National HealthCare Corporation (NYSE American: NHC) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited figures below are in millions of dollars, except per-share data and percentages. NHC operates senior-care facilities and homecare, hospice, and related businesses, primarily in the southeastern United States.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net operating revenue and grant income | $271.4 | $263.2 | $550.3 | $514.1 |
| Net patient revenue | $260.1 | $237.0 | $516.4 | $453.8 |
| Operating income | $4.6 | $13.8 | $18.8 | $29.0 |
| Net income attributable to NHC | $3.2 | $104.9 | $18.5 | $126.2 |
| Diluted EPS | $0.21 | $6.80 | $1.20 | $8.19 |
- Revenue and grant income rose 3.1% in Q2 and 7.0% for the first half. Patient revenue increased 9.7% and 13.8%, respectively; homecare and hospice patient revenue rose to $32.3 million in Q2 from $14.4 million and to $63.8 million for the half from $31.7 million.
- Operating margin was 1.7% in Q2 versus 5.2% a year earlier; for the first half it was 3.4% versus 5.6%. Salaries, wages, and benefits increased 6.8% in Q2 and 10.4% for the half, with these costs rising as a share of revenue to 64.5% and 62.8%, respectively.
- Reported earnings comparisons are heavily affected by the $95.2 million gain recognized in 2021 when NHC acquired the remaining interest in Caris HealthCare. NHC-reported non-GAAP adjusted net income was $7.2 million in Q2 2022 versus $15.1 million, and $21.3 million for the first half versus $31.7 million. These are company-defined non-GAAP measures, not substitutes for GAAP results.
- Government stimulus income was $0.3 million in Q2 2022 versus $15.1 million, and $10.9 million for the first half versus $37.9 million. The company attributed lower adjusted earnings chiefly to reduced stimulus income and continuing wage inflation.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was negative $1.2 million, compared with positive $40.1 million in 2021. NHC cited $44.6 million of working-capital cash use, including payroll, provider-relief-fund, and contract-liability movements.
- Investing cash outflow was $8.2 million, including $17.0 million of property and equipment purchases. Financing cash outflow was $18.8 million, including $17.0 million of common dividends.
- Cash, cash equivalents, and restricted cash totaled $91.6 million at June 30, down from $119.7 million at year-end; unrestricted cash was $75.8 million. Current marketable equity and debt securities totaled $144.0 million. Management said these resources and operating cash flows should cover near-term obligations and plans.
- Total assets were $1.350 billion, total liabilities $447.9 million, and equity $902.6 million. NHC reported no long-term debt. Finance and operating lease liabilities totaled $151. (The balance sheet lists $8.2 million of finance lease obligations and $143.8 million of operating lease liabilities.)
- Current assets were $394.8 million and current liabilities $224.4 million. Dividends declared were $0.57 per share for Q2; $1.12 per share for the first half.
Changes, outlook, and risks
- Skilled-nursing census improved: 84.0% in Q2 versus 81.1% a year earlier, and 83.3% for the half versus 78.9%. Management also cited ongoing labor shortages, use of high-cost agency nurses, and inflation in supplies, food, and pharmaceuticals.
- NHC said it expected COVID-19 developments to adversely affect 2022 financial performance, but could not quantify the impact. It expected an approximately 26% corporate effective tax rate for 2022; the first-half effective rate was 27.2%.
- Medicare sequestration reductions were 1% from April through June 2022 and returned to 2% on July 1. CMS’s FY2023 skilled-nursing rule provided for an approximate 2.7% payment increase, including a phased parity adjustment. The filing also describes a proposed 4.2% aggregate FY2023 Medicare home-health payment decrease. Tennessee Medicaid rate changes effective July 2022 were estimated by NHC to add about $3.2 million annually.
- NHC signed agreements to transfer operations of seven Massachusetts and New Hampshire skilled-nursing facilities to a third-party operator, expected in Q3 or Q4 2022, subject to due diligence and related lease changes. The facilities generated $35.5 million of first-half 2022 patient revenue and had an $0.9 million pretax loss.
- Accrued risk reserves for workers’ compensation and general and professional liability were $102.7 million. NHC warned that claims could exceed insurance and reserves. A qui tam False Claims Act/Anti-Kickback Statute case involving an NHC affiliate remained stayed; the affiliate denies the allegations. The filing does not provide a clear quantified loss estimate for this case.
- Marketable equity securities were valued at $139.4 million, including $98.8 million of NHI stock. NHC disclosed that a hypothetical 10% market-price change would move equity-portfolio fair value by approximately $13.9 million. Debt securities had $8.1 million of gross unrealized losses, which the company characterized as non-credit-related.
Important facts for investors to verify
- Whether census and patient-revenue gains can continue to offset labor, staffing-agency, and other inflationary costs.
- The durability of earnings and operating cash generation as Provider Relief Fund income declines and Medicare sequestration reductions resume.
- Progress and financial effects of the planned transfer of the seven New England facilities and associated lease amendments.
- Development of the $102.7 million risk-reserve estimate, related claims, and the stayed qui tam litigation.
- Concentration and valuation exposure in NHI shares, and liquidity needs given negative first-half operating cash flow and dividend payments.