UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues and grant income: | ||||||||||||||||
| Net patient revenues | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Government stimulus income | ||||||||||||||||
| Net operating revenues and grant income | ||||||||||||||||
| Cost and expenses: | ||||||||||||||||
| Salaries, wages, and benefits | ||||||||||||||||
| Other operating | ||||||||||||||||
| Facility rent | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Other income: | ||||||||||||||||
| Non–operating income | ||||||||||||||||
| Gain on acquisition of equity method investment | ||||||||||||||||
| Unrealized losses on marketable equity securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income/(loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax (provision)/benefit | ( | ) | ( | ) | ||||||||||||
| Net income/(loss) | ( | ) | ( | ) | ||||||||||||
| Net (income)/loss attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Net income/(loss) attributable to National HealthCare Corporation | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Earnings/(loss) per share attributable to National HealthCare Corporation stockholders: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Dividends declared per common share | $ | $ | $ | $ | ||||||||||||
The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Statements of Comprehensive Income/(Loss)
(unaudited – in thousands)
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income/(loss) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Other comprehensive loss: | ||||||||||||||||
| Unrealized losses on investments in marketable debt securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Reclassification adjustment for realized gains on sales of marketable debt securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax benefit related to items of other comprehensive income | ||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (income)/loss attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Comprehensive income/(loss) attributable to National HealthCare Corporation | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Balance Sheets
(in thousands)
| September 30, 2022 | December 31, 2021 | |||||||
| unaudited | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents, current portion | ||||||||
| Marketable equity securities | ||||||||
| Marketable debt securities | ||||||||
| Restricted marketable equity securities | ||||||||
| Restricted marketable debt securities, current portion | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total current assets | ||||||||
| Property and Equipment: | ||||||||
| Property and equipment, at cost | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Net property and equipment | ||||||||
| Other Assets: | ||||||||
| Restricted cash and cash equivalents, less current portion | ||||||||
| Restricted marketable debt securities, less current portion | ||||||||
| Deposits and other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Notes receivable | ||||||||
| Investments in unconsolidated companies | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Balance Sheets (continued)
(in thousands, except share and per share amounts)
| September 30, 2022 | December 31, 2021 | |||||||
| unaudited | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Finance lease obligations, current portion | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Accrued payroll | ||||||||
| Amounts due to third party payors | ||||||||
| Accrued risk reserves, current portion | ||||||||
| Other current liabilities | ||||||||
| Provider relief funds | ||||||||
| Contract liabilities | ||||||||
| Dividends payable | ||||||||
| Total current liabilities | ||||||||
| Finance lease obligations, less current portion | ||||||||
| Operating lease liabilities, less current portion | ||||||||
| Accrued risk reserves, less current portion | ||||||||
| Refundable entrance fees | ||||||||
| Deferred income taxes | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares, respectively, issued and outstanding | ||||||||
| Capital in excess of par value | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income/(loss) | ( | ) | ||||||
| Total National HealthCare Corporation stockholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Statements of Cash Flows
(unaudited – in thousands)
| Nine Months Ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Equity in earnings of unconsolidated investments | ( | ) | ( | ) | ||||
| Distributions from unconsolidated investments | ||||||||
| Unrealized losses on marketable equity securities | ||||||||
| (Gains)/losses on sale of marketable securities | ( | ) | ||||||
| Gain on acquisition of equity method investment | ( | ) | ||||||
| Recovery of notes receivable | ( | ) | ||||||
| Deferred income taxes | ( | ) | ||||||
| Stock–based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Trade accounts payable | ( | ) | ||||||
| Accrued payroll | ( | ) | ( | ) | ||||
| Amounts due to third party payors | ( | ) | ||||||
| Accrued risk reserves | ||||||||
| Provider relief funds | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Other current liabilities | ||||||||
| Other noncurrent liabilities | ( | ) | ( | ) | ||||
| Net cash provided by/(used in) operating activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of equity method investment, net of cash acquired | ( | ) | ||||||
| Investments in unconsolidated companies and notes receivable | ( | ) | ( | ) | ||||
| Proceeds from the sale of property and equipment | ||||||||
| Collections of notes receivable | ||||||||
| Purchases of marketable securities | ( | ) | ( | ) | ||||
| Proceeds from sale of marketable securities | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Principal payments under finance lease obligations | ( | ) | ( | ) | ||||
| Dividends paid to common stockholders | ( | ) | ( | ) | ||||
| Noncontrolling interest contributions | ||||||||
| Issuance of common shares | ||||||||
| Repurchase of common shares | ( | ) | ( | ) | ||||
| Entrance fee refunds | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net Decrease in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents | ( | ) | ( | ) | ||||
| Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period | ||||||||
| Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period | $ | $ | ||||||
| Balance Sheet Classifications: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents | $ | $ | ||||||
The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share and per share amounts)
(unaudited)
For the nine months ended September 30, 2022:
| Common Stock | Capital in Excess of | Retained | Accumulated Other Comprehensive | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Par Value | Earnings | Income (Loss) | Interest | Equity | ||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income | – | |||||||||||||||||||||||||||
| Contributions attributable to noncontrolling interest | – | |||||||||||||||||||||||||||
| Other comprehensive loss | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock–based compensation | – | |||||||||||||||||||||||||||
| Shares sold – options exercised | ||||||||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends declared to common stockholders ($ per share) | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income/(loss) | – | ( | ) | |||||||||||||||||||||||||
| Other comprehensive loss | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock–based compensation | – | |||||||||||||||||||||||||||
| Shares sold – options exercised | ||||||||||||||||||||||||||||
| Dividends declared to common stockholders ($ per share) | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock–based compensation | ||||||||||||||||||||||||||||
| Shares sold – options exercised | ||||||||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends declared to common stockholders ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | ) | ||||||||||||||||||||||||||
For the nine months ended September 30, 2021:
| Common Stock | Capital in Excess of | Retained | Accumulated Other Comprehensive | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Par Value | Earnings | Income | Interest | Equity | ||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income | – | |||||||||||||||||||||||||||
| Other comprehensive loss | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock–based compensation | – | |||||||||||||||||||||||||||
| Shares sold – options exercised | ||||||||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends declared to common stockholders ($ per share) | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income | – | |||||||||||||||||||||||||||
| Contributions attributable to noncontrolling interest | – | |||||||||||||||||||||||||||
| Other comprehensive income | – | |||||||||||||||||||||||||||
| Stock–based compensation | – | |||||||||||||||||||||||||||
| Shares sold – options exercised | ||||||||||||||||||||||||||||
| Dividends declared to common stockholders ($ per share) | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Other comprehensive loss | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock–based compensation | – | |||||||||||||||||||||||||||
| Dividends declared to common stockholders ($ per share) | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2022
(unaudited)
Note 1 – Description of Business
National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2022, we operate or manage, through certain affiliates,
Note 2 – Summary of Significant Accounting Policies
The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles (“GAAP”), with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2021 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2021 consolidated financial statements are available at our web site: www.nhccare.com.
Basis of Presentation
The unaudited interim condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of NHC. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by NHC. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to NHC and the noncontrolling interest in its consolidated statements of operations.
We assume that users of these interim financial statements have read or have access to the audited December 31, 2021 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.
Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period, including but not limited to, the potential future effects of the novel coronavirus (“COVID-19”).
Net Patient Revenues and Accounts Receivable
Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, home health care services, and hospice services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.
The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered. Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.
