National HealthCare Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; compared with the corresponding 2018 periods. Financial amounts below are in millions of dollars unless noted.
Business context
NHC provides senior healthcare services, operating or managing skilled nursing, assisted and independent living, behavioral health, and homecare businesses, primarily in the southeastern United States. At quarter-end it reported 75 skilled nursing facilities, 26 assisted living facilities, five independent living facilities, one behavioral health hospital, and 36 homecare programs.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net operating revenue | $247.2 | $242.1 | $495.4 | $485.1 |
| Income from operations | $10.2 | $12.2 | $26.0 | $28.0 |
| Net income attributable to NHC | $13.7 | $22.5 | $35.0 | $19.7 |
| Diluted EPS | $0.89 | $1.47 | $2.28 | $1.29 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $39.2 | $49.4 |
Q2 revenue rose 2.1%, while attributable net income fell 39.0%; operating margin narrowed to 4.1% from 5.0%. For the first half, revenue rose 2.1%, operating margin was 5.2% versus 5.8%, and attributable net income increased 77.8%. The earnings comparisons were significantly affected by marketable-equity-security fair-value movements and, for the first half, the prior-year Caris legal settlement. Company-reported non-GAAP net income was $12.9 million for Q2 versus $14.3 million, and $29.8 million for the first half versus $30.6 million; these measures exclude selected items and are not GAAP results.
Q2 net patient revenue increased 2.0%. Skilled nursing occupancy averaged 90.5% in Q2 versus 89.3%; first-half occupancy was 90.4% versus 89.5%. Medicare and managed-care per-diem rates declined year over year, while Medicaid and private-pay rates increased. Costs grew faster than revenue in Q2: other operating expense rose 8.0%, including costs from the new NHC Advantage insurance plan and higher self-insured reserve experience. Salaries and benefits rose 1.7%.
Cash, debt, and liquidity
Cash and cash equivalents were $29.7 million at June 30, 2019; restricted cash was another $36.2 million, making total cash and restricted cash $65.9 million. Marketable equity securities were $147.0 million, and restricted marketable debt securities were $155.6 million. Current assets were $321.6 million and current liabilities $171.7 million.
Six-month operating cash flow was $39.2 million, down from $49.4 million. Investing used $11.4 million, including $14.0 million of property additions and $15.6 million for an equity-method investment, partly offset by sales of restricted debt securities. Financing used $16.8 million, including $15.3 million of dividends. The company reported $55.0 million drawn on its credit facility, with $55.0 million available; the facility matures in October 2020 and has a variable rate. A 1% rate change was estimated to affect annual interest expense by approximately $0.55 million.
Adoption of the new lease standard added $214.4 million of operating lease right-of-use assets and liabilities. Finance lease liabilities were $21.1 million. The balance-sheet increase in lease liabilities should be considered when comparing with 2018, which was not restated. NHC declared dividends of $0.52 per share in Q2, versus $0.50 in Q2 2018.
Changes, outlook, risks, and unusual items
- Revenue growth reflected NHC Advantage, the behavioral health hospital acquired in 2018, and newer assisted-living and memory-care facilities; the 2018 sale of a Kentucky skilled nursing facility partly offset growth.
- In June, NHC acquired the remaining interest in a 60-bed Missouri memory-care facility, previously accounted for as an equity-method investment. Remeasuring its prior interest generated a $2.0 million gain.
- Marketable equity securities generated a $6.8 million unrealized gain in the first half of 2019; Q2 alone had a $0.1 million unrealized loss. The comparable Q2 2018 period had a $12.4 million unrealized gain. NHC’s $147.0 million equity portfolio was concentrated: National Health Investors stock represented approximately 87%.
- Management estimated a 2019 corporate income tax rate of approximately 26%, excluding nondeductible expenses. The filing gives no company-wide earnings or revenue forecast. Management cited a 2.4% net FY2020 Medicare skilled-nursing payment increase under the rule announced in July, and estimated Tennessee Medicaid rate changes would add about $1.7 million annually. The new skilled-nursing Patient-Driven Payment Model was scheduled for October 1, 2019; home-health payment-model changes were scheduled for 2020.
- Professional-liability and workers’ compensation reserves totaled $97.3 million. NHC and/or managed centers were defendants in 65 patient injury or wrongful-death claims; claims could exceed reserves and insurance. A False Claims Act qui tam case against wholly owned Nutritional Support Services remained pending, with unspecified damages sought; the government declined to intervene and the company said it intended to defend the case.
- Other stated risks include changes to Medicare and Medicaid reimbursement or regulation, labor availability and costs, census and competition, refinancing, investment-market volatility, and the ability to attract and retain qualified personnel. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether operating performance and margins improve as the new insurance plan and recent facilities mature, given higher other operating costs.
- Actual reimbursement and operating effects of PDPM and home-health payment changes, along with census and per-diem trends.
- Valuation and concentration risk in the NHI shareholding, and the resulting volatility in reported earnings.
- Adequacy of the $97.3 million claims reserves and developments in the pending qui tam litigation.
- Refinancing plans for the $55.0 million variable-rate credit facility before its October 2020 maturity, and the effect of lease commitments on liquidity.
- Cash-flow conversion, investment and acquisition spending, and dividend coverage; first-half operating cash flow declined year over year.