National HealthCare Corporation (NHC) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results. NHC operates or manages 76 long-term-care centers with 9,548 beds across 10 states, alongside hospice, homecare, assisted-living, insurance, management, and property-rental businesses.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net operating revenues | $190.8m | $176.9m | $383.7m | $350.2m |
| Income before taxes | $22.2m | $19.6m | $52.6m | $36.4m |
| Net income | $13.6m | $11.9m | $32.3m | $22.3m |
| Net income available to common stockholders | $11.4m | $9.7m | $28.0m | $17.9m |
| Basic / diluted EPS | $0.83 / $0.83 | $0.70 / $0.70 | $2.04 / $1.97 | $1.30 / $1.30 |
| Operating cash flow | Not separately reported by quarter | $27.2m | $19.6m |
- Q2 revenue rose 7.8%; pretax income rose 13.4%. For the six-month period, revenue rose 9.6% and pretax income rose 44.6%.
- Net margin was approximately 7.1% in Q2 2011 versus 6.7% a year earlier, and 8.4% for the first half versus 6.4%. The first-half improvement includes a favorable $8.3m year-over-year change in accrued-risk-reserve results.
- Six-month operating cash flow increased 38.8% to $27.2m. Investing used $13.5m, including $13.4m for property and equipment; financing used $4.8m. Cash and cash equivalents ended at $37.3m, up from $28.5m at year-end.
- At June 30, current assets were $326.9m and current liabilities $197.9m. These include restricted cash of $50.2m and restricted securities of $78.1m. Unrestricted marketable securities were $85.1m.
- Total debt was $10.0m, comprising a variable-rate term note due 2018; the $75m revolving facility had no borrowings. The facility matures October 25, 2011, and renewal was anticipated but not committed.
- Common and preferred dividends paid totaled $12.0m in the first half. The company reported $353.9m of future operating lease obligations, including $33.7m due within one year.
Material changes and operating drivers
- Net patient revenue increased 8.6% in Q2 and 10.5% for the first half. The company attributed growth to higher per-diem rates and acquired or newly opened operations. First-half average Medicare, managed-care, and Medicaid per-diem rates increased 19.8%, 9.1%, and 1.5%, respectively.
- Average census at owned and leased centers declined to 90.5% in Q2 from 92.2%, and to 90.8% for the first half from 92.0%.
- First-half salaries, wages, and benefits rose 10.2%; total costs and expenses rose 5.4%. Other operating expense declined 4.2%, primarily reflecting the $8.3m favorable reserve comparison, partly offset by costs from new and acquired operations.
- NHC opened a 75-unit assisted-living community in Columbia, South Carolina, and a 46-unit assisted-living addition in Franklin, Tennessee, during Q2. It expected to begin construction on two skilled-nursing facilities in Tennessee during 2011.
- Stock-based compensation was $1.8m in the first half versus $0.1m a year earlier. The filing cites accelerated vesting of options covering 158,000 shares as a factor in the increase.
Outlook, risks, and unusual items
- Medicare: A CMS final rule issued July 29, 2011 provides for an 11.1% net reduction in skilled-nursing PPS payments beginning October 1, 2011, along with reimbursement-method changes. Management expects a significant adverse effect versus fiscal 2011, dependent on census and patient mix. Medicare, Medicaid, and other government programs account for approximately 70% of net patient revenue.
- Other reimbursement changes: South Carolina implemented a 3% Medicaid rate cut in April 2011, estimated to reduce revenue by about $370,000 per quarter. Tennessee Medicaid rate increases were not scheduled for July 2011. Home-health Medicare rates fell 5.2% effective January 2011; NHC estimated an annual revenue impact of about $3.4m. Hospice Medicare rates were scheduled to rise 2.5% effective October 2011.
- Liquidity and refinancing: Management expected cash flows, cash and marketable securities, and the undrawn revolver to cover near-term needs. Revolver renewal remained uncertain; inability to refinance could require use of cash and securities and constrain growth.
- Claims and reserves: Accrued risk reserves were $92.2m, down from $105.1m at year-end. NHC and/or managed centers were defendants in 24 professional-liability claims. Claims, including unasserted claims, could exceed reserves and insurance coverage; reserve estimates may change materially.
- Other exposures: Medicare and Medicaid reimbursement reviews, regulatory compliance, acquisition-related liabilities, and collection of subordinated or uncertain management fees could affect results. The company had $14.7m of unrecognized tax benefits and $4.2m of related accrued interest and penalties. A 2009 Tennessee Attorney General civil investigative demand concerning relationships with nonprofit entities had been answered; the filing reported no known material regulatory proceeding or investigation underway or threatened.
- The company cited no material changes to the risk factors in its 2010 Form 10-K and provided no specific earnings guidance. It stated that the interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Expected financial impact of the 11.1% Medicare skilled-nursing payment reduction and related reimbursement changes, considering census and payer mix.
- Renewal terms and timing for the $75m revolver maturing October 25, 2011.
- Support for the $92.2m accrued-risk reserve, insurance limits, pending claims, and the favorable reserve results that aided first-half expenses.
- Whether census stabilizes and acquired or newly opened facilities deliver expected revenue and cost performance.
- Concentration risk in NHI shares: $72.4m, or 85.1%, of the $85.1m equity-securities portfolio; the filing estimates a 10% market-price change would alter equity portfolio fair value by about $8.5m.
- The first-half diluted EPS calculation includes assumed conversion of preferred stock, unlike Q2 diluted EPS; verify share-count and dilution implications alongside the $0.40-per-share preferred dividend.