National HealthCare Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial amounts below are in millions unless otherwise stated. NHC operates or manages senior-care facilities and homecare programs, primarily in the southeastern United States.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net operating revenue | $225.4 | $218.2 | $672.7 | $645.3 |
| Income before taxes | $18.3 | $18.7 | $59.8 | $60.6 |
| Net income | $12.6 | $12.8 | $38.2 | $38.6 |
| Net income available to common shareholders | $10.4 | $10.7 | $31.7 | $32.1 |
| Diluted EPS | $0.72 | $0.75 | $2.21 | $2.25 |
- Q3 revenue increased 3.3%; pretax income declined 1.9%. Nine-month revenue increased 4.2%; pretax income declined 1.3%.
- Management said pretax income would have risen 6.6% in Q3 and 7.1% for nine months excluding operating losses at recently opened facilities.
- Q3 net patient revenue rose 3.6%, supported by same-facility skilled nursing revenue growth and contributions from three new facilities. Other revenue declined 4.0%, mainly after NHC discontinued accounting services for seven facilities.
- Operating expenses grew faster than quarterly revenue: salaries, wages and benefits rose 4.8% in Q3 and 4.9% for nine months. Salaries and benefits were 60.0% of revenue in Q3 versus 59.1% a year earlier; the nine-month share was 58.4% versus 58.0%.
- Skilled nursing occupancy improved to 89.7% for Q3 and 90.0% for nine months, versus 88.8% and 88.9%, respectively, in 2014. Composite skilled nursing per diem rates increased 2.0% in Q3 and 2.5% for nine months.
- Nine-month other comprehensive loss was $13.6 million, primarily reflecting unrealized investment losses; comprehensive income was $24.6 million versus $41.9 million in 2014.
Cash flow, liquidity and capital structure
- Nine-month operating cash flow was $63.3 million, up from $57.9 million. Investing used $47.4 million, including $39.0 million of property and equipment additions; financing used $14.9 million. Cash and cash equivalents ended the period at $70.8 million.
- At September 30, current assets were $305.6 million and current liabilities $180.7 million. These included $110.6 million of marketable securities and $8.5 million of restricted cash among current assets.
- Reported long-term debt was $10.0 million, plus $34.3 million of capital lease obligations. Facility rent expense was $30.0 million for nine months; future minimum operating lease payments were $390.5 million.
- On October 7, NHC replaced its $75 million revolving facility with a $175 million facility maturing in 2020. The new facility bears interest at LIBOR plus 1.40% or the defined base rate plus 0.40%. After quarter-end, NHC borrowed approximately $110 million to fund preferred-stock redemption.
- On November 3, NHC redeemed 8.29 million preferred shares for approximately $130.6 million, funded with cash and credit-facility borrowings; 2.47 million shares converted into 597,968 common shares. Preferred stock was no longer outstanding after that date.
- Nine-month common dividends declared were $1.14 per share. The company reported no common-stock repurchases during the nine-month period.
Outlook, risks and significant items
- No specific company earnings or revenue guidance was provided. Management expects operating cash flow, cash and marketable securities, and credit availability to support near-term obligations and growth plans, while noting that future performance and financing depend on reimbursement, demand, competition and capital-market conditions.
- Management reported the FY2016 Medicare skilled nursing payment update at approximately 1.2%. Tennessee Medicaid rate changes effective July 2015 were estimated to add about $2.3 million annually; reimbursement effects depend on census and payer mix.
- Growth projects included facilities under construction in Tennessee and South Carolina, with expected openings primarily in 2016. A 60-bed memory-care partnership in Missouri was expected to begin operations in Q4 2015.
- Government investigations remain unresolved: a DOJ/OIG inquiry into rehabilitative therapy billing and medical necessity at Tennessee facilities, and investigations into hospice eligibility at Caris HealthCare. NHC said it could not evaluate the outcomes; either could materially affect results or financial position.
- South Carolina Medicaid audits covering 11 facilities are under administrative appeal; no provision was recorded because the outcome could not be reasonably estimated.
- Accrued risk reserves were $105.9 million. NHC is substantially self-insured and cautioned that claims, including unasserted claims, could exceed reserves and coverage. It reported 33 pending personal-injury or wrongful-death claims involving NHC or managed centers.
- Investment exposure is concentrated: NHC held $110.6 million in equity securities, including $93.7 million of NHI stock (about 85% of the equity portfolio). A hypothetical 10% equity-price change would change the portfolio’s fair value by about $11.1 million.
- The nine-month effective tax rate was 36.2%; the company disclosed $14.3 million of unrecognized tax benefits and $2.4 million of accrued interest and penalties. Q3 tax expense benefited by $1.7 million from statute-of-limitations expirations.
Most important facts for investors to verify
- Progress in the DOJ/OIG therapy-billing inquiry, Caris hospice investigation and South Carolina Medicaid appeals, including any resulting exposure or reserve changes.
- Post-redemption debt, interest expense, liquidity and covenant headroom under the $175 million credit facility.
- Whether occupancy, payer mix and reimbursement-rate gains offset wage, therapy and new-facility costs.
- Performance and valuation concentration of the NHI investment, and the effect of market movements on reported comprehensive income and equity.
- Actual opening dates, ramp-up costs and operating contribution from development projects.
- Evolution of self-insurance reserves and potential claims beyond available coverage.