The Company determines the transaction price based on established billing rates reduced by explicit price concessions provided to third party payors. Explicit price concessions are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. Bad debt expense was $
Other Revenues
Other revenues include revenues from the provision of insurance services, management and accounting services to other long–term care providers, and rental income. Our insurance revenues consist of premiums that are generally paid in advance and then amortized into income over the policy period. We charge for management services based on a percentage of net revenues. We charge for accounting services based on a monthly fee or a fixed fee per bed of the healthcare center under contract. We record other revenues as the performance obligations are satisfied based on the terms of our contractual arrangements.
We recognize rental income based on the terms of our operating leases. Under certain of our leases, we receive variable rent, which is based on the increase in revenues of a lessee over a base year. We recognize variable rent annually or monthly, as applicable, when, based on the actual revenue of the lessee is earned.
Government Grants
We account for government grants in accordance with International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance, and as such, we recognize grant income on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate.
Segment Reporting
In accordance with the provisions of Accounting Standards Codification ("ASC") 280, Segment Reporting, the Company is required to report financial and descriptive information about its reportable operating segments. The Company has
Other Operating Expenses
Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities. Our primary patient care costs include drugs, medical supplies, purchased professional services, food, and professional liability insurance and licensing fees. The primary facility costs include utilities and property insurance.
General and Administrative Costs
With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, excluding stock-based compensation, which were $
Long-Term Leases
The Company’s lease portfolio primarily consists of finance and operating real estate leases for certain skilled nursing facilities, assisted and independent living facilities, homecare and hospice offices, and pharmacy warehouses. The original terms of the leases typically range from to years. Several of the real estate leases include renewal options which vary in length and may not include specific rent renewal amounts. We determine if an arrangement is a lease at inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.
The Company records right-of-use assets and liabilities for non-cancelable real estate operating leases with original or remaining lease terms in excess of one year. Leases with a lease term of 12 months or less at inception are not recorded and are expensed on a straight-line basis over the lease term. We recognize lease components and non-lease components together and not as separate parts of a lease for real estate leases.
Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present value of the lease payments are discounted using the incremental borrowing rate associated with each lease. The variable components of the lease payment that fluctuate with the operations of a health facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements,
Finance leases are recorded at cost. Finance leases are amortized in accordance with the provision codified within ASC 842, Leases. Amortization of finance lease assets is included in depreciation and amortization expense.
Business Combinations
We account for acquisitions using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Acquisitions are accounted for as purchases and are included in our consolidated financial statements from their respective acquisition dates. Assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date using the appropriate valuation method. Goodwill generated from acquisitions is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. In determining the fair value of identifiable assets, we use various valuation techniques. These valuation methods require us to make estimates and assumptions surrounding projected revenues and costs, future growth, and discount rates.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is subject to an annual impairment test. We perform our annual goodwill impairment assessment on the first day of the fourth quarter. Tests are performed more frequently if events occur, or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
The Company’s indefinite-lived intangible assets consist of trade names and certificates of need and licenses. The Company reviews indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.
Accrued Risk Reserves
We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.
Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.
We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.
Continuing Care Contracts
We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that
Non-refundable fees are included as a component of the transaction price and are amortized into revenue over the actuarily determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are not included as part of the transaction price and are classified as noncurrent liabilities in our consolidated balance sheets.
We also annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded with a corresponding charge to income. As of September 30, 2022, and December 31, 2021, we have recorded a future service obligation liability in the amount of $
Other Noncurrent Liabilities
Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions, deferred revenue, and obligations to provide future services to our CCRC residents. Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”) and the non-refundable portion (10%) of CCRC entrance fees being amortized over the remaining life expectancies of the residents.
Noncontrolling Interest
The noncontrolling interest in a subsidiary is presented within total equity in the Company's interim condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its interim condensed consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of the subsidiary earnings, contributions, and distributions.
Variable Interest Entities
We have equity interests in unconsolidated limited liability companies that operate various post-acute and senior healthcare businesses. We analyze our investments in these limited liability companies to determine if the company is considered a variable interest entity (“VIE”) and would require consolidation. To the extent that we own interests in a VIE and we (i) have the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.
The Company's maximum exposure to losses in its investments in unconsolidated VIEs cannot be quantified and may or may not be limited to its investment in the unconsolidated VIE. The investments in unconsolidated VIEs are classified as “investments in unconsolidated companies” in the interim condensed consolidated balance sheets.
Reclassifications
Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.
Note 3 – Coronavirus Pandemic
In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Through the CARES Act, as well as the Paycheck Protection Program and Health Care Enhancement Act ("PPPCHE"), the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider 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 unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.
The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $
Additionally, 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. In the second quarter of 2020, we received approximately $
The CARES Act and subsequent related legislation temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022. The Medicare sequestration policy reduced fee-for-service Medicare payments by 2 percent. Beginning April 1, 2022, the sequestration reductions were 1% from April 1, 2022 through June 30, 2022. The full 2% reduction went back into effect July 1, 2022. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension, which the sequestration reduction for 2030 has been increased up to 3%.
The CARES Act also temporarily permitted 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 have been due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. At September 30, 2022 and December 31, 2021, we have deferred $
We have also received supplemental Medicaid payments from many of the states in which we operate to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $
Note 4 – Net Patient Revenues
The Company disaggregates revenue from contracts with customers by service type and by payor.
Revenue by Service Type
The Company’s net patient services can generally be classified into the following two categories: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals, and (2) homecare and hospice services (in thousands).
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net patient revenues: | ||||||||||||||||
| Inpatient services | $ | $ | $ | $ | ||||||||||||
| Homecare and hospice | ||||||||||||||||
| Total net patient revenue | $ | $ | $ | $ | ||||||||||||
For inpatient and hospice services, revenue is recognized on a daily basis as each day represents a separate contract and performance obligation. For homecare, revenue is recognized when services are provided based on the number of days of service rendered in the period of care or on a per-visit basis. Typically, patients and third-party payors are billed monthly after services are performed or the patient is discharged, and payments are due based on contract terms.
As our performance obligations relate to contracts with a duration of one year or less, the Company is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients are typically under no obligation to remain admitted in our facilities or under our care. As the period between the time of service and time of payment is typically one year or less, the Company did not adjust for the effects of a significant financing component.
Revenue by Payor
Certain groups of patients receive funds to pay the cost of their care from a common source. The following table sets forth sources of net patient revenues for the periods indicated:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| Source | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Medicare |
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| Managed Care |
|
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| ||||||||||||
| Medicaid |
|
|
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| ||||||||||||
| Private Pay and Other |
|
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| Total |
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Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days (there is temporary relief from the three-day hospital stay during the COVID-19 emergency). For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services.
For homecare services, Medicare pays based on the acuity level of the patient and based on periods of care. A period of care is defined as a length of care up to 30 days with multiple continuous periods allowed. The services covered by the payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit.
For hospice services, Medicare pays a daily rate to cover the hospice’s costs for providing services included in the patient care plan. Medicare makes daily payments based on 1 of 4 levels of hospice care. All hospice care and services offered to patients and their families must follow an individualized written plan of care that meets the patient’s needs.
Our hospice service revenue is subject to certain limitations on payments from Medicare. We are subject to an inpatient cap limit and an overall Medicare payment cap for each provider number. We monitor these caps on a provider-by-provider basis and estimate amounts due back to Medicare if we estimate a cap has been exceeded. If applicable, we record these cap adjustments as a reduction to revenue.
