National HealthCare Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 (prior-year revenue figures were retrospectively adjusted for the new revenue standard). NHC provides senior-care services across 10 states, including skilled nursing, assisted and independent living, homecare, insurance, management and property-leasing services.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net operating revenue | $242.961 million | $238.538 million | +1.9% |
| Net patient revenue | $231.692 million | $227.254 million | +2.0%; inpatient revenue rose, while homecare revenue declined |
| Income from operations | $15.883 million | $15.864 million | +0.1%; operating margin 6.5% vs. 6.7% |
| Net income (loss) attributable to NHC | $(2.791) million | $12.728 million | EPS $(0.18) vs. $0.84 |
| Operating cash flow | $13.306 million | $13.011 million | Up $0.295 million |
| Capital expenditures | $7.100 million | $8.066 million | Cash used in investing activities was $5.828 million |
| Cash, cash equivalents and restricted cash | $66.740 million | $63.809 million | Combined balance at quarter-end |
| Long-term debt | $100.000 million | $100.000 million | $90 million drawn on revolving facility; $85 million available |
| Dividend declared per common share | $0.48 | $0.45 | Cash dividends paid: $7.297 million vs. $6.818 million |
At March 31, 2018, total assets were $1.059 billion, total liabilities $367.584 million, and equity $691.637 million. Current assets were $305.160 million and current liabilities $131.652 million. Unrestricted cash was $54.962 million and marketable equity securities were $123.568 million; restricted investments and cash are not all available for general corporate use. The company reported $305 million of future operating lease payments and $30.767 million of capital lease payments.
Material changes and operating performance
- Revenue growth reflected higher per-diem rates in existing skilled nursing operations and $1.803 million of additional revenue from three recently opened facilities. Skilled-nursing occupancy declined to 89.6% from 90.2%.
- Skilled-nursing per-diem rates increased 1.6% overall: Medicaid +2.1% and private pay +3.1%, offset by Medicare -0.3% and managed care -2.4%. Homecare revenue decreased to $15.341 million from $15.657 million.
- Total costs and expenses rose 2.0% to $227.078 million. Salaries, wages and benefits increased 1.5%; other operating expense increased 3.2%. Salary and benefit costs were 57.7% of revenue versus 57.9%; other operating costs were 26.8% versus 26.5%.
- Operating income was nearly flat, while reported net results swung to a loss principally because the company began recording fair-value changes on marketable equity securities through earnings and recognized a Caris legal charge.
- Company-defined non-GAAP net income was $16.093 million, or diluted EPS of $1.06, compared with $13.370 million and $0.88. Adjustments included unrealized securities losses, Caris legal costs and charges, new-facility start-up results, stock compensation, and related taxes; this is a non-GAAP measure, not a substitute for GAAP results.
Liquidity, outlook, risks and unusual items
- Operating cash flow was $13.306 million. Cash and restricted cash decreased by $0.681 million during the quarter; financing cash outflow was $8.159 million, including $7.297 million of dividends and $0.867 million of share repurchases.
- Management said cash flows, cash on hand, marketable securities and unused credit capacity were expected to meet liquidity needs and planned growth over the next 12 months. The $175 million revolving facility matures in October 2020 and bears variable rates; a 1 percentage-point rate change would affect annual interest cost by approximately $1 million.
- No formal earnings or revenue guidance was provided. Management expected a 2018 corporate tax rate of approximately 26%, excluding nondeductible expenses, versus approximately 39% in 2017. It anticipated continuing dividend payments subject to quarterly board approval.
- Adoption of ASU 2016-01 moved changes in equity-security fair value into net income. NHC recorded a $15.517 million unrealized loss in Q1; approximately 88% of its $123.568 million equity portfolio was NHI stock. A 10% share-price move would change portfolio fair value by about $12.3 million.
- Caris, in which NHC has a 75.1% noncontrolling interest, recorded an $8.5 million estimated liability for a hospice False Claims Act matter; NHC reported an $8.228 million negative impact including legal costs. The parties had reached a settlement in principle and proceedings were stayed, but resolution was not final and the matter could materially affect NHC.
- NHC and/or managed centers were defendants in 63 professional-liability claims. Accrued risk reserves were $96.246 million; management cautioned claims could exceed reserves and coverage. A separate NHC DOJ-related qui tam case was dismissed without prejudice, but amended employment-related claims were filed and NHC stated it would defend itself.
- Other risks include occupancy and labor pressures, changing Medicare/Medicaid rates and rules, competition, reimbursement audits, and the ability to refinance debt. Management expected the new lease accounting standard, effective in 2019, to materially increase reported assets and liabilities.
Key facts investors should verify
- Whether the Caris settlement is finalized, its ultimate cost, and the effect on NHC’s equity-method earnings.
- Trends in occupancy, payer rates, labor costs and margins, particularly as new facilities mature.
- Market value and concentration risk in the equity portfolio, especially NHI, and the resulting earnings volatility.
- Development of professional-liability reserves and outcomes of pending claims and employment litigation.
- Credit-facility covenants, variable-rate exposure, lease commitments, and continued capacity to fund dividends and capital projects.
- Final impact of the provisional tax accounting and implementation of the new lease standard.