National Healthcare Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. NHC operates or manages senior-care facilities and homecare programs, primarily in the southeastern United States.
Financial performance
- Net operating revenue: $222.4 million, up 5.6% from $210.5 million. Net patient revenue rose 6.2% to $212.1 million; other revenue fell 3.9% to $10.3 million.
- Profit: Income before income taxes was $21.7 million, up 0.5%; net income was $13.2 million, essentially unchanged. Net income available to common stockholders was $11.1 million. Basic EPS was $0.80, unchanged; diluted EPS was $0.77 versus $0.78.
- Margins: Income before non-operating income was $17.4 million, or approximately 7.8% of revenue, versus $17.0 million, or 8.1%, a year earlier. Net margin was approximately 6.0%, versus 6.3%.
- Costs: Total costs and expenses increased 5.9% to $205.0 million. Salaries, wages and benefits were 56.6% of revenue, versus 56.9%; other operating expenses were 26.9%, versus 26.5%.
- Cash flow: Operating cash flow was $24.4 million, versus $15.1 million. Investing cash outflow was $13.9 million, including $12.6 million of property and equipment additions; financing cash outflow was $2.1 million. Operating cash flow less property additions was approximately $11.8 million. Cash and cash equivalents increased $8.4 million during the quarter to $78.2 million.
- Balance sheet and liquidity: Total assets were $1.092 billion; current assets were $332.1 million and current liabilities $180.4 million. Marketable securities were $134.8 million, with an additional $153.0 million of restricted marketable securities. Long-term debt was $10.0 million; capital lease obligations totaled $35.8 million. The $75 million revolving facility was undrawn.
- Dividends and equity: Common dividends declared were $0.34 per share, versus $0.32; preferred dividends were $2.2 million. Stockholders’ equity was $748.4 million.
Changes versus Q1 2014
- Management attributed most patient-revenue growth to four newly operated skilled nursing facilities, contributing $6.7 million, and same-facility skilled nursing growth of $4.7 million.
- Average census at owned and leased skilled nursing facilities improved to 90.3% from 89.2%. The composite skilled-nursing per diem rate rose 2.5%; Medicare, Medicaid and private-pay rates rose 0.3%, 1.2% and 2.1%, respectively, while managed-care rates declined 0.6%.
- Despite revenue growth, pre-tax income increased only 0.5%, reflecting higher operating costs and a $0.4 million decline in non-operating income. Equity earnings from Caris, the hospice investment, declined $0.6 million.
- Operating cash flow rose by $9.2 million. Management cited working-capital changes, including higher accounts payable and risk reserves, while accrued payroll fell partly because of the timing of 2014 incentive-compensation payments.
- Other revenue was affected by discontinuing accounting and financial services to seven facilities; NHC expected this to reduce other revenue by about $0.35 million per quarter.
Outlook, risks and notable items
- Management expected cash, marketable securities, operating cash flow and available borrowing capacity to cover near-term needs and planned growth. It anticipated renewing the $75 million revolving facility, due October 21, 2015, but had no lender commitment at filing.
- Expansion plans included facilities under construction and additional projects. The filing gives estimated opening periods for projects, but provides no company-wide earnings or revenue guidance.
- Management expected Tennessee Medicaid reimbursement changes to increase pre-tax income by approximately $0.3–$0.5 million per quarter and South Carolina rate increases to add about $0.45 million per quarter. Actual effects depend on census and payer mix. Medicare’s 2015 skilled-nursing update was 2.0%; home-health payments were reduced 0.3% overall.
- Key exposures include government reimbursement and regulatory changes, labor and occupancy pressures, and self-insured claims. Accrued risk reserves were $110.9 million; NHC and/or managed centers faced 37 professional-liability claims. Management cautioned that claims, including unasserted claims, could exceed reserves and insurance.
- Federal and state authorities were investigating rehabilitative-therapy billing and medical necessity at certain Tennessee facilities. Caris was also under government investigation concerning hospice patient eligibility. NHC said it was cooperating and could not assess either investigation’s outcome.
- The $134.8 million equity-securities portfolio included $115.8 million of NHI stock, approximately 86% of that portfolio. A hypothetical 10% equity-price change would alter the portfolio’s fair value by about $13.5 million.
- After quarter-end, the board authorized new repurchase programs of up to $25 million each for common and preferred stock, expiring August 31, 2016. Also after quarter-end, the credit line with National was temporarily increased from $2 million to $7 million through December 31, 2015.
Important facts for investors to verify
- Progress and terms of the revolving-credit renewal before its October 2015 maturity.
- Developments in the DOJ/OIG therapy investigation and Caris hospice-eligibility investigation, and any resulting financial exposure.
- Whether self-insurance reserves adequately reflect claim severity and unasserted-claim risk.
- Changes in NHI’s share price and the concentration and liquidity of NHC’s investment portfolio.
- Actual repurchases under the new programs, and project costs, opening schedules and operating performance of new facilities.