National HealthCare Corporation (NYSE American: NHC) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Unless otherwise noted, dollar amounts are in millions.
Business context
NHC operates and manages skilled nursing, assisted living, independent living, behavioral health and homecare services across 10 states. It also provides management, accounting, insurance and rental services, and holds a 75.1% noncontrolling interest in hospice provider Caris. At year-end, NHC operated or managed 75 skilled nursing facilities, 25 assisted living facilities, five independent living facilities, one behavioral health hospital and 35 homecare locations. Health care services generated 95.1% of FY2019 net operating revenue.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net operating revenue | $996.4 | $980.3 | +1.6% |
| Income from operations | $49.0 | $56.1 | -12.6% |
| Operating margin | 4.9% | 5.7% | -0.8 percentage points |
| Net income attributable to NHC | $68.2 | $59.0 | +15.7% |
| Diluted EPS | $4.44 | $3.87 | +14.7% |
| Operating cash flow | $100.1 | $98.4 | +1.7% |
| Capital expenditures | $26.4 | $29.8 | Lower by $3.4 |
- Net patient revenue was $947.9 million, up 1.6%; other revenue was $48.5 million, up 2.0%. Inpatient services revenue grew to $893.2 million, while homecare revenue declined to $54.7 million from $59.9 million.
- GAAP net income included $12.2 million of unrealized gains on marketable equity securities and a $2.0 million gain from remeasuring a previously held investment after acquiring the remaining interest in a memory-care facility. NHC’s non-GAAP net income, which excludes specified items, was $59.6 million versus $64.4 million in 2018; non-GAAP diluted EPS was $3.88 versus $4.22. These company-defined measures are not substitutes for GAAP results.
- Operating costs rose 2.5%, faster than revenue. Salaries, wages and benefits increased 1.7% to $592.8 million, while other operating expense rose 5.7% to $268.4 million. Management cited wage pressure and costs associated with the NHC Advantage insurance plan.
- Skilled nursing census averaged 90.3%, versus 89.8% in 2018. Assisted-living occupancy increased to 81.4% from 78.7%. Medicare was 34% of net patient revenue, Medicaid 27%, managed care 12%, and private pay and other 27%.
- For Q4 2019, revenue was $253.9 million, operating income $16.5 million and net income attributable to NHC $13.8 million; diluted EPS was $0.89. Q4 2018 figures were $248.9 million, $17.2 million, $18.2 million and $1.19, respectively. Q4 2019 included a $3.9 million unrealized securities loss, compared with a $0.7 million gain in Q4 2018.
Cash, debt and liquidity
- At December 31, 2019, cash and cash equivalents were $50.3 million; total cash including restricted cash was $61.0 million. Marketable equity securities were $152.5 million and restricted marketable debt securities were $147.4 million.
- Operating cash flow of $100.1 million exceeded capital expenditures of $26.4 million. Financing cash use was $79.7 million, including $45.0 million of credit-facility principal payments and $31.2 million of common dividends.
- Credit-facility borrowings were $10.0 million, down from $55.0 million; the remaining $50.0 million of the $60.0 million facility was available. The balance was due in 2020, and the facility matured October 7, 2020. NHC reported compliance with its financial covenants.
- Total liabilities were $507.6 million and total assets $1.287 billion. Adoption of lease accounting put $202.9 million of operating lease right-of-use assets and $202.9 million of operating lease liabilities on the balance sheet; 2018 comparatives were not restated. Disclosed contractual obligations included $270.3 million of operating and finance lease payments, undiscounted.
- Accrued risk reserves were $96.0 million, largely relating to self-insured employee health, workers’ compensation and professional/general liability exposures.
Changes, outlook and key risks
- Revenue growth was supported by NHC Advantage, which contributed approximately $10.9 million of additional net patient revenue, newly opened facilities, the acquired behavioral health hospital and higher rates. Homecare revenue declined primarily due to lower volume and an unfavorable payer mix.
- Management reported a 7.6% increase in average Medicare per diem for Q4 compared with Q4 2018 following the October 2019 start of the Patient-Driven Payment Model (PDPM). It also described Medicare home-health payment changes effective January 2020, including 30-day payment periods. These reforms may alter reimbursement and operating requirements.
- Management expected operating cash flows, cash, marketable securities and available credit to be adequate for contractual obligations, operating liquidity and development plans over the next 12 months. The filing provides no specific earnings or revenue guidance. Management intends to continue quarterly dividends, but says future declarations are not assured. A new authorization permits up to $25 million of repurchases through August 31, 2020; none had been made under it by year-end.
- Significant risks include changes to Medicare and Medicaid reimbursement, regulatory enforcement and quality-rating rules, labor shortages and wage inflation, competition and occupancy, and potentially costly patient-care litigation. NHC is substantially self-insured; claims could exceed recorded reserves or insurance coverage.
- NHC’s $152.5 million equity portfolio was concentrated: approximately 87% was National Health Investors (NHI) stock. The filing estimates that a 10% market-price change would alter portfolio fair value by about $15.2 million. The 2019 unrealized gain increased GAAP earnings but is market-sensitive.
- A False Claims Act qui tam case names NHC subsidiary Nutritional Support Services over alleged reporting of incorrect drug-code information. The government declined to intervene; damages are unspecified and the subsidiary intends to defend the case. The filing does not quantify a potential loss.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The professional-liability reserve estimate was identified as a critical audit matter because of significant actuarial judgment.
Important facts for investors to verify
- Whether operating margins recover as labor and other operating costs rise, and how census, payer mix and homecare volumes develop.
- The financial effect of PDPM and home-health payment changes, along with actual state Medicaid rate updates.
- Whether the credit facility was refinanced or repaid before its October 2020 maturity, and the availability and terms of replacement financing.
- The sensitivity of earnings, equity and liquidity to NHI share-price movements and the concentration of the investment portfolio.
- The adequacy of the $96.0 million risk reserves, outcomes of the NSS litigation and other claims, and the sustainability of dividends and capital spending.