NATIONAL HEALTHCARE CORPORATION Forward-Looking Statements
References throughout this document to the Company includeNational HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions "Plain English" guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words "we", "our", "ours" and "us" refer only toNational HealthCare Corporation and its wholly-owned subsidiaries and not any other person. This Quarterly Report on Form 10-Q and other information we provide from time to time, contains certain "forward-looking" statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three-year strategic plan, and similar statements including, without limitations, those containing words such as "believes", "anticipates", "expects", "intends", "estimates", "plans", and other similar expressions are forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors: ? national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;
? the effect of government regulations and changes in regulations governing the
healthcare industry, including our compliance with such regulations;
? changes in Medicare and Medicaid payment levels and methodologies and the
application of such methodologies by the government and its fiscal
intermediaries;
? liabilities and other claims asserted against us, including patient care
liabilities, as well as the resolution of current litigation (see Note 16:
Contingencies and Commitments);
? the uncertainty of the extent, duration and effects of the COVID-19 pandemic
and the response of governments
? the ability to attract and retain qualified personnel;
? the availability and terms of capital to fund acquisitions and capital
improvements;
? the ability to refinance existing debt on favorable terms;
? the competitive environment in which we operate;
? the ability to maintain and increase census levels; and
? demographic changes.
See the notes to the quarterly financial statements, and "Item 1. Business" in
our 2019 Annual Report on Form 10-K for a discussion of various governmental
regulations and other operating factors relating to the healthcare industry and
the risk factors inherent in them. This may be found on our web site at
www.nhccare.com. You should carefully consider these risks before making any
investment in the Company. These risks and uncertainties are not the only ones
facing us. There may be additional risks that we do not presently know of or
that we currently deem immaterial. If any of the risks occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our shares of stock could decline,
and you may lose all or part of your investment. Given these risks and
uncertainties, we can give no assurances that these forward-looking statements
will, in fact, transpire and, therefore, caution investors not to place undue
reliance on them.
Overview
National HealthCare Corporation ("NHC" or the "Company") is a leading provider
of senior health care services. We operate or manage, through certain
affiliates, 76 skilled nursing facilities with a total of 9,633 licensed beds,
24 assisted living facilities, five independent living facilities, one
behavioral health hospital and 35 homecare programs. We operate specialized care
units within certain of our healthcare centers such as Alzheimer's disease care
units and sub-acute nursing units. We also have a non-controlling ownership
interest in a hospice care business that services NHC owned health care centers
and others. In addition, we provide insurance services, management and
accounting services, and we lease properties to operators of skilled nursing and
assisted living facilities. We operate in 10 states and are located primarily in
the southeastern United States .
25--------------------------------------------------------------------------------
Table of Contents Impact of COVID-19 In earlyMarch 2020 , COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by theWorld Health Organization . The COVID-19 virus has spread rapidly, with every state inthe United States ("U.S.") having confirmed cases. The rapid spread has resulted in authorities around theU.S. implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, an adverse impact on the Company's results of operations. As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic.NHC's primary objective has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance fromCenters for Medicare and Medicaid Services ("CMS"), theCenters for Disease Control and Prevention ("CDC"), and state and local health departments to prevent the spread of the disease within our operations. The financial results for the three months endedJune 30, 2020 were significantly impacted by COVID-19 with census in our skilled nursing facilities dropping to 84.3%, while we also incurred significantly increased operating expenses. Since the first week of March, our census has declined due to the lack of new admissions from our acute care providers and referral partners. Our operating expenses have also increased with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment ("PPE"), sanitizers and cleaning supplies, COVID-19 testing of our patients and partners, and food and dietary products. Besides the incentive compensation being paid to our tireless partners on the frontlines, we continue to take every possible action to support our partners with free meals on their shifts, a one-month health insurance premium holiday in April, as well as extended paid sick leave days. Despite COVID-19 disrupting operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity and low debt levels provide us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress. At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our financial results during 2020 and beyond, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2020. The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of acute and post-acute healthcare patients cared for across the broader health care systems, the timing and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on our industry and broader economy, including future government stimulus efforts. We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date. The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.
