National HealthCare Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also includes unaudited fourth-quarter data. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
NHC provides skilled nursing, assisted and independent living, rehabilitation, home health, hospice-related investment, management, insurance and rental services across 10 states. At year-end, it operated or managed 74 skilled nursing facilities, 21 assisted living facilities, five independent living facilities and 36 homecare programs. Skilled nursing facility occupancy was 89.5% in 2016, versus 90.0% in 2015. Medicare accounted for 37% of net patient revenue, Medicaid 26%, private pay and other 25%, and managed care 12%.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Net operating revenue | $926.6 | $906.6 | Up 2.2% |
| Income before non-operating income | $60.5 | $67.1 | Down 9.8%; margin 6.5% versus 7.4% |
| Non-operating income | $19.7 | $18.1 | Up 8.4% |
| Net income | $50.5 | $53.1 | Down 4.9%; net margin 5.5% versus 5.9% |
| Net income available to common shareholders | $50.5 | $46.3 | Up 9.1%; FY2015 included preferred dividends |
| Diluted EPS | $3.32 | $3.20 | Up 3.8% |
| Operating cash flow | $90.9 | $83.4 | Up 9.0% |
| Capital expenditures | $62.6 | $58.4 | Cash flow from operations less capex was approximately $28.3 |
Revenue growth reflected new facilities, higher rental income under a new lease, and a $1.4 million South Carolina Medicaid audit settlement. Excluding newly constructed facilities, revenue increased 1.1%. Costs and expenses rose 3.2% to $866.1 million, faster than revenue: salaries, wages and benefits increased 2.9% to $548.0 million and rose to 59.1% of revenue; other operating costs increased 3.0% to $233.8 million. Interest expense increased to $3.9 million, primarily because the credit facility was outstanding for a full year.
Year-end total assets were $1,087.4 million and stockholders’ equity was $669.6 million. Cash and cash equivalents were $26.3 million, with $5.3 million of restricted cash; marketable securities were $138.0 million and restricted marketable securities $183.7 million. Long-term debt was $120.0 million: $110.0 million under a variable-rate credit facility and a $10.0 million note. The facility had $65.0 million of unused capacity and matures in October 2020. The company reported $90.9 million of operating cash flow and $81.5 million of cash used in investing activities. Contractual obligations totaled $521.4 million, including $385.0 million of operating and capital lease obligations.
Common dividends declared were $1.75 per share, compared with $1.54 in 2015. The company repurchased 130,000 shares for $8.2 million in August 2016; a new $25 million authorization had no repurchases through year-end.
Fourth-quarter results
Unaudited Q4 2016 revenue was $238.0 million, compared with $233.9 million in Q4 2015. Net income was $13.9 million versus $15.0 million; net income available to common shareholders was $13.9 million versus $14.6 million. Basic and diluted EPS were $0.92 and $0.91, respectively, versus $1.03 and $0.99. Q4 2016 included the $1.4 million South Carolina audit settlement.
Outlook, risks and unusual items
- Outlook: The filing provides no formal earnings or revenue guidance. Management planned to seek Certificates of Need for additional beds and assess expansion opportunities. Two assisted living developments were expected to open in Q1 2017; a skilled nursing bed addition and memory-care expansion were expected in Q3 2017.
- Reimbursement and demand: Medicare, Medicaid and managed-care rates, regulatory changes, occupancy, patient mix and shorter skilled-nursing stays could affect revenue and margins. The company estimated the 2017 Medicare home-health rule would reduce its agency reimbursement by about 1.0%; the FY2017 skilled-nursing Medicare rate update was approximately 2.4%.
- Labor, insurance and claims: Management cited labor-cost and staffing pressures. Accrued risk reserves were $91.2 million, down from $98.5 million; NHC and/or managed facilities were defendants in 43 liability claims, up from 32. Actual self-insured losses could exceed reserves or coverage.
- Legal contingencies: A federal investigation concerns billing and medical necessity of certain rehabilitation therapy services at Tennessee facilities; the outcome was not estimable. The U.S. intervened in a False Claims Act case against Caris, in which NHC holds a 75.1% non-controlling interest, alleging hospice billing for ineligible patients. Caris denies the allegations; the case was at an early stage and potential liability was not estimable.
- Capital and investment risks: Debt bears variable rates; the company estimated a 1% rate change would alter annual interest cost by about $1.2 million. NHI represented 87.6% of the $138.0 million equity portfolio, creating concentration risk. A 10% change in quoted equity prices would change portfolio fair value by approximately $12.1 million.
- Accounting and audit: NHC early adopted restricted-cash cash-flow presentation guidance retrospectively. Management and Ernst & Young reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether occupancy, census and payor mix stabilize or weaken, and how reimbursement updates compare with wage and other cost inflation.
- Progress and expected returns on new construction, bed additions, and planned Certificates of Need.
- Updates on the federal rehabilitation-services investigation, the Caris hospice litigation, and the adequacy of the $91.2 million risk reserve.
- Use of the $65 million remaining credit-facility capacity, debt maturities and compliance with loan covenants; lease commitments are also substantial.
- Exposure to NHI-related investment concentration and the effect of market-value fluctuations on earnings, equity and liquidity.
- Collection prospects for $21.3 million of unrecognized and unpaid management fees from National; the filing says recognition depends on future collectability being reasonably assured.