National HealthCare Corporation — Q3 2014 Form 10-Q
Business context and period. The unaudited quarter and nine months ended September 30, 2014; comparative periods are 2013. NHC operates or manages senior-care facilities and homecare programs, and also provides insurance, management, accounting, and rental services. At quarter-end, it reported 73 long-term care centers, 18 assisted living facilities, five independent living facilities, and 37 homecare programs across 10 states.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net operating revenues | $218.2 million | $195.8 million | $645.3 million | $582.2 million |
| Income before taxes | $18.7 million | $30.4 million | $60.6 million | $76.7 million |
| Net income | $12.8 million | $19.9 million | $38.6 million | $48.0 million |
| Net income available to common | $10.7 million | $17.7 million | $32.1 million | $41.5 million |
| Diluted EPS | $0.75 | $1.19 | $2.25 | $2.88 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $57.9 million | $90.2 million |
Quarterly revenue rose 11.5%; nine-month revenue rose 10.8%. Net patient revenue grew 13.6% in both comparisons, largely reflecting 11 newly operated skilled nursing facilities. Other revenue fell 18.4% for the quarter and 24.1% for nine months. Income before taxes declined 38.6% in Q3 and 21.0% year to date; management says the comparison is affected by favorable 2013 items (including a $5.5 million recovery of previously written-down notes and SeniorTrust/ElderTrust settlement-related items). Excluding cited prior-period items, management reported pre-tax income down 5.3% for Q3 and 14.9% for nine months.
Costs grew faster than revenue: total costs and expenses increased 15.3% in Q3 and 12.8% for nine months. Salaries, wages and benefits were 59.1% of revenue in Q3 versus 58.1%, and 58.0% year to date versus 56.7%. Other operating costs were 25.4% of Q3 revenue versus 23.4%, and 25.8% year to date versus 25.6%. Depreciation and interest expense also increased, in part with new facilities and Missouri capital leases. Approximate income-before-non-operating-income margins, calculated from reported figures, were 6.7% in Q3 2014 versus 9.8% in Q3 2013, and 7.4% versus 9.0% for the nine-month periods.
Skilled nursing census at owned and leased facilities averaged 88.8% in Q3 and 88.9% for nine months, compared with 89.5% in each 2013 comparison. For nine months, Medicare, Medicaid, and private-pay per diem rates increased 1.6%, 2.6%, and 4.6%, respectively; managed-care rates decreased 1.9%.
Financial position, cash flow, and capital allocation
- At September 30, 2014, cash and cash equivalents were $76.9 million; unrestricted marketable securities were $108.5 million. Current assets were $298.8 million and current liabilities $166.3 million, including restricted assets and liabilities.
- Total assets were $1.043 billion; stockholders’ equity was $710.1 million. Long-term debt was $10.0 million and capital-lease obligations were $37.3 million ($3.0 million current, $34.3 million long-term). The $75 million revolving facility had no borrowings outstanding.
- Nine-month operating cash flow was $57.9 million, down 35.7% year over year. Investing used $39.9 million and financing used $22.8 million; cash declined $4.8 million to $76.9 million. Operating cash flow included working-capital uses, notably lower accrued payroll, higher restricted cash, and a federal tax receivable.
- Capital expenditures were $36.7 million. Common and preferred dividends paid totaled $20.4 million. NHC repurchased 125,000 shares for $7.0 million under a new authorization allowing up to $25 million of repurchases through August 31, 2015.
- Common dividends declared were $0.34 per share for Q3 and $1.00 per share year to date. Preferred dividends were $6.5 million year to date.
Outlook, commentary, and risks
- Liquidity and credit: Management expects cash on hand, securities, operating cash flows, and available credit to meet near-term needs. The credit facility was extended after quarter-end and matures October 21, 2015. Management anticipated renewal but had no lender commitment; failure to refinance could constrain growth and require use of cash and securities.
- Reimbursement: Management estimated Medicare sequestration would reduce remaining-2014 net patient revenue by approximately $1.35–$1.60 million across the company. CMS’s FY2015 skilled-nursing payment update was 2.0%, but its effect depends on census and patient mix. Management forecast Tennessee Medicaid changes to increase pre-tax income by about $1.2–$2.0 million annually; South Carolina rate changes were estimated to add about $1.8 million annually. These are estimates, not company-wide earnings guidance.
- Operations and growth: Start-up expenses at new facilities, lower census, labor costs, and weaker non-operating income weighed on results. Construction and development projects were underway, with further projects planned; management expected new accounting-service discontinuations to reduce other revenue by about $1.6 million annually.
- Investment exposure: NHC’s $108.5 million equity-securities portfolio included $93.2 million of National Health Investors, Inc. stock—85.9% of that portfolio. A hypothetical 10% price change would change equity portfolio fair value by approximately $10.9 million. The filing reports substantial unrealized gains, so market-price changes can affect comprehensive income and equity.
- Claims and investigation: Accrued risk reserves were $112.8 million; NHC and/or managed centers were defendants in 38 professional-liability claims. Management warns claims, including unasserted claims, could exceed reserves and insurance. A DOJ investigation concerning billing and medical necessity of certain Tennessee rehabilitative therapy services was ongoing; an HHS OIG subpoena was received October 7, 2014. NHC said it was cooperating and could not evaluate the outcome.
- Other items: Caris HealthCare equity-method earnings fell $2.0 million in Q3 and $5.5 million year to date versus 2013. Nine-month 2014 tax expense benefited from $1.5 million of statute-of-limitations expirations. Management identified no material risk-factor changes and reported disclosure controls were effective.
Most important facts for investors to verify
- Whether lower census, higher labor and operating costs, and new-facility start-up expenses persist or improve.
- Progress and potential financial consequences of the DOJ/OIG therapy-billing investigation, and adequacy of the $112.8 million risk reserve.
- Credit-facility renewal prospects and the company’s capacity to fund leases, construction, dividends, and repurchases from cash generation.
- Exposure to NHI share-price movements and the concentration of unrealized investment gains.
- Actual effects of Medicare and state Medicaid reimbursement changes, including whether expected rate benefits offset sequestration and other cost pressures.