Legislation and Government Stimulus Due to COVID-19
TheU.S. government enacted several laws beginning inMarch 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. The CARES Act provided$2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities. The CARES Act originally appropriated$100 billion to establish thePublic Health and Social Services Emergency Fund , which is referred to as theProvider Relief Fund .The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19. OnApril 24, 2020 , another$75 billion was added to the ProviderRelief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to$175 billion . During the second quarter of 2020, we received three disbursements from theProvider Relief Fund which totaled$43,942,000 . These funds came with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19. Of the$43,942,000 of funds received, the Company recorded$24,648,000 of income related to these funds during the three months endedJune 30, 2020 . This$24,648,000 is reflected within government stimulus income in the interim condensed consolidated statements of operations. As ofJune 30, 2020 , amounts not recognized as income are approximately$19,294,000 and are reflected in the current liability section of our interim condensed consolidated balance sheet (provider relief funds). We anticipate incurring additional COVID-19 related expenses and lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining$19,294,000 million of provider relief funds before the end of the pandemic. As part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors ("MAC's") to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. We received approximately$51 million as part of this program. These funds will begin to be applied against claims for services provided to Medicare patients after approximately 120 days from the date we received the funds. The payback period will be for approximately 90 days; therefore, any remaining unapplied accelerated payment proceeds will be repaid within 210 days. Application to claims of the accelerated payments received by the Company is currently expected to begin inAugust 2020 . As ofJune 30, 2020 , the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheets as the related performance obligations have not been completed. The CARES Act temporarily suspended Medicare sequestration beginningMay 1, 2020 throughDecember 31, 2020 . The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. We expect our net patient revenues to increase by approximately$2,600,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period. 26
--------------------------------------------------------------------------------
Table of Contents
The CARES Act also temporarily permits employers to defer the deposit and payment of the employer's portion of the social security taxes (6.2% of employee wages) that otherwise would be due betweenMarch 27, 2020 andDecember 31, 2020 . The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid byDecember 31, 2021 , and the other half byDecember 31, 2022 . Currently, we expect the deferral of these payroll taxes to improve our liquidity and cash available for operations during 2020 by approximately$21 million to$26 million , or$7 million to$8.5 million per quarter (2nd, 3rd, and 4th quarter impact). AtJune 30, 2020 , we have deferred$7.7 million of social security taxes. We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. At this time, we expect our net patient revenues to increase by approximately$11,000,000 in 2020 due to these supplemental Medicaid payments. For the three months and six months endedJune 30, 2020 , we have recorded$3,859,000 and$5,532,000 , respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.
Summary of Goals and Areas of Focus
Occupancy A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for the six months endingJune 30, 2020 was 87.9% compared to 90.4% for the same period a year ago. Although our census was strong for most of the first quarter of 2020, during the second half of March, our census began to decline due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. For the three months endedJune 30, 2020 , overall census in our owned and leased skilled nursing facilities was 84.3% compared to 90.5% in the second quarter of 2019. With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community-based services, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors. Additionally,NHC is in various stages of partnerships with hospital systems, payors, and other post-acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services. Quality ofPatient Care CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance. 27
--------------------------------------------------------------------------------
Table of Contents
The tables below summarize
NHC Ratings Industry Ratings Total number of skilled nursing facilities, end of period
76
Number of 4 and 5-star rated skilled nursing facilities 53
Percentage of 4 and 5-star rated skilled nursing
facilities 70% 45%
Average rating for all skilled nursing facilities, end
of period 4.00 3.16
Development and Growth
We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.
Type of
Operation Description Size Location Placed in Service
Memory Care New Facility 60 beds Farragut, TN January, 2019
Memory Care Acquisition 60 beds St. Peters, MO June, 2019
Skilled Nursing Acquisition 166 beds Knoxville, TN February, 2020
Assisted Living Bed Addition 20 beds Gallatin, TN Under Construction
Skilled Nursing Bed Addition 30 beds Kingsport, TN Under Construction
Accrued Risk Reserves
Our accrued professional liability and workers' compensation reserves totaled
$105,008,000 at June 30, 2020 and are a primary area of management focus. We
have set aside restricted cash and cash equivalents and marketable securities to
fund our estimated professional liability and workers' compensation liabilities.
