Business context and reporting period
National HealthCare Corporation (NHC) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. NHC operates or manages skilled nursing, assisted and independent living facilities, and homecare programs, primarily in the southeastern United States. It also provides insurance, management and accounting services, leases healthcare properties, and holds a noncontrolling interest in hospice provider Caris. Beginning in 2017, NHC reported inpatient services and homecare as its two operating segments, with other activities in an “all other” category.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net operating revenues | $239.2 million | $229.6 million |
| Income before non-operating income | $15.9 million | $17.6 million |
| Income before taxes | $20.6 million | $22.4 million |
| Net income attributable to NHC | $12.7 million | $13.7 million |
| Diluted EPS | $0.84 | $0.91 |
| Operating cash flow | $13.0 million | $24.3 million |
| Capital expenditures | $8.1 million | $13.4 million |
Net operating revenue increased 4.2%, while NHC-attributable net income fell 7.1%. Income before non-operating income was about 6.6% of revenue, compared with 7.7% in the prior-year quarter. The income tax rate was 38.8% in both periods. Dividends declared rose to $0.45 per share from $0.40.
At March 31, cash and cash equivalents were $47.1 million and marketable securities were $136.3 million; restricted cash and securities were additional assets. Total cash, including restricted cash, was $63.8 million. Current assets were $304.5 million and current liabilities $132.1 million. Long-term debt was $120 million, unchanged from year-end, comprising $110 million drawn on a $175 million revolving facility and a $10 million note due January 2018. The facility had $65 million available. Capital lease obligations totaled $29.4 million.
Total assets were $1.079 billion and stockholders’ equity was $676.7 million. Accrued risk reserves were $94.8 million. Net cash from investing was $26.3 million, principally reflecting $33.9 million of restricted securities sales; $30 million of those proceeds were transferred from insurance subsidiaries to unrestricted cash for liquidity. The 2016 cash-flow comparison was retrospectively adjusted for the adoption of restricted-cash presentation guidance.
Material changes and management commentary
- Net patient revenue rose 4.5%, including $6.1 million from facilities newly placed in service; existing skilled nursing operations also benefited from higher census and rates. Overall skilled nursing census increased to 90.3% from 89.9%.
- Per diem rates increased year over year: Medicare 3.9%, Medicaid 1.9%, managed care 1.9%, and private pay 4.1%. Composite skilled nursing per diem increased 3.3%.
- Costs and expenses rose 5.4% to $223.4 million. Salaries and benefits increased 6.2%, and rose to 57.7% of revenue from 56.6%, reflecting wage pressure and new facilities. Four recently opened facilities generated approximately $2.0 million of pretax operating losses; management said NHC-attributable net income excluding those losses would have increased 1.9%.
- Operating cash flow declined, with working-capital use of $11.3 million, mainly reflecting payment timing for 2016 incentive compensation and higher other current liabilities. Management expects operating cash flow, cash, marketable securities, and available borrowing capacity to support near-term obligations and development plans.
- Construction and expansion continued. NHC expected an assisted living facility to open in Q2 2017, a memory-care addition in Q3, and a skilled nursing bed addition in Q4. Management also planned to seek certificates of need and evaluate expansion opportunities.
Outlook, risks, contingencies, and unusual items
NHC provided no specific earnings or revenue guidance. Management identified reimbursement changes, labor availability and cost, occupancy, competition, and access to capital as factors affecting future performance. The company estimated that the 2017 Medicare home-health rule would reduce reimbursement to its agencies by about 1.0%; it also noted that Medicaid payments may not cover care costs. Approximately 65% of net patient revenue came from Medicare, Medicaid, and other government programs.
Significant contingencies include 60 pending professional-liability claims involving NHC and/or managed centers, with potential exposure beyond reserves and insurance. A DOJ/OIG investigation concerns billing and medical necessity for rehabilitation therapy at Tennessee facilities; NHC said it was cooperating and could not assess the outcome. The U.S. government has intervened in a False Claims Act case against Caris alleging hospice services were provided to ineligible patients; Caris denies the allegations, and its motion to dismiss was pending. NHC said potential effects of either matter could be material but could not estimate liability.
NHC reported $118.4 million of NHI stock, about 86.8% of its marketable equity portfolio, creating concentration and equity-price risk. The company also had $120 million of variable-rate debt; a 1% rate change would affect annual interest cost by about $1.2 million. It reported no material change in risk factors and said disclosure controls were effective. The board and shareholders approved increasing authorized common shares from 30 million to 45 million on May 9, 2017; NHC reported no current plan or commitment to issue the additional shares. NHC adopted stock-compensation accounting guidance in January and recognized a $124,000 tax benefit; it anticipated a material balance-sheet impact from future lease-accounting adoption.
Important facts for investors to verify
- Whether new-facility operating losses ease as projects ramp up, and whether census and reimbursement-rate gains persist.
- Whether labor-cost growth and other operating expenses continue to outpace revenue growth.
- Cash-flow normalization after the working-capital outflow, and the availability and permitted use of restricted insurance assets.
- Refinancing or extension of the $10 million note due January 2018, and compliance with credit-facility covenants.
- Developments, potential financial exposure, and reserve adequacy for the DOJ/OIG and Caris investigations and patient-liability claims.
- The effect of NHI’s concentration in the investment portfolio, future share issuance capacity, and implementation of lease and revenue accounting standards.