National HealthCare Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise. NHC provides senior-care services, including skilled nursing, assisted and independent living, and homecare, primarily in the southeastern United States. At quarter-end it operated or managed 76 skilled nursing facilities, 24 assisted living facilities, five independent living facilities, and 36 homecare programs.
Financial performance
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net operating revenue | $242.0 | $231.3 | $720.7 | $688.6 |
| Income before non-operating income | $9.8 | $10.6 | $37.8 | $42.9 |
| Net income attributable to NHC | $11.4 | $11.1 | $34.7 | $36.7 |
| Diluted EPS | $0.75 | $0.73 | $2.28 | $2.41 |
| Dividends declared per share | $0.48 | $0.45 | $1.41 | $1.30 |
- Q3 revenue rose 4.6% and NHC-attributable income rose 2.2%. For the nine months, revenue increased 4.7%, while attributable income declined 5.3%.
- Operating income before non-operating income was about 4.0% of revenue in Q3 versus 4.6% a year earlier, and 5.2% for the nine months versus 6.2%. Wages and benefits were 60.3% of Q3 revenue and 59.2% year to date; other operating costs were 26.5% in both periods.
- Costs and expenses increased 5.2% in Q3 and 5.7% year to date, outpacing revenue growth. Management cited higher labor costs, wage pressure, new-facility costs, and less favorable self-insurance reserve results.
- Q3 non-operating income rose to $6.1 million, partly reflecting a $1.3 million gain associated with the sale of an assisted-living investment. The sale also ended management services for that facility after September 30, 2017.
- Q3 effective tax rate was 29.5%, including a $1.753 million tax benefit from statute-of-limitations expirations. The nine-month effective rate was 36.1%.
Cash flow, balance sheet, and liquidity
- For the nine months, operating cash flow was $71.0 million, versus $64.8 million. Capital expenditures were $24.3 million, down from $50.5 million; operating cash flow less capital expenditures was approximately $46.7 million.
- Investing activities provided $1.2 million, compared with $57.1 million used in 2016. Restricted-security sales exceeded purchases by $21.7 million; $30 million was transferred from insurance-company assets to unrestricted cash during the first quarter.
- Financing activities used $22.0 million, including $20.9 million of dividends. Cash, cash equivalents, and restricted cash totaled $81.7 million at period-end, compared with $31.6 million at the start of the year.
- At September 30, cash and cash equivalents were $69.8 million, marketable securities $143.8 million, and current assets $336.1 million against current liabilities of $147.6 million. Restricted cash and restricted marketable securities are not necessarily available for general corporate use.
- Total debt was $120 million: $110 million drawn on a $175 million revolving facility and a $10 million unsecured note due January 1, 2018. NHC intended to extend the note; if unable, it said the credit facility was available. Remaining facility capacity was $65 million; the facility matures in October 2020 and bears variable rates. A 1 percentage-point rate change would affect annual interest cost by about $1.2 million.
- Total liabilities were $419.3 million and stockholders’ equity $691.5 million. Contractual obligations included $322.1 million of operating-lease payments and $33.4 million of capital-lease payments; annual base rent to NHI was $34.2 million.
Operating trends, outlook, and material items
- Skilled-nursing census averaged 90.4% in Q3, up from 89.3%, and 90.4% for the nine months, up from 89.5%. Nine-month skilled-nursing per diem rates increased 3.0% overall; Medicare, Medicaid, and private-pay rates rose 2.7%, 2.1%, and 3.5%, respectively.
- Management attributed revenue growth chiefly to higher census and per diem rates, plus new facilities. It reported that five facilities opened during 2016–2017 had a combined $5.5 million of pre-tax operating losses in the first nine months of 2017; excluding those losses, management calculated NHC-attributable income of $37.7 million for 2017 versus $38.0 million for 2016.
- Three new facilities’ Q3 pre-tax operating losses were approximately $1.0 million; excluding them, management said Q3 attributable income would have been $11.8 million, up 6.4%. These are management’s adjusted comparisons, not reported GAAP results.
- Management expected the company’s cash, marketable securities, operating cash flow, and available borrowing capacity to meet near-term obligations and support growth plans. No full-year earnings or revenue guidance was provided. A 30-bed Springfield, Missouri addition under construction was expected to open in Q1 2018.
- For FY2018, management estimated Tennessee Medicaid rate increases would add about $3.6 million annually and South Carolina changes about $1.1 million; a Missouri rate reduction was expected to reduce annual revenue by about $1.4 million. CMS’s FY2018 skilled-nursing Medicare rule provided an approximate 1.0% rate update. The company estimated a roughly 1.0% reduction to its homecare agencies from 2017 Medicare payment changes.
- NHC adopted new restricted-cash cash-flow presentation retrospectively. It adopted share-based compensation guidance in 2017. It expected the forthcoming lease standard to have a material financial-statement impact; it was still evaluating the new revenue standard and did not expect significant impacts at that time.
Risks and contingencies
- Accrued risk reserves were $95.5 million, including reported and estimated unreported claims. NHC and/or managed facilities were defendants in 60 personal-injury or wrongful-death claims. The company warned claims could exceed reserves or insurance coverage and materially affect results, financial position, or cash flows.
- A DOJ/OIG investigation concerning billing and medical necessity of certain rehabilitation therapy services remained unresolved; NHC said it was cooperating and could not assess the outcome.
- Caris Healthcare, in which NHC holds a 75.1% noncontrolling interest, faced a U.S. False Claims Act case alleging billing for ineligible hospice patients and retention of overpayments. Caris denied the allegations; discovery was ongoing and trial was set for March 2019. Potential liability could not be assessed.
- Approximately 65% of net patient revenue came from Medicare, Medicaid, and other government programs. Reimbursement changes, regulatory enforcement, labor availability and cost, occupancy, competition, and patient-care liabilities are significant business risks.
- NHC held $143.8 million of marketable equity securities, including $126.0 million of NHI stock—87.6% of the equity portfolio. A 10% equity-price movement would change the portfolio’s fair value by approximately $14.3 million. The company reported $113.6 million of net unrealized equity gains.
- The Board authorized a $25 million share repurchase program running September 1, 2017 through August 31, 2018; no shares had been repurchased under it by quarter-end. Management anticipated continuing quarterly dividends subject to Board approval.
- Management concluded disclosure controls were effective as of September 30, 2017; no material change in internal control over financial reporting was reported. No material changes to the annual-report risk factors were reported.
Important facts for investors to verify
- Whether the January 2018 $10 million note was extended, and the terms and availability of the revolving facility.
- Developments and potential financial exposure in the DOJ/OIG inquiry and Caris False Claims Act litigation, as well as adequacy of the $95.5 million risk reserves.
- Whether labor and insurance costs moderate and new facilities improve from their reported operating losses.
- Actual reimbursement and census trends, including state Medicaid changes and the impact of Medicare payment policies.
- Investment concentration in NHI stock, restricted-asset availability, and the effects of adopting new lease and revenue accounting standards.