As to exposure for professional liability claims, we have developed performance
certification criteria to measure and bring focus to the patient care issues
most likely to produce professional liability exposure, including in-house
acquired pressure ulcers, significant weight loss and numbers of falls. These
programs for certification, which we regularly modify and improve, have produced
measurable improvements in reducing these incidents. Our experience is that
achieving goals in these patient care areas improves both patient and employee
satisfaction.
Government Reimbursement Programs
Medicare - Skilled Nursing Facilities
OnOctober 1, 2019 , the new case-mix reimbursement model of Patient Driven Payment Model ("PDPM") became effective. Under PDPM, the payment to skilled nursing facilities is based heavily on the patient's condition rather than specific services provided by each skilled nursing facility. CMS' fiscal year 2020 final rule provided for an approximate net 2.4% increase, or$851 million , compared to the fiscal year 2019 levels. The CARES Act temporarily suspended Medicare sequestration beginningMay 1, 2020 throughDecember 31, 2020 . The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. We expect our net patient revenues to increase by approximately$2,600,000 in 2020 (2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight-month period. 28
--------------------------------------------------------------------------------
Table of Contents
For the first six months of 2020, our average Medicare per diem rate for skilled nursing facilities increased 10.9% as compared to the same period in 2019.
OnJuly 31, 2020 , CMS released its final rule outlining fiscal year 2021 Medicare payment rates and policy changes for skilled nursing facilities, which will beginOctober 1, 2020 . The fiscal year 2021 final rule provided for an approximate 2.2% increase, or$750 million , compared to fiscal year 2020 levels. This included a 2.2% market-basket update, adjusted by a 0.0% productivity adjustment. The final rule continues to reflect the commitment to shifting Medicare payments from volume to value, with the continued implementation of PDPM and value-based purchasing to improve interoperability, operational quality, and safety.
Medicaid - Skilled Nursing Facilities
EffectiveJuly 1, 2020 and for the fiscal year 2021, the state ofTennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately$2,000,000 , or$500,000 per quarter. EffectiveJuly 1, 2019 and for the fiscal year 2020, the state ofTennessee implemented specific individual nursing facility rate increases. The resulting increase in revenue for the 2020 fiscal year was approximately$1,280,000 annually, or$320,000 per quarter.
Effective
We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. At this time, we expect our net patient revenues to increase by approximately$11,000,000 in 2020 due to these supplemental Medicaid payments. For the three months and six months endedJune 30, 2020 , we have recorded$3,859,000 and$5,532,000 , respectively, in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.
For the first six months of 2020, our average Medicaid per diem increased 4.6% compared to the same period in 2019.
We face challenges with respect to states' Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities' exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities. Medicare - Homecare Programs InNovember 2019 , CMS released a final rule that sets forth the implementation of the PDGM and a 30-day unit of payment as mandated by the Bipartisan Budget Act of 2018 ("BBA"). CMS projects payments to home health agencies in fiscal year 2020 will increase in aggregate by 1.3%, or$250 million , based on proposed policies. The increase reflects the 1.5% home health payment update percentage as mandated by the BBA and a 0.2% decrease in aggregate payments due to reductions made by the new rural add-on policy, also mandated by the BBA. InJune 2020 , CMS released its proposed rule outlining fiscal year 2021 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2021 will increase in aggregate by 2.6%, or$540 million , based on proposed policies. The increase reflects the effects of the 2.7% home health payment update percentage and a 0.1% decrease due to reductions made by the rural add-on policy. This Rule also includes a provision to make permanent the regulatory changes related to telecommunication technologies in providing care under the Medicare home health benefit beyond the expiration of the COVID-19 public health emergency. Segment Reporting The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and our behavioral health hospital; and (2) homecare services. These reportable operating segments are consistent with information used by the Company's Chief Executive Officer, as chief operating decision maker ("CODM"), to assess performance and allocate resources. The Company also reports an "all other" category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 - Summary of Significant Accounting Policies. The Company's CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below. 29
