National HealthCare Corporation (NYSE American: NHC) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 5, 2019. Unless otherwise noted, dollar amounts below are in millions. NHC operates senior-care facilities and homecare programs, and also provides insurance, management, accounting, and rental services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net operating revenue | $247.1 | $246.3 | $742.5 | $731.4 |
| Operating income | $6.6 | $10.8 | $32.5 | $38.9 |
| Net income attributable to NHC | $19.5 | $21.1 | $54.4 | $40.8 |
| Diluted EPS | $1.27 | $1.39 | $3.55 | $2.68 |
| Operating margin | 2.7% | 4.4% | 4.4% | 5.3% |
- Quarterly operating revenue rose 0.3%, but operating income fell about 39%; attributable net income declined 8.0%. Higher wages and operating costs more than offset modest revenue growth.
- Nine-month operating revenue increased 1.5%, while operating income declined about 16%. Reported attributable net income and diluted EPS increased year over year, helped by investment-related and other non-operating items; non-GAAP net income was $42.8 million versus $46.6 million.
- Unrealized gains on marketable equity securities were $9.3 million in Q3 and $16.1 million year to date, compared with $3.5 million and $0.4 million, respectively, in 2018. These gains are market-sensitive and included in reported earnings.
- Reporting inconsistency to note: MD&A describes the nine-month increase in attributable net income as 7.3%, but the financial statements show $54.4 million versus $40.8 million, which implies growth of about 33%. Investors should verify this discrepancy.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $74.9 million, down from $77.1 million. Investing used $9.8 million and financing used $51.9 million; cash, cash equivalents, and restricted cash ended at $68.1 million.
- Capital additions were $19.7 million. The company paid $25.0 million of debt principal and $23.2 million in common dividends during the nine months.
- At September 30, cash and cash equivalents were $59.3 million; marketable equity securities were $156.3 million. Current assets were $351.2 million and current liabilities $181.1 million. Restricted cash and securities are not equivalent to unrestricted operating cash.
- Credit-facility debt was $30.0 million, down from $55.0 million at year-end 2018. The facility’s borrowing capacity was reduced from $110 million to $60 million; $30 million remained available, and the facility matures October 2020. Its rate is variable; a 1 percentage-point rate change would affect annual interest cost by about $0.3 million.
- Lease accounting adoption in 2019 recognized operating lease right-of-use assets of $208.8 million and corresponding liabilities of $208.8 million. Total liabilities increased to $535.2 million from $346.5 million at year-end, in part reflecting this new balance-sheet presentation. The filing reports $20.1 million of finance lease liabilities in addition to operating lease liabilities.
- Quarterly dividends declared were $0.52 per share, versus $0.50 a year earlier. A new stock repurchase authorization permits up to $25 million of purchases; none had been made under the new plan by quarter-end.
Operating changes and management commentary
- Skilled-nursing census averaged 90.1% in Q3, unchanged year over year; nine-month census was 90.3% versus 89.7%. Management cited wage pressure and a lower skilled-patient mix as operating challenges.
- Q3 net patient revenue was nearly flat. Growth from NHC Advantage, the company’s Tennessee institutional special-needs plan, and newer assisted-living and memory-care operations was partly offset by lower homecare revenue and the 2018 sale of a Kentucky skilled-nursing facility.
- For the first nine months, NHC Advantage contributed approximately $8.6 million of incremental net patient revenue. Homecare revenue declined approximately $3.4 million, attributed primarily to lower volume and less favorable payer mix. Management and accounting revenue helped lift other revenue.
- Management reported that 72% of NHC skilled-nursing facilities had four- or five-star ratings, versus 44% industry-wide; the company’s average rating was 3.97 versus 3.09 for the industry. CMS rating-system changes affected ratings across the sector.
- NHC acquired the remaining interest in a 60-bed Missouri memory-care facility in June 2019, recording a $2.0 million gain on remeasurement of its previously held interest. It also began operating a new 60-bed memory-care facility in Tennessee in January 2019.
Outlook, risks, and contingencies
- Management said expected liquidity sources—including operating cash flow, cash, marketable equity securities, and available credit—were expected to meet near- and long-term requirements. No earnings or revenue forecast was provided.
- For fiscal 2020, CMS’s skilled-nursing rule provided for an estimated net Medicare payment increase of about 2.4%. The new Patient-Driven Payment Model began October 1, 2019. Tennessee and South Carolina Medicaid rate changes were estimated to add about $1.68 million and $2.01 million annually, respectively. Home-health payment and methodology changes, including PDGM, were scheduled for 2020.
- Management expected a 2019 corporate income tax rate of approximately 26%, excluding nondeductible expenses. The Q3 effective rate was 14.0%, favorably affected by tax benefits related to statute expirations and return adjustments.
- Accrued risk reserves for health, workers’ compensation, and general and professional liability were $98.3 million. The company is substantially self-insured; claims could exceed reserves and insurance coverage, and reserve estimates may change.
- A subsidiary, Nutritional Support Services, faces a False Claims Act qui tam suit alleging incorrect drug-code reporting. The U.S. declined to intervene; plaintiffs seek unspecified damages, and the company says it intends to defend the case.
- Other principal risks include changes in Medicare and Medicaid reimbursement or regulation, labor availability and cost, occupancy and payer mix, patient-care litigation, competition, access to capital, and the ability to refinance the credit facility. NHC’s $156.3 million equity portfolio was concentrated: $134.3 million, or about 86%, was NHI stock. A 10% market-price movement would change portfolio fair value by approximately $15.6 million.
- The company adopted lease accounting in 2019 without a retained-earnings adjustment. It was evaluating the expected-credit-loss accounting standard not yet adopted at the filing date.
Important facts for investors to verify
- Resolve the MD&A’s stated 7.3% nine-month net-income growth against the financial-statement figures, which imply substantially higher growth.
- Assess recurring operating performance separately from unrealized investment gains, acquisition remeasurement gains, and other non-operating items; compare GAAP and company-defined non-GAAP results.
- Track labor costs, skilled-patient mix, homecare volumes, and occupancy, particularly as PDPM and PDGM take effect.
- Review refinancing plans and terms ahead of the October 2020 credit-facility maturity, along with lease obligations and remaining borrowing availability.
- Monitor the NHI share concentration, the adequacy of self-insurance reserves, and developments in the NSS litigation and healthcare reimbursement rules.