Medicaid is operated by individual states with the financial participation of the federal government. The states in which we operate currently use prospective cost–based reimbursement systems. Under cost–based reimbursement systems, the skilled nursing facility is reimbursed for the reasonable direct and indirect allowable costs it incurred in a base year in providing routine resident care services as defined by the program.
Private pay, managed care, and other payment sources include commercial insurance, individual patient funds, managed care plans and the Veterans Administration. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the healthcare center's charges or specifically negotiated contracts. For private pay patients in skilled nursing, assisted living and independent living facilities, the Company bills for room and board charges, with the remittance being due on receipt of the statement and generally by the 10th day of the month the services are performed.
Certain managed care payors for homecare services pay on a per-visit basis. This revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates.
Contract Liabilities
Included in the Company’s interim condensed consolidated balance sheets are contract liabilities, which represent payments the Company receives in advance of services provided. As of September 30, 2022 and December 31, 2021, the Company has recorded $
A summary of the contract liabilities are as follows (in thousands):
| Balance at December 31, 2021 | $ | |||
| Payments received | ||||
| Payments recouped | ( | ) | ||
| Balance at September 30, 2022 | $ |
Third Party Payors
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are following all applicable laws and regulations.
Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded, and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $
Note 5 – Other Revenues
Other revenues are outlined in the table below. Revenues from rental income include health care real estate properties owned by us and leased to third party operators. Revenues from management and accounting services include fees provided to manage and provide accounting services to other healthcare operators. Revenues from insurance services include premiums for workers’ compensation and professional liability insurance policies that our wholly owned insurance subsidiaries have written for certain healthcare operators to which we provide management or accounting services. "Other" revenues include miscellaneous health care related earnings (in thousands).
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Rental income | $ | $ | $ | $ | ||||||||||||
| Management and accounting services fees | ||||||||||||||||
| Insurance services | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total other revenues | $ | $ | $ | $ | ||||||||||||
Rental Income
The Company leases real estate assets consisting of skilled nursing facilities and assisted living facilities to third party operators. Additionally, we sublease
Management Fees from National Health Corporation
We manage
Insurance Services
For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021 were $
For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021 were $
Note 6 – Non–Operating Income
Non–operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on sales of marketable securities, and interest income (in thousands).
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Dividends and net realized gains and losses on sales of securities | $ | $ | $ | $ | ||||||||||||
| Interest income | ||||||||||||||||
| Equity in earnings of unconsolidated investments | ||||||||||||||||
| Total non-operating income | $ | $ | $ | $ | ||||||||||||
Caris HealthCare, L.P.
On June 11, 2021, the Company acquired the remaining
Note 7 – Business Segments
The Company has
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.
The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands):
| Three Months Ended September 30, 2022 | ||||||||||||||||
| Inpatient | Homecare and Hospice | All Other | Total | |||||||||||||
| Revenues and grant income: | ||||||||||||||||
| Net patient revenues | $ | $ | $ | $ | ||||||||||||
| Other revenues | ( | ) | ||||||||||||||
| Net operating revenues and grant income | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Salaries, wages, and benefits | ||||||||||||||||
| Other operating | ||||||||||||||||
| Rent | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Income/(loss) from operations | ( | ) | ( | ) | ||||||||||||
| Non-operating income | ||||||||||||||||
| Unrealized losses on marketable equity securities | ( | ) | ( | ) | ||||||||||||
| Income/(loss) before income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||
| Inpatient | Homecare and Hospice | All Other | Total | |||||||||||||
| Revenues: | ||||||||||||||||
| Net patient revenues | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Government stimulus income | ||||||||||||||||
| Net operating revenues and grant income | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Salaries, wages, and benefits | ||||||||||||||||
| Other operating | ||||||||||||||||
| Rent | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Income/(loss) from operations | ( | ) | ||||||||||||||
| Non-operating income | ||||||||||||||||
| Unrealized losses on marketable equity securities | ( | ) | ( | ) | ||||||||||||
| Income/(loss) before income taxes | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||
| Inpatient | Homecare and Hospice | All Other | Total | |||||||||||||
| Revenues: | ||||||||||||||||
| Net patient revenues | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Government stimulus income | ||||||||||||||||
| Net operating revenues and grant income | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Salaries, wages, and benefits | ||||||||||||||||
| Other operating | ||||||||||||||||
| Rent | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Income/(loss) from operations | ( | ) | ||||||||||||||
| Non-operating income | ||||||||||||||||
| Unrealized losses on marketable equity securities | ( | ) | ( | ) | ||||||||||||
| Income/(loss) before income taxes | $ | $ | $ | ( | ) | $ | ||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||
| Inpatient | Homecare and Hospice | All Other | Total | |||||||||||||
| Revenues and grant income: | ||||||||||||||||
| Net patient revenues | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Government stimulus income | ||||||||||||||||
| Net operating revenues and grant income | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Salaries, wages, and benefits | ||||||||||||||||
| Other operating | ||||||||||||||||
| Rent | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Income/(loss) from operations | ( | ) | ||||||||||||||
| Non-operating income | ||||||||||||||||
| Gain on acquisition of equity method investment | ||||||||||||||||
| Unrealized losses on marketable equity securities | ( | ) | ( | ) | ||||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||
Note 8 – Long-Term Leases
Operating Leases
At September 30, 2022, we lease from NHI the real property of
On September 1, 2022, we transferred the operations of
Finance Leases
At September 30, 2022, we leased and operated three senior healthcare facilities in the state of Missouri under three separate lease agreements. Two of the healthcare facilities are skilled nursing facilities that also include assisted living facilities and the third healthcare facility is a memory care facility. Each of the leases is a -year lease with
Minimum Lease Payments
The following table summarizes the maturity of our finance and operating lease liabilities as of September 30, 2022 (in thousands):
| Finance Leases | Operating Leases | |||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | ||||||||
| Less: amounts representing interest | ( | ) | ( | ) | ||||
| Present value of future minimum lease payments | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Noncurrent lease liabilities | $ | $ | ||||||
Note 9 – Earnings per Share
Basic net income per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.
The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands, except for share and per share amounts):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Basic: | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Net income/(loss) attributable to National HealthCare Corporation | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Earnings/(loss) per common share, basic | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Diluted: | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Effects of dilutive instruments | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Net income/(loss) attributable to National HealthCare Corporation | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Earnings/(loss) per common share, diluted | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
In the above table, options to purchase
Note 10 – Investments in Marketable Securities
Our investments in marketable equity securities are carried at fair value with the changes in unrealized gains and losses recognized in our results of operations at each measurement date. Our investments in marketable debt securities are classified as available for sale securities and carried at fair value with the unrealized gains and losses recognized through accumulated other comprehensive income at each measurement date. Any credit related decline in fair market values of our available for sale debt securities are recorded in our results of operations through an allowance for credit losses. Realized gains and losses from securities sales are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 11 for a description of the Company's methodology for determining the fair value of marketable securities.