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth the Company's unaudited interim condensed consolidated statements of operations by business segment (in thousands):
Three Months Ended June 30, 2020
Inpatient
Services Homecare All Other Total
Revenues and grant income:
Net patient revenues $ 214,387 $ 11,284 $ - $ 225,671
Other revenues 127 - 11,196 11,323
Government stimulus income 22,622 2,026 - 24,648
Net operating revenues and grant
income 237,136 13,310 11,196 261,642
Costs and expenses: Salaries, wages, and benefits 136,380 7,963 12,571 156,914 Other operating 63,999 4,342 2,520 70,861 Rent 8,380 446 1,494 10,320 Depreciation and amortization 9,626 106 813 10,545 Interest 366 - 87 453 Total costs and expenses 218,751 12,857 17,485 249,093 Income (loss) from operations 18,385 453 (6,289 ) 12,549 Non-operating income - - 5,954 5,954 Unrealized gains on marketable equity securities - - 20,053 20,053 Income before income taxes$ 18,385 $ 453 $ 19,718 $ 38,556 Three Months Ended June 30, 2019 Inpatient Services Homecare All Other Total Revenues: Net patient revenues$ 220,887 $ 14,377 $ -$ 235,264 Other revenues 242 - 11,645 11,887 Net operating revenues 221,129 14,377 11,645 247,151 Costs and expenses: Salaries, wages, and benefits 130,720 8,480 8,678 147,878 Other operating 60,172 4,674 2,752 67,598 Rent 8,229 489 1,479 10,197 Depreciation and amortization 9,471 61 803 10,335 Interest 319 - 635 954 Total costs and expenses 208,911 13,704 14,347 236,962 Income (loss) from operations 12,218 673 (2,702 ) 10,189 Non-operating income - - 8,272 8,272 Unrealized losses on marketable equity securities - - (54 ) (54 ) Income before income taxes$ 12,218 $ 673 $ 5,516 $ 18,407 30
--------------------------------------------------------------------------------
Table of Contents
Six Months Ended June 30, 2020
Inpatient
Services Homecare All Other Total
Revenues and grant income:
Net patient revenues $ 445,374 $ 24,392 $ - $ 469,766
Other revenues 561 - 22,791 23,352
Government stimulus income 22,622 2,026 - 24,648
Net operating revenues and grant
income 468,557 26,418 22,791 517,766
Costs and expenses:
Salaries, wages, and benefits 271,595 16,279 16,509 304,383
Other operating 129,104 8,161 5,264 142,529
Rent 16,757 903 2,992 20,652
Depreciation and amortization 19,197 160 1,626 20,983
Interest 748 - 117 865
Total costs and expenses 437,401 25,503 26,508 489,412
Income (loss) from operations 31,156 915 (3,717 ) 28,354
Non-operating income - - 14,100 14,100
Unrealized losses on marketable
equity securities - - (40,339 ) (40,339 )
Income (loss) before income taxes$ 31,156 $ 915 $ (29,956 ) $ 2,115 Six Months Ended June 30, 2019 Inpatient (As Adjusted) Services Homecare All Other Total Revenues: Net patient revenues$ 442,521 $ 28,854 $ -$ 471,375 Other revenues 473 - 23,588 24,061 Net operating revenues 442,994 28,854 23,588 495,436 Costs and expenses: Salaries, wages, and benefits 259,778 16,880 12,608 289,266 Other operating 122,801 8,926 5,303 137,030 Rent 16,520 951 2,964 20,435 Depreciation and amortization 19,124 122 1,606 20,852 Interest 668 - 1,212 1,880 Total costs and expenses 418,891 26,879 23,693 469,463 Income (loss) from operations 24,103 1,975 (105 ) 25,973 Non-operating income - - 14,273 14,273 Unrealized gains on marketable equity securities - - 6,784 6,784 Income before income taxes$ 24,103 $ 1,975 $ 20,952 $ 47,030 31
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information that excludes the unrealized gains or losses on our marketable equity securities, operating results for the newly constructed healthcare facilities not at full capacity, share-based compensation expense, and any gains on the acquisitions of equity method investments is helpful in allowing investors to more accurately access the Company's operations.
