National HealthCare Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. NHC operates or manages 75 long-term care centers with 9,460 beds in 10 states, alongside hospice, assisted living, homecare, insurance, management, accounting, and property leasing businesses. Amounts below are in millions unless noted.
Financial performance
| Metric | Three months 2012 | Three months 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net operating revenues | $189.4 | $197.1 | $567.2 | $580.8 |
| Income before non-operating income | $16.7 | $17.9 | $47.9 | $60.9 |
| Non-operating income | $6.8 | $5.1 | $18.5 | $14.9 |
| Net income | $17.2 | $17.2 | $43.5 | $49.5 |
| Net income available to common stockholders | $15.1 | $15.0 | $37.0 | $43.0 |
| Diluted earnings per share | $1.04 | $1.05 | $2.63 | $3.02 |
- Third-quarter revenue declined 3.9%; pretax income increased 1.6%. Nine-month revenue declined 2.3% and pretax income fell 12.2%.
- Calculated income-before-non-operating-income margin was 8.8% in Q3 2012 versus 9.1% in Q3 2011, and 8.4% for the first nine months versus 10.5%.
- Q3 costs and expenses fell 3.6% to $172.7 million, led by an $6.3 million decrease in other operating expenses. Nine-month costs were nearly flat at $519.3 million.
- Cash from operations was $60.1 million for nine months, versus $53.8 million a year earlier. Investing used $24.3 million and financing used $13.1 million; cash and cash equivalents increased to $83.7 million from $61.0 million at year-end 2011.
- At September 30, current assets were $397.9 million and current liabilities $218.8 million. These included $35.9 million restricted cash and $109.0 million restricted marketable securities. Unrestricted marketable equity securities were $98.0 million.
- Debt was $10.0 million, a variable-rate term note due 2018; the $75 million revolving facility was undrawn. Interest expense was $0.1 million in Q3 and $0.3 million for nine months.
- Common dividends declared were $0.90 per share for the first nine months; preferred dividends were $0.60 per share. Cash dividends paid totaled $19.0 million.
Material changes and drivers
- Net patient revenue declined 3.7% in Q3 and 2.1% for nine months. NHC cited lower Medicare rates and the January 2012 assignment of Solaris Hospice operations to Caris; the Solaris revenue moved out of patient revenue while NHC’s equity earnings from Caris increased in non-operating income.
- Average census at owned and leased centers eased to 89.7% for Q3 from 90.5%, and to 90.3% for nine months from 90.7%. Q3 Medicare and managed-care per diem rates declined 8.6% and 3.0%; Medicaid and private-pay rates rose 2.4% and 2.6%.
- For nine months, 2011 included a favorable $10.5 million reserve adjustment. Excluding it, NHC said 2012 pretax income would have increased $1.2 million, or 1.9%, year over year.
- Non-operating income increased, primarily from higher Caris equity earnings following NHC’s increased interests. NHC held a 75.1% non-controlling equity-method interest at quarter-end and did not consolidate Caris.
- Nine-month other comprehensive income was $8.7 million, primarily reflecting unrealized gains on investments. The NHI investment’s fair value was $83.9 million, about 85.6% of the equity securities portfolio.
Outlook, risks, and unusual items
- Reimbursement: NHC estimated the FY2012 Medicare skilled-nursing rate changes would reduce annual revenue by about $24 million, with therapy-related requirements adding about $6 million in annual costs. Its average Medicare per diem rate was down 6.9% for the first nine months. The FY2013 SNF update effective October 1, 2012 was 1.8%; the company said its effect depends on census and patient mix.
- NHC estimated homecare rate changes would reduce annual revenue by about $2.6 million. It estimated Tennessee Medicaid rate changes would add about $3.5 million annually in FY2013, and South Carolina changes about $1.7 million; actual effects depend on operations and patient mix. Potential Medicare provider payment reductions of up to 2% beginning in 2013 were identified as a risk, with impact not yet predictable.
- NHC anticipated adequate near-term liquidity from operations, cash, securities, and borrowing capacity. The $75 million revolver was extended on October 24, 2012 and matures October 23, 2013; renewal beyond that date was anticipated but not committed by the lender.
- Planned development included a 90-bed Tennessee skilled-nursing facility expected to be completed in Q3 2013, a 50-bed South Carolina addition expected to start in Q4 2012, and a 92-bed Tennessee facility expected to begin in 2013. Contractual obligations included $311.7 million of operating leases and $9.1 million to complete construction.
- Accrued risk reserves were $103.2 million, up from $98.7 million at year-end. NHC reported 21 pending professional-liability claims involving the company and/or managed centers and warned that claims could exceed reserves and insurance coverage.
- SeniorTrust of Florida and related entities filed suit on September 4, 2012, alleging control, fiduciary-duty and other claims relating to past transactions. NHC denied the allegations and said it would vigorously defend itself. The filing does not quantify potential damages or establish an outcome.
- Tax statute expirations benefited the Q3 and nine-month 2012 tax provision by $3.2 million. Unrecognized tax benefits totaled $11.9 million, with $3.0 million of decreases estimated from statute expirations over the following 12 months.
- No formal earnings guidance was provided. Management cited cost containment, care quality, census, labor availability, government reimbursement, and refinancing as important factors. It reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether census, payer mix, Medicare reimbursement, and cost controls can offset continuing rate pressure and the transfer of Solaris Hospice revenue to Caris.
- Whether the Caris investment’s reported earnings and cash distributions remain supportive, and how the non-controlling ownership structure affects NHC’s results.
- The adequacy of the $103.2 million risk reserve and insurance coverage, the development of the 21 claims, and the SeniorTrust lawsuit’s potential exposure.
- Renewal terms and availability of the $75 million revolving facility before its October 2013 maturity, and the company’s capacity to meet lease, construction, dividend, and other commitments.
- The sensitivity of earnings and equity to the NHI holding: it represented 85.6% of marketable equity securities, and a hypothetical 10% equity-price change would alter the portfolio’s fair value by about $9.8 million.