Marketable securities consist of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| Investments available for sale: | ||||||||||||||||
| Marketable equity securities | $ | $ | $ | $ | ||||||||||||
| Corporate debt securities | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||
| Restricted investments available for sale: | ||||||||||||||||
| Marketable equity securities | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Asset-based securities | ||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||
| State and municipal securities | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
Included in the marketable equity securities are the following (in thousands, except share amounts):
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Shares | Cost | Fair Value | Shares | Cost | Fair Value | |||||||||||||||||||
| NHI Common Stock | $ | $ | $ | $ | ||||||||||||||||||||
The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
| Maturities: | ||||||||||||||||
| Within 1 year | $ | $ | $ | $ | ||||||||||||
| 1 to 5 years | ||||||||||||||||
| 6 to 10 years | ||||||||||||||||
| Over 10 years | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Gross unrealized gains related to marketable equity securities are $
Gross unrealized gains related to available for sale marketable debt securities are $
The Company’s unrealized losses in our available for sale marketable debt securities were determined to be non-credit related. The Company has recognized any credit related impairments for the nine months ended September 30, 2022 and 2021.
For the marketable securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities.
Proceeds from the sale of marketable securities during the nine months ended September 30, 2022 and 2021 were $
Note 11 – Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:
| Level 1 – The valuation is based on quoted prices in active markets for identical instruments. | |
| Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market. | |
| Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following table summarizes fair value measurements by level at September 30, 2022 and December 31, 2021 for assets and liabilities measured at fair value on a recurring basis (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| September 30, 2022 | Fair Value | Quoted Prices in Active For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | – | |||||||||||
| Restricted cash and cash equivalents | – | |||||||||||||||
| Marketable equity securities | – | |||||||||||||||
| Corporate debt securities | – | |||||||||||||||
| Mortgage–backed securities | – | |||||||||||||||
| U.S. Treasury securities | – | |||||||||||||||
| State and municipal securities | – | |||||||||||||||
| Total financial assets | $ | $ | $ | $ | – | |||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| December 31, 2021 | Fair Value | Quoted Prices in Active Markets For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | – | |||||||||||
| Restricted cash and cash equivalents | – | |||||||||||||||
| Marketable equity securities | – | |||||||||||||||
| Corporate debt securities | – | |||||||||||||||
| Asset–backed securities | – | |||||||||||||||
| U.S. Treasury securities | – | |||||||||||||||
| State and municipal securities | – | |||||||||||||||
| Total financial assets | $ | $ | $ | $ | – | |||||||||||
Note 12 – Goodwill and Other Intangible Assets
At September 30, 2022, the Company reviewed the carrying value of goodwill for impairment indicators, including due to the events and circumstances surrounding the Coronavirus Pandemic ("COVID-19"). As a result of the review, there were
At September 30, 2022, the following table represents the activity related to our goodwill by segment (in thousands):
| Inpatient Services | Homecare and Hospice | All Other | Total | |||||||||||||
| January 1, 2022 | $ | $ | $ | – | $ | |||||||||||
| Additions | – | |||||||||||||||
| September 30, 2022 | $ | $ | $ | – | $ | |||||||||||
We also have recorded indefinite-lived intangible assets that consist of trade names ($
Note 13 - Stock Repurchase Program
During the nine months ended September 30, 2022, the Company repurchased
Note 14 – Stock–Based Compensation
NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $
At September 30, 2022, the Company had $
Stock Options
The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2022 and for the year ended December 31, 2021.
| September 30, 2022 | December 31, | |||||||
| Risk–free interest rate | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life, in years | ||||||||
| Expected dividend yield | % | % | ||||||
The following table summarizes our outstanding stock options for the nine months ended September 30, 2022 and for the year ended December 31, 2021.
| Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Options outstanding at January 1, 2021 | $ | $ | – | |||||||||
| Options granted | – | |||||||||||
| Options exercised | ( | ) | – | |||||||||
| Options cancelled | ( | ) | – | |||||||||
| Options outstanding at December 31, 2021 | – | |||||||||||
| Options granted | – | |||||||||||
| Options exercised | ( | ) | – | |||||||||
| Options cancelled | ( | ) | – | |||||||||
| Options outstanding at September 30, 2022 | $ | |||||||||||
| Options exercisable at September 30, 2022 | $ | |||||||||||
| Options Outstanding September 30, 2022 | Exercise Prices | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | ||||||||||||
| 372,912 | |||||||||||||||
| 88,395 | |||||||||||||||
| 461,307 | |||||||||||||||
Note 15 – Income Taxes
The Company's income tax benefit as a percentage of our income before income taxes was
The Company's income tax provision as a percentage of our income before income taxes was
Typically, these percentages vary from the U.S. federal statutory income tax rate of
Our quarterly income tax provision, and our estimate of our annual effective income tax rate, is subject to variation due to several factors, including volatility based on the amount of pre-tax income or loss.
The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2019 (with certain state exceptions).
Note 16 – Contingencies and Commitments
Accrued Risk Reserves
We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned and leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $
As a result of the terms of our insurance policies and our use of wholly owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We consider the professional services of independent actuaries to assist us in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors.
Workers’ Compensation
For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis.
General and Professional Liability Insurance and Lawsuits
The senior care industry has experienced significant increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly owned captive insurance company.
There is certain additional litigation incidental to our business, none of which, based upon information available to date, would be material to our financial position, results of operations, or cash flows. In addition, the long–term care industry is continuously subject to scrutiny by governmental regulators, which could result in litigation or claims related to regulatory compliance matters.
Qui Tam Litigation
United States of America, ex rel. Jennifer Cook and Sally Gaither v. Integrated Behavioral Health, Inc., NHC HealthCare/Moulton, LLC, et al., Case No. 2:20-CV-00877-AMM (N.D. Ala.) This is a qui tam case originally filed under seal on June 22, 2020. The United States declined intervention on March 1, 2021. Thereafter, the Plaintiff filed an amended Complaint against Dr. Sanja Malhotra, Integrated Behavioral Health, Inc. and other entities that Dr. Malhotra is alleged to own or in which he has a financial interest. The Complaint also named multiple skilled nursing facilities as Defendants, including NHC Healthcare/Moulton, LLC, an affiliate of National HealthCare Corporation. The Complaint alleges that nurse practitioners affiliated with Dr. Malhotra provided free services to the facilities in exchange for referrals to entities owned by or in which Dr. Malhotra had a financial interest in violation of the False Claims Act and Anti-Kickback Statute. NHC Healthcare/Moulton, LLC denies the allegations and is vigorously defending the claim. A motion to dismiss was filed on November 4, 2021. On January 28, 2022, the district court stayed this matter and administratively terminated the motion to dismiss pending the U.S. Supreme Court's review of a petition for certiorari filed in an unrelated matter, but involving one of the legal arguments raised in the motion to dismiss. The U.S. Supreme Court has recently denied the petition for certiorari, but the district court has not yet lifted the stay in this matter. We expect that the motion to dismiss will be renewed once the stay is lifted. There is no expected timeline for the lifting of the stay.
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 federal and state relief measures as a result of COVID-19 which have provided substantial support to us during this pandemic.
Note 17 – Massachusetts and New Hampshire Skilled Nursing Facilities
On September 1, 2022, we transferred the operations of
The seven skilled nursing facilities had net patient revenues of $
| Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Forward–Looking Statements
References throughout this document to the Company include National 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 to National 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 competitive environment in which we operate; |
| ● |
our need to make investments continually in our processes and information systems to protect the privacy of patients, partners and other persons and reduce the risk of successful cybersecurity attacks; |
| ● |
damage to our reputation, regulatory penalties, legal claims and liability under state and federal laws that we could suffer upon any cybersecurity or privacy breaches; |
| ● |
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 2021 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. As of September 30, 2022, we operate or manage, through certain affiliates, 68 skilled nursing facilities with a total of 8,726 licensed beds, 23 assisted living facilities, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 29 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. 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 8 states and are located primarily in the southeastern United States.