The operating results for the newly constructed healthcare facilities not at full capacity for the six months endedJune 30, 2020 include facilities that began operations from 2018 to 2020, which is one memory care facility. For the six months endedJune 30, 2019 , included are facilities that began operations from 2017 to 2019, which is one skilled nursing facility, two assisted living facilities, and one memory care facility.
The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
2020 2019 2020 2019
Net income attributable to National
Healthcare Corporation $ 28,324 $ 13,711 $ 1,472 $ 34,980
Non-GAAP adjustments
Unrealized (gains)/losses on
marketable equity securities (20,053 ) 54 40,339 (6,784 )
Gain on acquisition of equity method
investment - (1,975 ) (1,708 ) (1,975 )
Operating results for newly opened
facilities not at full capacity 112 137 314 731
Share-based compensation expense 823 684 1,289 1,108
Provision (benefit) of income taxes
on non-GAAP adjustments 4,971 284 (10,461 ) 1,785
Non-GAAP Net income $ 14,177 $ 12,895 $ 31,245 $ 29,845
GAAP diluted earnings per share $ 1.84 $ 0.89 $ 0.10 $ 2.28
Non-GAAP adjustments
Unrealized (gains)/losses on
marketable equity securities (0.97 ) - 1.94 (0.34 )
Gain on acquisition of equity method
investment - (0.09 ) (0.08 ) (0.09 )
Operating results for newly opened
facilities not at full capacity 0.01 0.01 0.02 0.04
Share-based compensation expense 0.04 0.03 0.05 0.05
Non-GAAP diluted earnings per share
32
--------------------------------------------------------------------------------
Table of Contents Results of Operations The following table and discussion set forth items from the interim condensed consolidated statements of operations as a percentage of net operating revenues and grant income for the three months and six months endedJune 30, 2020 and 2019. Percentage of Net Operating Revenues and Grant Income Three Months Ended Six Months Ended June 30 June 30 2020 2019 2020 2019 Net operating revenues and grant income: 100.0 % 100.0 % 100 % 100 % Costs and expenses: Salaries, wages, and benefits 60.0 59.8 58.8 58.4 Other operating 27.1 27.4 27.5 27.7 Facility rent 3.9 4.1 4.0 4.1 Depreciation and amortization 4.0 4.2 4.0 4.2 Interest 0.2 0.4 0.2 0.4 Total costs and expenses 95.2 95.9 94.5 94.8 Income from operations 4.8 4.1 5.5 5.2 Non-operating income 2.2 3.3 2.7 2.9 Unrealized gains/(losses) on marketable equity securities 7.7 0.0 (7.8 ) 1.4 Income before income taxes 14.7 7.4 0.4 9.5 Income tax provision (3.8 ) (1.9 ) (0.1 ) (2.4 ) Net income 10.9 5.5 0.3 7.1 Net (income)/loss attributable to noncontrolling interest (0.1 ) 0.0 0.0 0.0 Net income attributable to stockholders of NHC 10.8 5.5 0.3 7.1
Three Months Ended
Results for the quarter endedJune 30, 2020 compared to the second quarter of 2019 include a 5.9% increase in net operating revenues and grant income and a 23.2% increase in income from operations. Excluding the grant income recorded during the second quarter of 2020, net operating revenues decreased 4.1% compared to the second quarter of 2019. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months endedJune 30, 2020 was$14,177,000 compared to$12,895,000 for the second quarter of 2019, which is an increase of 9.9%.
