5.
- After quarter-end, NHC received $19.5 in Provider Relief Fund grants, subject to use and reporting conditions, and $50.7 in advance Medicare payments. The advances are expected to begin offsetting claims after about 120 days, with remaining amounts repayable within 210 days of receipt. Neither receipt was included in Q1 results.
- Management estimated the temporary Medicare sequestration suspension would add about $2.7 to 2020 patient revenue and supplemental Medicaid payments about $7.0, of which $1.7 was recorded in Q1. It estimated payroll-tax deferrals could improve 2020 liquidity by $21–$26, with deferred amounts payable in 2021 and 2022. These are estimates, not full-year earnings guidance.
- Key risks include the pandemic’s uncertain duration and effects, lower census, staffing and supply costs, Medicare and Medicaid reimbursement and regulatory changes, and professional-liability claims. Accrued risk reserves were $100.8; actual claims could exceed insurance coverage and reserves.
- NHC’s $92.1 marketable-equity portfolio was concentrated: NHI stock accounted for $80.7, or 87.7%. The stock-price decline drove the large quarterly unrealized loss. Goodwill review identified no impairment indicator requiring a quantitative test at March 31, but management said estimates may change with COVID-19 conditions.
- A False Claims Act qui tam case against a subsidiary was dismissed by court order on March 14, 2020. Management said disclosure controls were effective at quarter-end.
Most important facts for investors to verify
- Subsequent-period census, admissions, staffing and COVID-related operating costs, including any further effects on revenue and cash flow.
- Terms and timing of refinancing or repayment of the credit facility maturing in October 2020.
- Use, reporting requirements and any repayment or reconciliation obligations for relief grants and Medicare advances.
- Continued value and concentration risk of NHI shares and the effect of future market changes on reported earnings.
- Development in accrued liability claims, reserve estimates and insurance recoveries, and in Medicare/Medicaid settlements and supplemental payments.