Impact of COVID-19
In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. 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 from the Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations.
We began our first vaccination clinics in our skilled nursing facilities in December 2020. As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations, as well as a significant decrease in the adverse health events related to COVID. Despite the COVID-19 cases and adverse health events from COVID declining, our operating expenses have remained elevated with incentive compensation being paid to attract and retain frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite the continued disruption of COVID-19 to our operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity provides 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 future financial results, but we expect the developments related to COVID-19 to adversely affect our financial performance in 2022. 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 the 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
The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider 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 unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.
The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0 and $10,429,000 of government stimulus income from the Provider Relief Funds for the three months ended September 30, 2022 and 2021, respectively. The Company recorded $10,940,000 and $48,304,000 of government stimulus income from the Provider Relief Funds for the nine months ended September 30, 2022 and 2021, respectively. The grant income was determined on a systemic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by HHS.
Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. In the second quarter of 2020, we received approximately $51,253,000 as part of this program. These funds began to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. As of September 30, 2022, $138,000 of the accelerated payments remain and is reflected within contract liabilities in the interim condensed consolidated balance sheet.
The CARES Act and subsequent related legislation temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. Beginning April 1, 2022, the sequestration reductions were 1% from April 1, 2022 through June 30, 2022. The full 2% reduction went back into effect July 1, 2022. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension, which the sequestration reduction for 2030 has been increased up to 3%.
The CARES Act also temporarily permitted 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 have been due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. At September 30, 2022, we have deferred $10,545,000 of the Company’s share of the social security taxes included in the current liabilities section of the consolidated balance sheet.
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 nine months ending September 30, 2022 was 83.4% compared to 80.0% for the same period a year ago. For the three months ended September 30, 2022, overall census in our owned and leased skilled nursing facilities was 83.7% compared to 82.0% in the third quarter of 2021.
Due to the pandemic, as well as the increased strain the pandemic has caused on America's healthcare labor shortage, 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, as well as find creative initiatives to retain and attract qualified healthcare professionals. 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 of Patient 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.
In July 2022, CMS launched its enhanced Five-Star Quality Rating System which integrates data nursing homes report on their weekend staffing rates for nurses and information on annual turnover among nurses and administrators. Through this enhancement, CMS will hold facilities to a higher standard and incentivize more robust staffing by strengthening personnel’s impact on overall star ratings.
The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of September 30, 2022:
| NHC Ratings |
Industry Ratings |
|||||||
| Total number of skilled nursing facilities, end of period |
68 | |||||||
| Number of 4 and 5-star rated skilled nursing facilities |
42 | |||||||
| Percentage of 4 and 5-star rated skilled nursing facilities |
62% |
|
37% |
|
||||
| Average rating for all skilled nursing facilities, end of period |
3.8 | 2.9 | ||||||
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 |
||||||||
| Hospice |
Acquisition |
28 offices |
Various |
June 2021 |
||||||||
| Homecare |
New Office |
1 office |
Anderson, SC |
January 2022 |
||||||||
| Hospice |
New Office |
1 office |
Tullahoma, TN |
March 2022 |
||||||||
| Behavioral Health Hospital |
New Facility |
64 beds |
Knoxville, TN |
April 2022 |
||||||||
| Behavioral Health Hospital |
New Facility |
16 beds |
St. Louis, MO |
June 2022 |
Accrued Risk Reserves
Our accrued professional liability and workers’ compensation reserves totaled $103,710,000 at September 30, 2022 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
On July 29, 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2021. The fiscal year 2022 rule provided for an approximate 1.2% increase, or $410 million, compared to 2021 levels. The net increase included a 2.7% market-basket update that was offset by a 0.7% productivity adjustment and a 0.8% market-basket forecast error adjustment since the difference between the projected and actual market basket for FY2020 exceeded its threshold.
In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates and policy changes for skilled nursing facilities, which began on October 1, 2022. The fiscal year 2023 rule provided for an approximate 2.7% increase, or $904 million, compared to 2022 levels. The net increase includes a 3.9% market-basket increase plus a 1.5% market basket forecast error adjustment, less a 0.3% productivity adjustment and a 2.3% decrease in the FY 2023 SNF PPS rates as a result of the recalibrated parity adjustment. The recalibrated parity adjustment is a total of 4.6% and is being phased in over the next two years (2.3% annually).
For the first nine months of 2022, our average Medicare per diem rate for skilled nursing facilities increased 2.2% as compared to the same period in 2021.
Medicaid – Skilled Nursing Facilities
Effective July 1, 2022 and for the fiscal year 2023, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2023 fiscal year will be approximately $3,200,000 annually, or $800,000 per quarter.
Effective October 1, 2022 and for the fiscal year 2023, the state of South Carolina implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2023 fiscal year will be approximately $3,735,000 annually, or $934,000 per quarter.
Effective July 1, 2021 and for the fiscal year 2022, the state of Missouri implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2022 fiscal year will be approximately $2,000,000 annually, or $500,000 per quarter.
We have also received from many of the states in which we operate supplemental Medicaid payments to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $4,736,000 and $5,053,000 in net patient revenues for these supplemental Medicaid payments for the three months ended September 30, 2022 and 2021, respectively. We have recorded $15,275,000 and $16,102,000 in net patient revenues for these supplemental Medicaid payments for the nine months ended September 30, 2022 and 2021, respectively.
For the first nine months of 2022, our average Medicaid per diem increased 2.3% compared to the same period in 2021.
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
In November 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2022 will increase in aggregate by 3.2%, or $570 million. The increase reflects the effects of the home health payment update percentage of 2.6%, an estimated 0.7% increase that reflects the effects of the updated fixed-dollar loss ratio, and an estimated 0.1% decrease in payments due to the changes in the rural add-on percentages for 2022.
In October 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2023 will increase in aggregate by 0.7%, or $125 million. The increase reflects the effects of the home health payment update percentage of 4.0%, a permanent behavioral assumption adjustment resulting in a decrease of 3.5%, and an estimated 0.2% increase that reflects the effects of an update to the fixed-dollar loss ratio used in determining outlier payments.
Medicare – Hospice
In July 2021, CMS released its final rule outlining fiscal year 2022 Medicare payment rates. CMS issued a rate increase of 2.0%, or $480 million, effective October 1, 2021. The increase is the result of a 2.7% market basket increase reduced by a 0.7% productivity adjustment. The FY2022 hospice payment updates also include an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2022 is $31,298.
In July 2022, CMS released its final rule outlining fiscal year 2023 Medicare payment rates. CMS issued a rate increase of 3.8%, or $825 million, effective October 1, 2022. The increase is the result of a 4.1% inpatient hospital market basket increase reduced by a 0.3% productivity adjustment. The FY2023 hospice payment update also includes an update to the statutory aggregate cap amount, which limits the overall payments per patient that are made annually. The cap amount for FY2023 would be $32,487.
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 behavioral health hospitals; and (2) homecare and hospice 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.