Net operating revenues and grant income
Net patient revenues decreased
The total census at owned and leased skilled nursing facilities for the quarter averaged 84.3%, compared to an average of 90.5% for the same quarter a year ago. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. Our Medicare per diem rates increased 12.3% and managed care per diem rates increased 3.0% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 6.6% and 0.8%, respectively, compared to the same quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 3.1% compared to the same quarter a year ago. Our Medicare per diem rates have benefited from the new case-mix reimbursement model of PDPM, which was implemented onOctober 1, 2019 . The CARES Act also temporarily suspended Medicare sequestration beginningMay 1, 2020 throughDecember 31, 2020 . The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Our Medicaid per diem rates have benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. For the three months endedJune 30, 2020 , we have recorded$3,859,000 due to these supplemental Medicaid payments. InFebruary 2020 , the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility inKnoxville, Tennessee . For the three months endedJune 30, 2020 , this skilled nursing facility increased net patient revenues approximately$2,958,000 compared to the second quarter of 2019. 33
--------------------------------------------------------------------------------
Table of Contents
Our homecare operations had a decline in net patient revenues of approximately$3,093,000 in the second quarter of 2020 compared to the second quarter of 2019. Our homecare net patient revenue decline was primarily due to volume declines related to COVID-19.
Other revenues decreased
During the three months ended
Total costs and expenses Total costs and expenses for the three months endedJune 30, 2020 compared to the same period of 2019 increased$12,131,000 , or 5.1%, to$249,093,000 from$236,962,000 . Salaries, wages, and benefits increased$9,036,000 , or 6.1%, to$156,914,000 from$147,878,000 . Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 60.0% compared to 59.8% for the three months endedJune 30, 2020 and 2019, respectively. The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately$5,895,000 in incentive compensation related to COVID-19 for the three months endedJune 30, 2020 compared to the second quarter of 2019. For the three months endedJune 30, 2020 , we also incurred approximately$1,882,000 in salaries and wages from the skilled nursing facility that we acquired inFebruary 2020 , compared to the second quarter of 2019. Other operating expenses increased$3,263,000 , or 4.8%, to$70,861,000 for the 2020 period compared to$67,598,000 for the 2019 period. Other operating expenses as a percentage of net operating revenues and grant income was 27.1% and 27.4% for the three months endedJune 30, 2020 and 2019, respectively. During the second quarter of 2020, we incurred approximately$5,682,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, lab and testing supplies, food, and dietary supplies. Due to the impact of COVID-19 and our census declining, we have implemented, and continue to implement, a plan to minimize and control expenses within every department of our operations. These expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19. The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. AtJune 30, 2020 , we have no outstanding balance on our credit facility. Other income Non-operating income decreased by$2,318,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements. The decrease in non-operating income is primarily due from the gain on the acquisition of an equity method investment made in the second quarter of 2019. In the prior year period, a gain of$1,975,000 was recorded on the acquisition of the remaining financial interest in a 60-bed memory care facility inSt. Peters, Missouri . We previously held a 25% noncontrolling ownership interest and equity method investment in the facility. Upon acquiring the remaining 75% financial interest, we fair valued the business and our previously held equity position based upon the facility's fair value. Income taxes The income tax provision for the three months endedJune 30, 2020 is$10,034,000 (an effective income tax rate of 26.0%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2020 to be approximately 26.0%. Noncontrolling interest The noncontrolling interest in subsidiaries is presented within total equity of the Company's consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable toNHC in its consolidated statements of operations. The Company's earnings per share is calculated based on net income attributable toNHC's stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.
Six Months Ended
Results for the six months endedJune 30, 2020 compared to the first six months of 2019 include a 4.5% increase in net operating revenues and grant income and a 9.2% increase in income from operations. Excluding the grant income recorded for the six months endedJune 30,2020 , net operating revenues would have decreased 0.5% compared to the same six-month period in 2019. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the six months endedJune 30, 2020 was$31,245,000 compared to$29,845,000 for the same period of 2019, which is an increase of 5.2%.
Net operating revenues and grant income
Net patient revenues decreased
The total census at owned and leased skilled nursing facilities for the first
six months of 2020 averaged 87.9% compared to an average of 90.4% for the same
period a year ago. The decline in census is due to COVID-19 and the lack of new
admissions from our acute care providers and referral partners. Our Medicare per
diem rates increased 10.9% and managed care per diem rates increased 2.4%
compared to the same period a year ago. Medicaid and private pay per diem rates
increased 4.6% and 1.6%, respectively, compared to the same period a year ago.
Overall, the composite skilled nursing facility per diem at our owned and leased
skilled nursing facilities increased 2.8% compared to the same period a year
ago.
