Business context and reporting period
National HealthCare Corporation (NHC) filed its Form 10-K for the fiscal year ended December 31, 2018. This is an annual report, not a standalone quarterly filing; the filing also provides unaudited fourth-quarter results. NHC operates or manages skilled nursing, assisted and independent living, behavioral health and homecare businesses, and holds a 75.1% non-controlling interest in hospice provider Caris. At year-end, it operated or managed 75 skilled nursing facilities and 35 homecare programs across 10 states.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net operating revenue | $980.3 million | $963.9 million | +1.7% |
| Income from operations | $56.1 million | $54.1 million | +3.6% |
| Income before taxes | $74.9 million | $74.5 million | +0.4% |
| Net income attributable to NHC | $59.0 million | $56.2 million | +4.9% |
| Diluted EPS | $3.87 | $3.69 | +$0.18 |
| Operating margin | 5.7% | 5.6% | +0.1 percentage point |
| Net margin attributable to NHC | 6.0% | 5.8% | +0.2 percentage point |
Revenue was 95.1% patient-service revenue. Skilled nursing occupancy in owned and leased facilities was 89.8%, down from 90.2%; the composite skilled nursing per diem rose 1.2%. Medicare and managed-care per diems changed by +0.3% and -2.0%, respectively, while Medicaid and private-pay per diems increased 2.9% and 3.0%. Salaries, wages and benefits increased 1.9% to $582.7 million; the company cited wage pressure. Homecare patient revenue declined to $59.9 million from $63.1 million.
Operating cash flow was $98.4 million, up from $94.5 million. Capital additions were $29.8 million. Cash, cash equivalents and restricted cash totaled $54.9 million at year-end, including $43.2 million of unrestricted cash; marketable securities were $140.2 million and restricted marketable securities totaled $172.6 million. Current assets were $322.0 million against current liabilities of $157.9 million.
Long-term debt fell to $55.0 million from $100.0 million after $45.0 million of principal repayments. The variable-rate credit facility had $55.0 million of remaining capacity and matures in October 2020. A 1 percentage-point rate change would affect annual interest cost by approximately $0.55 million at the year-end balance. Operating and capital lease obligations were substantial; contractual lease payments totaled approximately $306.2 million.
Fourth-quarter results
Q4 2018 revenue was $248.9 million versus $246.3 million in Q4 2017. Operating income was $17.2 million versus $16.3 million. Net income attributable to NHC was $18.2 million, or $1.19 per diluted share, compared with $21.5 million, or $1.41 per diluted share. Q4 2017 included a $8.5 million tax benefit from federal tax reform, making the year-over-year net-income comparison less representative of underlying operating performance.
Material changes and unusual items
- GAAP net income attributable to NHC increased 4.9%. Management’s non-GAAP net income was $64.4 million versus $54.2 million, up 18.8%; this measure excludes specified items including Caris legal costs, immature facility results, stock compensation and marketable-equity gains. It is not a substitute for GAAP results.
- Caris’s 2018 earnings included NHC’s $8.4 million share of the effect of an $8.5 million settlement and related legal expenses. The settlement resolved the described federal hospice eligibility and overpayment litigation for specified conduct.
- NHC acquired control of a 14-bed behavioral health hospital in August 2018. The acquisition generated a $2.1 million remeasurement gain and $3.4 million of goodwill; the hospital contributed about $2.5 million of patient revenue for the five months included in 2018.
- NHC recorded a $1.7 million gain on sale of a skilled nursing facility. Adoption of an accounting standard moved equity-security fair-value changes into net income; 2018 included a $1.1 million unrealized gain. NHI represented about 88% of the equity portfolio’s $140.2 million fair value.
- 2018 effective tax rate was 21.6%, including a $2.2 million benefit from statute-of-limitations expirations. Management estimated a 22%–26% effective tax rate for 2018 and future years; the 2017 rate included a separate $8.5 million tax-reform benefit.
Outlook, risks and contingencies
Management expected operating cash flow, cash and securities, and available credit to support near-term obligations and development plans. It gave no specific earnings or revenue guidance. It cited CMS’s approximately 2.4% FY2019 SNF payment update and 2.2% 2019 home-health payment update, while identifying upcoming payment-system changes: PDPM for skilled nursing facilities from October 2019 and PDGM, including a shift to 30-day payment periods, for home health from January 2020. Tennessee, South Carolina and Missouri Medicaid rate changes were expected to add approximately $6.3 million of annual revenue in FY2019 combined, based on management estimates.
Key risks include changes to Medicare, Medicaid and private-pay reimbursement; labor availability and wage inflation; occupancy and competitive pressures; extensive regulation and audits; and patient-care, professional-liability and workers’ compensation claims. NHC was self-insured to a significant extent and reported $96.0 million of accrued risk reserves, up from $93.3 million. It and/or managed facilities were defendants in 59 liability claims at year-end. A separate False Claims Act qui tam action against wholly owned Nutritional Support Services remained pending; the government declined to intervene, and the company said it intended to defend the case.
NHC also disclosed concentration and market risks in its investment portfolio, including significant exposure to NHI, and uncertainty around healthcare reform. The expected adoption of lease accounting standards was anticipated to materially increase reported assets and liabilities. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether operating momentum persists given lower skilled nursing occupancy, declining homecare revenue and ongoing wage pressure.
- How PDPM and PDGM affect reimbursement, service mix, costs and facility economics after implementation.
- The adequacy of the $96.0 million risk reserve relative to asserted and unasserted claims, and developments in the pending NSS litigation.
- Credit-facility refinancing or repayment plans ahead of its October 2020 maturity, including covenant headroom and variable-rate exposure.
- The impact of NHI concentration and equity-market volatility on reported earnings and liquidity; 2018 included a noncash fair-value gain.
- The actual balance-sheet and covenant effects of lease-standard adoption, and whether declared dividends and any planned share repurchases remain supported by cash generation.