The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands):
| Three Months Ended September 30, 2022 |
||||||||||||||||
| Inpatient |
Homecare and Hospice |
All Other |
Total |
|||||||||||||
| Revenues and grant income: |
||||||||||||||||
| Net patient revenues |
$ | 228,138 | $ | 32,109 | $ | - | $ | 260,247 | ||||||||
| Other revenues |
(198 | ) |
- | 10,794 | 10,596 | |||||||||||
| Net operating revenues and grant income |
227,940 | 32,109 | 10,794 | 270,843 | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Salaries, wages, and benefits |
144,047 | 19,581 | 9,570 | 173,198 | ||||||||||||
| Other operating |
66,522 | 6,310 | 51 | 72,883 | ||||||||||||
| Rent |
8,088 | 575 | 1,631 | 10,294 | ||||||||||||
| Depreciation and amortization |
9,198 | 248 | 807 | 10,253 | ||||||||||||
| Interest |
137 | - | - | 137 | ||||||||||||
| Total costs and expenses |
227,992 | 26,714 | 12,059 | 266,765 | ||||||||||||
| Income/(loss) from operations |
(52 | ) |
5,395 | (1,265 | ) | 4,078 | ||||||||||
| Non-operating income |
- | - | 2,731 | 2,731 | ||||||||||||
| Unrealized losses on marketable equity securities |
- | - | (11,056 | ) |
(11,056 | ) |
||||||||||
| Income/(loss) before income taxes |
$ | (52 | ) |
$ | 5,395 | $ | (9,590 | ) |
$ | (4,247 | ) |
|||||
| Three Months Ended September 30, 2021 |
||||||||||||||||
| Inpatient |
Homecare and Hospice |
All Other |
Total |
|||||||||||||
| Revenues: |
||||||||||||||||
| Net patient revenues |
$ | 222,884 | $ | 31,933 | $ | - | $ | 254,817 | ||||||||
| Other revenues |
128 | - | 11,363 | 11,491 | ||||||||||||
| Government stimulus income |
10,429 | - | - | 10,429 | ||||||||||||
| Net operating revenues and grant income |
233,441 | 31,933 | 11,363 | 276,737 | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Salaries, wages, and benefits |
141,318 | 18,771 | 10,146 | 170,235 | ||||||||||||
| Other operating |
64,755 | 5,618 | 2,736 | 73,109 | ||||||||||||
| Rent |
7,998 | 594 | 1,612 | 10,204 | ||||||||||||
| Depreciation and amortization |
9,300 | 118 | 811 | 10,229 | ||||||||||||
| Interest |
198 | - | - | 198 | ||||||||||||
| Total costs and expenses |
223,569 | 25,101 | 15,305 | 263,975 | ||||||||||||
| Income/(loss) from operations |
9,872 | 6,832 | (3,942 | ) |
12,762 | |||||||||||
| Non-operating income |
- | - | 3,399 | 3,399 | ||||||||||||
| Unrealized losses on marketable equity securities |
- | - | (23,797 | ) |
(23,797 | ) |
||||||||||
| Income/(loss) before income taxes |
$ | 9,872 | $ | 6,832 | $ | (24,340 | ) |
$ | (7,636 | ) |
||||||
| Nine Months Ended September 30, 2022 |
||||||||||||||||
| Inpatient |
Homecare and Hospice |
All Other |
Total |
|||||||||||||
| Revenues: |
||||||||||||||||
| Net patient revenues |
$ | 680,776 | $ | 95,885 | $ | - | $ | 776,661 | ||||||||
| Other revenues |
15 | - | 33,569 | 33,584 | ||||||||||||
| Government stimulus income |
10,940 | - | - | 10,940 | ||||||||||||
| Net operating revenues and grant income |
691,731 | 95,885 | 33,569 | 821,185 | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Salaries, wages, and benefits |
435,322 | 58,007 | 25,499 | 518,828 | ||||||||||||
| Other operating |
192,791 | 19,848 | 5,640 | 218,279 | ||||||||||||
| Rent |
24,498 | 1,759 | 4,513 | 30,770 | ||||||||||||
| Depreciation and amortization |
27,120 | 472 | 2,419 | 30,011 | ||||||||||||
| Interest |
451 | - | - | 451 | ||||||||||||
| Total costs and expenses |
680,182 | 80,086 | 38,071 | 798,339 | ||||||||||||
| Income/(loss) from operations |
11,549 | 15,799 | (4,502 | ) |
22,846 | |||||||||||
| Non-operating income |
- | - | 8,451 | 8,451 | ||||||||||||
| Unrealized losses on marketable equity securities |
- | - | (11,479 | ) |
(11,479 | ) |
||||||||||
| Income/(loss) before income taxes |
$ | 11,549 | $ | 15,799 | $ | (7,530 | ) |
$ | 19,818 | |||||||
| Nine Months Ended September 30, 2021 |
||||||||||||||||
| Inpatient |
Homecare and Hospice |
All Other |
Total |
|||||||||||||
| Revenues and grant income: |
||||||||||||||||
| Net patient revenues |
$ | 644,986 | $ | 63,662 | $ | - | $ | 708,648 | ||||||||
| Other revenues |
324 | - | 33,592 | 33,916 | ||||||||||||
| Government stimulus income |
48,304 | - | - | 48,304 | ||||||||||||
| Net operating revenues and grant income |
693,614 | 63,662 | 33,592 | 790,868 | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Salaries, wages, and benefits |
407,534 | 39,922 | 35,807 | 483,263 | ||||||||||||
| Other operating |
185,860 | 10,291 | 8,060 | 204,211 | ||||||||||||
| Rent |
24,129 | 1,478 | 4,830 | 30,437 | ||||||||||||
| Depreciation and amortization |
27,790 | 299 | 2,432 | 30,521 | ||||||||||||
| Interest |
657 | - | - | 657 | ||||||||||||
| Total costs and expenses |
645,970 | 51,990 | 51,129 | 749,089 | ||||||||||||
| Income/(loss) from operations |
47,644 | 11,672 | (17,537 | ) |
41,779 | |||||||||||
| Non-operating income |
- | - | 15,245 | 15,245 | ||||||||||||
| Gain on acquisition of equity method investment |
- | - | 95,202 | 95,202 | ||||||||||||
| Unrealized losses on marketable equity securities |
- | - | (23,227 | ) |
(23,227 | ) |
||||||||||
| Income before income taxes |
$ | 47,644 | $ | 11,672 | $ | 69,683 | $ | 128,999 | ||||||||
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 or start-up operations not at full capacity, share-based compensation expense, and any gains on the acquisitions of equity method investments is helpful in allowing investors to assess the Company’s operations more accurately.
The operating results for the newly constructed healthcare facilities or agencies not at full capacity for the three and nine months ended September 30, 2022 include facilities or offices that began operations from 2020 to 2022, which is two behavioral health hospitals, one homecare agency, and one hospice agency. For the three months and nine months ended September 30, 2021, included are facilities that began operations from 2019 to 2021, which is 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 September 30 |
Nine Months Ended September 30 |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net income/(loss) attributable to National Healthcare Corporation |
$ | (2,429 | ) |
$ | (3,348 | ) |
$ | 16,092 | $ | 122,802 | ||||||
| Non-GAAP adjustments |
||||||||||||||||
| Unrealized losses on marketable equity securities |
11,056 | 23,797 | 11,479 | 23,227 | ||||||||||||
| Gain on acquisition of equity method investment |
- | - | - | (95,202 | ) |
|||||||||||
| Operating results for newly opened facilities or agencies not at full capacity |
2,105 | 115 | 4,033 | 480 | ||||||||||||
| Share-based compensation expense |
639 | 726 | 1,980 | 1,905 | ||||||||||||
| Benefit of income taxes on non-GAAP adjustments |
(3,588 | ) |
(6,406 | ) |
(4,548 | ) |
(6,369 | ) |
||||||||
| Non-GAAP Net income |
$ | 7,783 | $ | 14,884 | $ | 29,036 | $ | 46,843 | ||||||||
| GAAP diluted earnings/(loss) per share |
$ | (0.16 | ) |
$ | (0.22 | ) |
$ | 1.04 | $ | 7.97 | ||||||
| Non-GAAP adjustments |
||||||||||||||||
| Unrealized losses on marketable equity securities |
0.53 | 1.14 | 0.56 | 1.12 | ||||||||||||
| Gain on acquisition of equity method investment |
- | - | - | (6.16 | ) |
|||||||||||
| Operating results for newly opened facilities or agencies not at full capacity |
0.10 | 0.01 | 0.19 | 0.02 | ||||||||||||
| Share-based compensation expense |
0.03 | 0.03 | 0.09 | 0.09 | ||||||||||||
| Non-GAAP diluted earnings per share |
$ | 0.50 | $ | 0.96 | $ | 1.88 | $ | 3.04 | ||||||||
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 and nine months ended September 30, 2022 and 2021.