34--------------------------------------------------------------------------------
Table of Contents
Our Medicare per diem rates have benefited from the new case-mix reimbursement model of PDPM, which was implemented onOctober 1, 2019 . The CARES Act also temporarily suspended Medicare sequestration beginningMay 1, 2020 throughDecember 31, 2020 . The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. SinceMarch 2020 , our Medicaid per diem rates benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. For the six months endedJune 30, 2020 , we have recorded$5,532,000 due to these supplemental Medicaid payments. InFebruary 2020 , the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility inKnoxville, Tennessee . For the six months endedJune 30, 2020 , this skilled nursing facility increased net patient revenues approximately$4,393,000 compared to the same period in the prior year. Our homecare operations had a decline in net patient revenues of approximately$4,462,000 in the first six months of 2020 compared to the same period of 2019. Our homecare net patient revenue decline was primarily due to volume declines due to COVID-19.
Other revenues decreased
During the six months ended
Total costs and expenses
Total costs and expenses for the six months ended
Salaries, wages, and benefits increased$15,117,000 , or 5.2%, to$304,383,000 from$289,266,000 . Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 58.8% compared to 58.4% for the six months endedJune 30, 2020 and 2019, respectively. The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately$6,714,000 in incentive compensation related to COVID-19 for the six months endedJune 30, 2020 compared to the same period of 2019. For the six months endedJune 30, 2020 , we also incurred approximately$2,396,000 in salaries and wages from the skilled nursing facility that we acquired inFebruary 2020 , compared to the same period of 2019. Other operating expenses increased$5,499,000 , or 4.0%, to$142,529,000 for the 2020 period compared to$137,030,000 for the 2019 period. Other operating expenses as a percentage of net operating revenue was 27.5% and 27.7% for the six months endedJune 30, 2020 and 2019. During the first six months of 2020, we incurred$6,630,000 in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, lab and testing supplies, food, and dietary supplies. Due to the impact of COVID-19 and our census declining sinceMarch 2020 , we have implemented, and continue to implement, a plan to minimize and control expenses within every department of our operations. These expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19. The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. AtJune 30, 2020 , we have no outstanding balance on our credit facility. Other income
Non-operating income decreased by
Income taxes The income tax provision for the six months endedJune 30, 2020 is$409,000 (an effective income tax rate of 19.3%). Excluding nondeductible expenses, we expect our corporate income tax rate for 2020 to be approximately 26.0%. Noncontrolling interest The noncontrolling interest in a subsidiary is presented within total equity of the Company's consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable toNHC in its consolidated statements of operations. The Company's earnings per share is calculated based on net income attributable toNHC's stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.
Liquidity, Capital Resources, and Financial Condition
Our primary sources of cash include revenues from the operations of our
healthcare and senior living facilities, management and accounting services,
rental income, and investment income. Our primary uses of cash include salaries,
wages and other operating costs of our healthcare and senior living facilities,
the cost of additions to and acquisitions of real property, facility rent
expenses, and dividend distributions. These sources and uses of cash are
reflected in our interim condensed consolidated statements of cash flows and are
discussed in further detail below.
