National HealthCare Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. NHC operates or manages senior-care facilities, homecare programs, and related insurance, management, accounting, and real-estate businesses, primarily in the southeastern United States.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net operating revenue | $224.9 million | $216.6 million | $447.3 million | $427.1 million |
| Income before income taxes | $19.8 million | $20.4 million | $41.5 million | $41.9 million |
| Net income | $12.4 million | $12.5 million | $25.6 million | $25.7 million |
| Net income available to common stockholders | $10.2 million | $10.3 million | $21.3 million | $21.4 million |
| Diluted EPS | $0.71 | $0.72 | $1.48 | $1.50 |
| Operating income before non-operating income | $15.7 million | $16.1 million | $33.1 million | $33.1 million |
Revenue increased 3.9% in Q2 and 4.7% for the half year, while pretax income declined 2.6% and 1.0%, respectively. Calculated operating margin before non-operating income was approximately 7.0% for Q2 (7.4% prior year) and 7.4% for the half year (7.7% prior year). The filing reports salaries, wages and benefits at 58.7% of revenue in Q2 versus 58.0%, and 57.6% for the half year versus 57.4%.
Six-month cash from operations was $40.2 million, up from $27.0 million. Investing used $29.3 million, including $23.0 million of property and equipment additions; financing used $9.1 million, including $14.0 million of dividends paid. Cash and cash equivalents ended at $71.5 million, compared with $75.8 million a year earlier. Common dividends declared were $0.40 per share for Q2 and $0.74 for the half year.
Balance sheet and liquidity
- At June 30, 2015, total assets were $1.074 billion and stockholders’ equity was $742.6 million. Current assets of $308.1 million exceeded current liabilities of $171.0 million; calculated current ratio was approximately 1.8.
- Long-term debt was $10.0 million, and capital lease obligations totaled $35.1 million, including current obligations. A $75 million revolving facility was undrawn at quarter-end; its stated maturity was October 21, 2015. Management said it anticipated renewal.
- Cash plus marketable securities was substantial, but the equity portfolio was concentrated: NHI stock represented approximately $101.6 million, or 86% of marketable equity securities. A hypothetical 10% equity-price change would alter portfolio fair value by about $11.8 million.
- Contractual obligations totaled $477.9 million, principally operating leases ($399.1 million), capital leases ($45.1 million), and construction obligations ($23.1 million). Management stated that cash, securities, operating cash flow, and borrowing capacity were expected to meet near-term requirements.
Changes, management commentary, and outlook
- Skilled-nursing occupancy at owned and leased facilities averaged 90.0% in Q2, compared with 88.7% a year earlier; for the first half it averaged 90.1%, versus 89.0%. Same-facility revenue growth reflected higher census and a greater share of skilled patients. Composite skilled-nursing per diem rates rose 2.9% in Q2 and 2.7% for the half year.
- Newly operated facilities supported revenue growth but weighed on reported pretax results. Excluding operating losses from recently opened or leased facilities, management said pretax income would have risen 6.3% in Q2 and 7.2% for the first half.
- Higher therapist-service costs, facility start-up costs, and wage inflation contributed to expense growth. Non-operating income declined, chiefly because of lower earnings from Caris, NHC’s 75.1% non-controlling hospice investment.
- NHC expected other revenue to fall by approximately $350,000–$400,000 per quarter after ending accounting and financial services for seven facilities. Construction projects were expected to open from late 2015 through 2016; the filing gives project-specific expected start dates but no consolidated earnings or revenue guidance.
- CMS’s FY2016 skilled-nursing payment rule, released July 30, 2015, provided an estimated 1.2% rate update. Management cautioned that realized effects depend on census and patient mix. Management also noted pressure from government shifts toward home- and community-based care, competition among senior-living options, and shorter skilled-nursing stays.
Risks, contingencies, and unusual items
- Unrealized investment losses drove other comprehensive loss of $11.8 million in Q2 and $9.5 million for the half year; comprehensive income was $0.6 million and $16.1 million, respectively. NHC recorded no other-than-temporary impairment on its marketable securities during the half year.
- Accrued risk reserves were $108.5 million. NHC and/or managed centers were defendants in 29 professional-liability claims; management warned claims could exceed reserves and insurance coverage.
- The DOJ and HHS OIG were investigating rehabilitative-therapy billing and medical necessity at Tennessee facilities. Caris was under government investigation regarding hospice patient eligibility. NHC said outcomes could not be evaluated and each matter could materially affect results or financial condition.
- South Carolina Medicaid cost-report audits covered 11 facilities. NHC had appealed findings and had not accrued an amount because the outcome could not be reasonably estimated; management warned of possible material adverse effects.
- Approximately 65% of net patient revenue came from Medicare, Medicaid, and other government programs. Reimbursement changes, regulatory interpretations, and compliance actions could affect results. The filing also identifies labor availability, occupancy, patient-care claims, and access to refinancing and capital as risks.
- The Board authorized new repurchase programs of up to $25 million each for common and preferred stock, expiring August 31, 2016; the filing does not state that purchases had been made under the new programs by quarter-end.
Most important facts for investors to verify
- Progress and terms of renewing or refinancing the $75 million revolving facility ahead of its October 2015 maturity.
- Subsequent developments and potential financial exposure from the DOJ/HHS, Caris, and South Carolina Medicaid matters.
- Whether occupancy, payer mix, and rate increases can offset labor, therapy, and new-facility costs.
- Changes in NHI share price and concentration, and the effect of investment-market movements on reported comprehensive income and liquidity.
- Actual spending under the common and preferred stock repurchase authorizations and the sustainability of dividend payments alongside construction commitments.