Percentage of Net Operating Revenues and Grant Income
| Three Months Ended |
Nine Months Ended September 30 |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net operating revenues and grant income |
100.0 | % |
100.0 | % |
100 | % |
100 | % |
||||||||
| Costs and expenses: |
||||||||||||||||
| Salaries, wages, and benefits |
63.9 | 61.5 | 63.2 | 61.1 | ||||||||||||
| Other operating |
26.9 | 26.4 | 26.5 | 25.8 | ||||||||||||
| Facility rent |
3.8 | 3.7 | 3.7 | 3.8 | ||||||||||||
| Depreciation and amortization |
3.8 | 3.7 | 3.7 | 3.9 | ||||||||||||
| Interest |
0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
| Total costs and expenses |
98.5 | 95.4 | 97.2 | 94.7 | ||||||||||||
| Income from operations |
1.5 | 4.6 | 2.8 | 5.3 | ||||||||||||
| Non–operating income |
1.0 | 1.2 | 1.0 | 1.9 | ||||||||||||
| Gain on acquisition of equity method investment |
- | - | - | 12.0 | ||||||||||||
| Unrealized losses on marketable equity securities |
(4.1 | ) |
(8.6 | ) |
(1.4 | ) |
(2.9 | ) |
||||||||
| Income/(loss) before income taxes |
(1.6 | ) |
(2.8 | ) |
2.4 | 16.3 | ||||||||||
| Income tax (provision)/benefit |
0.5 | 1.5 | (0.8 | ) |
(0.7 | ) |
||||||||||
| Net income/(loss) |
(1.1 | ) |
(1.3 | ) |
1.8 | 15.6 | ||||||||||
| Net loss attributable to noncontrolling interest |
0.2 | 0.1 | 0.2 | 0.0 | ||||||||||||
| Net income/(loss) attributable to stockholders of NHC |
(0.9 | ) |
(1.2 | ) |
2.0 | 15.6 | ||||||||||
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Results for the quarter ended September 30, 2022 compared to the third quarter of 2021 include a 2.1% decrease in net operating revenues and government stimulus income. The net operating revenues and government stimulus income decrease was primarily driven by the reduction in government stimulus income of $10.4 million during the third quarter of 2022 compared to the same period a year ago. Excluding the government stimulus income, same-facility net operating revenues increased 3.8% during the third quarter of 2022 compared to the same period a year ago.
For the quarter ended September 30, 2022, the GAAP net loss attributable to NHC was $2,429,000 compared to a net loss of $3,348,000 for the same period in 2021. Excluding the unrealized losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the quarter ended September 30, 2022 was $7,783,000 compared to $14,884,000 for the same period in 2021. The adjusted net income decrease was primarily due to the following three items: (1) the $10.4 million less Provider Relief Funds recorded during the third quarter of 2022; (2) the $1.5 million negative impact on our net patient revenues from Medicare sequestration that went into effect July 1, 2022; and (3) we are incurring higher inflationary pressures on our nursing labor costs.
Net operating revenues and grant income
Net patient revenues increased $5,430,000, or 2.1%, compared to the same period last year.
The total census at owned and leased skilled nursing facilities for the quarter averaged 83.7%, compared to an average of 82.0% for the same quarter a year ago. Overall, the composite skilled nursing facility per diem increased 2.4% compared to the same quarter a year ago. Our Medicare per diem rates increased 2.2% and managed care per diem rates increased 6.1% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 2.7% and 3.3%, respectively, compared to the same quarter a year ago. For the three months ended September 30, 2022 and 2021, respectively, $4,773,000 and $5,053,000 have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.
The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through March 31, 2022. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The full 2% reduction went back into effect July 1, 2022 and this reduced our net patient revenues approximately $1,500,000 during the third quarter of 2022 compared to the same quarter a year ago.
In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $5,102,000 for the three months ended September 30, 2022 compared to the same quarter last year.
Other revenues decreased $895,000, or 7.8%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.
During the three months ended September 30, 2022 and 2021, respectively, we recorded $0 and $10,429,000, respectively, in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.
Total costs and expenses
Total costs and expenses for the three months ended September 30, 2022 compared to the same period of 2021 increased $2,790,000, or 1.1% to $266,765,000 from $263,975,000.
Salaries, wages, and benefits increased $2,963,000, or 1.7%, to $173,198,000 from $170,235,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 63.9% compared to 61.5% for the three months ended September 30, 2022 and 2021, respectively. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations.
In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $4,587,000 for the three months ended September 30, 2022 compared to the same quarter last year.
Other operating expenses decreased $226,000, or 0.3%, to $72,883,000 for the 2022 period compared to $73,109,000 for the 2021 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.9% and 26.4% for the three months ended September 30, 2022 and 2021, respectively. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.
Other income
Non–operating income decreased by $668,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.
Income taxes
The income tax benefit for the three months ended September 30, 2022 is $1,140,000 (an effective income tax rate of 26.8%). We expect our corporate (federal and state) effective income tax rate for 2022 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 to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Results for the nine months ended September 30, 2022 compared to the same period of 2021 include a 3.8% increase in net operating revenues and grant income. The net operating revenues and grant income increase is primarily driven by the June 2021 acquisition of Caris hospice and the continued occupancy increase in our skilled nursing facilities. But, these increases were offset by the reduction in government stimulus income of $37.4 million for the first nine months of 2022 compared to the same period a year ago.
For the nine months ended September 30, 2022, GAAP net income attributable to NHC was $16,092,000 compared to net income of $122,802,000 for the same period in 2021. The large increase in our reported GAAP net income for the 2021 nine-month period was primarily due to the $95.2 million gain recorded from the acquisition of Caris. Excluding the gain on Caris, as well as excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income for the nine months ended September 30, 2022 was $29,036,000 compared to $46,843,000 for the same period in 2021. The decrease in adjusted net income for the nine-month period of 2022 compared to the same period of 2021 is primarily due to the $37.4 million less government stimulus income recorded during the 2022 period. We also continue to incur inflationary wage pressures within all areas of our operations.
Net operating revenues and grant income
Net patient revenues increased $68,013,000, or 9.6%, compared to the same period last year.