35--------------------------------------------------------------------------------
Table of Contents
The following is a summary of our sources and uses of cash flows (dollars in
thousands):
Six Months Ended
June 30 Six Month Change
2020 2019 %
Cash, cash equivalents, restricted cash,
and restricted cash equivalents, at
beginning of period $ 61,010 $ 54,920 $ 6,090 11.1
Cash provided by operating activities 154,727 39,172 115,555 295.0
Cash used in investing activities (18,567 ) (11,370 )
(7,197 ) (63.3 )
Cash used in financing activities (26,391 ) (16,816 )
(9,575 ) (56.9 )
Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period$ 170,779 $ 65,906 $ 104,873 159.1 Operating Activities Net cash provided by operating activities for the six months endedJune 30, 2020 was$154,727,000 as compared to$39,172,000 in the same period last year. Cash provided by operating activities consisted of net income of$1,706,000 and adjustments for non-cash items of$43,933,000 . There was cash provided by working capital in the amount of$102,187,000 for the six months endedJune 30, 2020 compared to cash used for working capital needs in the amount of$8,044,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of$6,901,000 during the six months endedJune 30, 2020 , compared to$2,609,000 for the same period a year ago. Included in cash provided by working capital is$50,992,000 of receipts from the Medicare Accelerated Payment Program,$19,294,000 of receipts related to theProvider Relief Fund that have not been recognized as income, and$7,705,000 of deferred employer social security taxes. All three of these working capital cash flow items were initiated by the CARES Act legislation. Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains/losses on our marketable equity securities, deferred taxes, stock compensation, and a gain on the acquisition of a 166-bed skilled nursing facility inKnoxville, Tennessee in which we previously held a noncontrolling ownership interest. Investing Activities Net cash used in investing activities totaled$18,567,000 for the six months endedJune 30, 2020 compared to$11,370,000 for the six months endedJune 30, 2019 . Cash used for property and equipment additions was$12,517,000 and$13,989,000 for the six months endedJune 30, 2020 and 2019, respectively. The acquisition of the 166-bed skilled nursing facility inKnoxville, Tennessee resulted in cash used of$6,648,000 for the six months endedJune 30, 2020 . The Company collected notes receivable of$1,139,000 and$660,000 for the six months endedJune 30, 2020 and 2019, respectively. Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of$69,000 and$23,216,000 for the six months endedJune 30, 2020 and 2019, respectively. Financing Activities Net cash used in financing activities totaled$26,391,000 and$16,816,000 for the six months endingJune 30, 2020 and 2019, respectively. Cash used for repayments on the Company's credit facility has been a net of$10,000,000 for the six months endedJune 30, 2020 . We made repayments under our finance lease obligations in the amount of$2,052,000 and$1,932,000 for the six months endedJune 30, 2020 and 2019, respectively. Cash used for dividend payments to common stockholders totaled$15,948,000 in the current year period compared to$15,275,000 for the same period a year ago. In the current period,$949,000 was provided by the issuance of common stock compared to$1,383,000 in the prior year period. Short-term liquidity We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of$149,471,000 , marketable equity securities of$112,114,000 , and as needed, our borrowing capacity on the credit facility, are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months. We are currently evaluating various options regarding the upcoming maturity date of our credit facility. At this time, we believe we have sufficient liquidity to meet our short-term liquidity needs with or without an extension of the credit facility. 36
--------------------------------------------------------------------------------
Table of Contents Long-term liquidity We expect to meet our long-term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of$149,471,000 , marketable equity securities of$112,114,000 and our borrowing capacity on the credit facility. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. AtJune 30, 2020 , we do not have an outstanding balance on our credit facility; therefore, leaving$60,000,000 available for future borrowings. The maturity date on the credit facility isOctober 7, 2020 . The credit facility is available for general corporate purposes, including working capital and acquisitions.
We
are currently evaluating various options regarding the upcoming maturity date of our credit facility.
Our ability to refinance the credit agreement, to meet our long-term contractual obligations, and to finance our operating requirements and growth plans will depend upon our future performance. Our future performance will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors. Commitment and Contingencies
OnJune 19, 2018 , a First Amended Complaint was filed namingNutritional Support Services, L.P. ("NSS"), a wholly owned subsidiary of the Company, as a defendant in the action captionedU.S. ex rel. McClain v.Nutritional Support Services, L.P. , No. 6:17-cv-2608-AMQ (D.S.C.), which was filed in theUnited States District Court for the District of South Carolina . The action alleges that NSS violated the False Claims Act by reporting a National Drug Code ("NDC") number that did not correspond to the NDC for dispensed prescriptions. The plaintiffs are seeking unspecified damages. OnApril 16, 2018 ,the United States filed a Notice of Election to Decline Intervention with respect to the allegations asserted in this action. OnMarch 14, 2020 , the Court entered an Order granting the Defendant's Motion to Dismiss. OnMay 6, 2020 , the Court entered a Final Judgment dismissing the case. Governmental Regulations Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided. New Accounting Pronouncements
See Note 2 to the interim condensed consolidated financial statements for the impact of new accounting standards.
© Edgar Online, source
