National HealthCare Corporation — Q2 2016 Form 10-Q
Business context and period. The report covers the quarter and six months ended June 30, 2016. NHC operates or manages senior-care facilities and homecare programs in 10 states, and also provides insurance, management, accounting, and rental services. Results are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net operating revenues | $227.8m | $224.9m | $457.4m | $447.3m |
| Income before income taxes | $19.6m | $19.8m | $42.0m | $41.5m |
| Net income | $11.9m | $12.4m | $25.6m | $25.6m |
| Net income available to common stockholders | $11.9m | $10.2m | $25.6m | $21.3m |
| Diluted earnings per common share | $0.78 | $0.71 | $1.68 | $1.48 |
Quarterly revenue increased 1.3%, while pretax income fell 1.4%. Six-month revenue rose 2.2% and pretax income rose 1.1%; net income was essentially unchanged. Common-stockholder income increased 16.4% for the quarter and 20.2% for the half, primarily because preferred stock was redeemed in November 2015 and preferred dividends no longer reduced common earnings. Common dividends declared were $0.45 per share in Q2 and $0.85 per share for the half.
Costs and expenses rose 1.9% in Q2 and 2.6% for the half. Salaries, wages, and benefits increased 2.4% and 2.9%, respectively; this cost was 59.3% of revenue in Q2 versus 58.7%, and 58.0% for the half versus 57.6%. Interest expense increased to $0.9m in Q2 and $1.9m for the half, principally reflecting borrowing associated with the preferred-stock redemption. Non-operating income increased to $4.9m in Q2 and $9.7m for the half, partly due to improved equity-method investment earnings.
Cash flow and balance sheet. Six-month operating cash flow was $36.1m, down from $40.2m. Capital spending was $36.1m, compared with $23.0m a year earlier; investing cash outflow was $32.2m. Financing cash outflow was $4.6m, including $12.1m in common dividends, partly offset by $10.1m from common-share issuance. Cash and cash equivalents ended at $37.5m, compared with $38.2m at year-end 2015.
At June 30, NHC had $120.0m of long-term debt: $110.0m drawn on a $175.0m revolving facility and a $10.0m term note. The facility had $65.0m available and matures in October 2020. Capital-lease obligations totaled $31.9m. Marketable securities were $141.8m, with additional restricted cash and securities. Management stated these resources and operating cash flows were expected to meet near- and long-term needs; restricted assets are not necessarily freely available for general use. Total assets were $1.09bn and stockholders’ equity was $671.5m.
Changes, outlook, and risks
- Skilled-nursing census averaged 89.3% in Q2 versus 90.0% a year earlier, and 89.6% for the half versus 90.1%. Composite skilled-nursing per diem rates increased 0.7% in Q2 and 0.5% for the half.
- Three recently opened facilities generated approximately $0.7m of Q2 pretax operating losses; five newer entities generated approximately $1.1m of first-half losses. Management said excluding these losses, pretax income would have increased 2.3% for Q2 and 3.7% for the half.
- A new ten-year triple-net lease for 11 properties is expected to increase annual rental income by approximately $2.3m. NHC ceased managing one facility on March 1, 2016, reducing expected management-fee revenue by about $0.6m annually.
- Three development projects were under construction at quarter-end and expected to begin operating in Q4 2016. CMS’s FY2017 skilled-nursing rule provided an approximate 2.4% rate update effective October 1, 2016. Management gave no company earnings guidance; it noted planned construction, possible market expansion, and an expectation to continue common dividends subject to quarterly board approval.
- Marketable equity securities totaled $141.8m, of which $122.4m was NHI stock (86% of the portfolio). NHC reported substantial unrealized gains on securities through other comprehensive income; a 10% equity-price move would change the fair value of its equity investments by approximately $14.2m.
- Accrued risk reserves were $98.5m. NHC and/or managed centers were defendants in 36 professional-liability claims; claims could exceed reserves and insurance. The company also disclosed an unresolved DOJ investigation concerning rehabilitative-therapy billing and medical necessity, and a Caris hospice eligibility qui tam case. Potential outcomes and liabilities could not be assessed.
- NHC paid $6.8m in 2015 following South Carolina Medicaid audit findings and is appealing to recover the funds; no receivable was recorded. Medicare and Medicaid reimbursement, occupancy, labor costs, regulatory changes, litigation, and investment-market concentration are material exposures.
Important facts for investors to verify
- Whether census and per-diem trends, together with higher labor costs, sustain or pressure operating profitability.
- Progress, opening dates, costs, and operating performance of projects expected to commence in Q4 2016.
- Use and terms of the $65m remaining revolving-credit capacity, and cash available after considering restricted balances and planned capital spending.
- Developments in the DOJ and Caris investigations, professional-liability claims and reserves, and the South Carolina Medicaid appeal.
- Valuation and concentration risk in NHI shares, including the effect of market movements on comprehensive income and equity.