The total census at owned and leased skilled nursing facilities for the nine-month period averaged 83.4%, compared to an average of 80.0% for the same period a year ago. Overall, the composite skilled nursing facility per diem increased 1.6% compared to the same period a year ago. Our Medicare per diem rates increased 2.2% and managed care per diem rates increased 4.7% compared to the nine-month period a year ago. Medicaid and private pay per diem rates increased 2.3% and 5.6%, respectively, compared to the same period a year ago. For the nine months ended September 30, 2022 and 2021, $15,312,000 and $16,102,000, respectively, have been included in our net patient revenues for supplemental COVID-19 Medicaid payments.
In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $32,114,000 for the nine months ended September 30, 2022 compared to the same period of 2021. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $2,375,000 for the nine months ended September 30, 2022 compared to the same quarter last year.
Other revenues decreased $332,000, or 1.0%, compared to the same period last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.
During the nine months ended September 30, 2022 and 2021, respectively, we recorded $10,940,000 and $48,304,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.
Total costs and expenses
Total costs and expenses for the nine months ended September 30, 2022 compared to the same period of 2021 increased $49,250,000, or 6.6% to $798,339,000 from $749,089,000.
Salaries, wages, and benefits increased $35,565,000, or 7.4%, to $518,828,000 from $483,263,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 63.2% compared to 61.1% for the nine months ended September 30, 2022 and 2021, respectively. Our Caris acquisition increased salaries, wages, and benefits $18,962,000 in the nine-month period of 2022 compared to the same period a year ago. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce challenges have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations.
In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $5,150,000 for the nine months ended September 30, 2022 compared to the same period last year.
Other operating expenses increased $14,068,000, or 6.9%, to $218,279,000 for the 2022 period compared to $204,211,000 for the 2021 period. Other operating expenses as a percentage of net operating revenues and grant income was 26.6% and 25.8% for the nine months ended September 30, 2022 and 2021, respectively. Our Caris acquisition increased other operating expenses $9,601,000 in the first nine months of 2022 compared to the same period a year ago. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.
Other income
Non–operating income decreased by $6,794,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements. The large decrease in our non-operating income is due to the June 2021 acquisition of Caris. Prior to the June 2021 acquisition date, Caris was our most significant equity method investment with a 75.1% non-controlling ownership interest. From the respective acquisition date, Caris’ financial information is now included in the Company’s consolidated financial statements and is no longer accounted for as an equity method investment.
Income taxes
The income tax provision for the nine months ended September 30, 2022 is $5,415,000 (an effective income tax rate of 27.3%). We expect our corporate (federal and state) effective income tax rate for 2022 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 to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’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.
The following is a summary of our sources and uses of cash flows (dollars in thousands):
| Nine Months Ended September 31 |
Nine Month Change |
|||||||||||||||
| 2022 |
2021 |
$ | % |
|||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, at beginning of period |
$ | 119,743 | $ | 158,502 | $ | (38,759 | ) |
(24.5 | ) |
|||||||
| Cash (used in)/provided by operating activities |
(3,192 | ) | 46,871 | (50,063 | ) |
(106.8 | ) |
|||||||||
| Cash used in investing activities |
(8,810 | ) |
(52,837 | ) |
44,027 | 83.3 | ||||||||||
| Cash used in financing activities |
(35,541 | ) |
(25,769 | ) |
(9,772 | ) |
(37.9 | ) |
||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period |
$ | 72,200 | $ | 126,767 | $ | (54,567 | ) |
(43.0 | ) |
|||||||
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2022 was $3,192,000 as compared to cash provided by operating activities of $46,871,000 in the same period last year. Cash used in operating activities consisted of net income of $14,403,000 and adjustments for non–cash items of $44,221,000. There was cash used for working capital needs in the amount of $63,011,000 for the nine months ended September 30, 2022 compared to $31,297,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $439,000 during the nine months ended September 30, 2022, compared to $6,314,000 for the same period a year ago.
Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, deferred taxes, and stock compensation.
Investing Activities
Net cash used in investing activities totaled $8,810,000 for the nine months ended September 30, 2022, compared to $52,837,000 for the nine months ended September 30, 2021. Cash used for property and equipment additions was $24,563,000 and $25,774,000 for the nine months ended September 30, 2022, and 2021, respectively. In the prior period, we used cash of $28,713,000 to acquire Caris. Proceeds from the sale of marketable securities, net of purchases, resulted in cash provided by investing activity of $9,397,000 for the nine months ended September 30, 2022. The Company also collected notes receivable of $4,181,000 and received proceeds from the sale of property and equipment of $4,175,000 for the nine months ended September 30, 2022.
Financing Activities
Net cash used in financing activities totaled $35,541,000 for the nine months ended September 30, 2022 compared to $25,769,000 for the nine months ended September 30, 2021. We made principal payments under our finance lease obligations in the amount of $3,495,000 and $3,292,000 for the nine months ended September 30, 2022 and 2021, respectively. Cash used for dividend payments to common stockholders totaled $25,830,000 in the current year period compared to $24,010,000 for the same period a year ago. We repurchased common shares outstanding in the amount of $6,907,000 in the current year period compared to $278,000 for the same period a year ago.
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 $44,515,000 and our marketable equity and debt securities of $132,214,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our growth and development plans in the next twelve months.
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 $44,515,000 and our marketable equity and debt securities of $132,214,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At September 30, 2022, we do not have any long-term debt.
Our ability 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
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.
| Quantitative and Qualitative Disclosures About Market Risk. |
Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.
Interest Rate Risk
The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At September 30, 2022, we have available for sale marketable debt securities in the amount of $148,431,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The portfolio composition allows flexibility in reacting to fluctuations of interest rates. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations.
Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. As a result of the short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.
We do not currently use any derivative instruments to hedge our interest rate exposure. We have not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to approvals by the Investment Committee of the Board of Directors.
Credit Risk
Credit risk is managed by diversifying the fixed maturity portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings.
Equity Price and Concentration Risk
Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At September 30, 2022, the fair value of our marketable equity securities is approximately $127,996,000. Of the $128.0 million equity securities portfolio, our investment in NHI comprises approximately $92.2 million, or 72.0%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $12.8 million. At September 30, 2022, our equity securities had net unrealized gains of $73.0 million. Of the $73.0 million of unrealized gains, $67.4 million is related to our investment in NHI.
| Controls and Procedures. |
As of September 30, 2022, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Principal Accounting Officer (“PAO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and PAO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.
| Legal Proceedings. |
For a discussion of prior, current, and pending litigation of material significance to NHC, please see Note 16 of this Form 10–Q.
| Risk Factors. |
During the nine months ended September 30, 2022, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
| Unregistered Sales of Equity Securities and Use of Proceeds. |
Not applicable
| Defaults Upon Senior Securities. |
None
| Mine Safety Disclosures. |
Not applicable
| Other Information. |
None
| Exhibits. |
| (a) List of exhibits |
EXHIBIT INDEX
| Exhibit No. |
Description |
|
| 3.1 |
||
| 3.2 |
||
| 3.3 |
||
| 3.4 |
||
| 4.1 |
||
| 10.1 |
||
| 10.2 |
||
| 31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
| 31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Principal Accounting Officer |
|
| 32 |
||
| 101.INS |
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104 |
Cover Page Interactive File (embedded within the Inline XBRL document and include in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NATIONAL HEALTHCARE CORPORATION |
||
| (Registrant) |
||
| Date: November 3, 2022 |
/s/ Stephen F. Flatt |
|
| Stephen F. Flatt |
||
| Chief Executive Officer |
||
| Date: November 3, 2022 |
/s/ Brian F. Kidd |
|
| Brian F. Kidd |
||
| Senior Vice President and Controller |
||
| (Principal Accounting Officer) |
||