National HealthCare Corporation (NHC) — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars; “$m” means millions.
Business context
NHC operates and manages skilled nursing, assisted and independent living, and home health services across 10 states. At year-end it operated or managed 74 skilled nursing facilities with 9,403 licensed beds, 20 assisted living facilities, five independent living facilities, and 36 homecare programs. It also held a 75.1% non-controlling interest in hospice provider Caris. Healthcare services generated 95.4% of 2015 net operating revenue.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net operating revenue | $906.6m | $871.7m | +4.0% |
| Income before taxes | $85.3m | $85.2m | +0.1% |
| Net income | $53.1m | $53.4m | -0.4% |
| Net income available to common shareholders | $46.3m | $44.7m | +3.6% |
| Diluted earnings per share | $3.20 | $3.14 | +$0.06 |
| Operating cash flow | $74.0m | $75.7m | -$1.7m |
| Capital expenditures | $58.4m | $53.3m | +$5.1m |
Net income margin was 5.9% of revenue versus 6.1% in 2014; income before taxes was 9.4% versus 9.8%. Operating costs rose 4.5%, faster than revenue. Salaries, wages and benefits were $532.7m, or 58.8% of revenue, with labor, therapy and health-insurance costs contributing to the increase.
Skilled nursing occupancy at owned and leased facilities improved to 90.0% from 88.9%. The composite skilled nursing per diem increased 2.6%; Medicare, Medicaid, managed care and private-pay per diems rose 0.9%, 1.6%, 1.1% and 2.7%, respectively. Payor mix was 40% Medicare, 25% Medicaid, 24% private pay and other, and 11% managed care.
Cash and cash equivalents were $38.2m at year-end, down from $69.8m. Marketable securities were $116.2m; restricted cash and restricted marketable securities were also held, principally to support insurance obligations. NHC reported $120m of long-term debt: $110m drawn on a $175m credit facility and a $10m term note. The facility had $65m available and matures in October 2020. A 1% interest-rate change would alter annual interest cost on outstanding debt by approximately $1.2m. Total assets were $1,045.3m and stockholders’ equity was $631.0m.
Contractual obligations included $424.4m of operating and capital lease payments and $29.9m of construction obligations. Accrued risk reserves were $98.5m, down from $106.2m. Common dividends declared were $1.54 per share, versus $1.34.
Material changes versus prior periods
- Revenue growth reflected improved same-facility skilled nursing census and patient mix, as well as three recently opened facilities. Excluding the newer operations, management said revenue increased 3.2% and pretax income increased 6.2%.
- Despite higher revenue, pretax income was nearly unchanged as expenses increased; operating income before non-operating income declined 1.3% to $67.1m.
- Preferred stock was redeemed in November 2015. Approximately $130.5m was paid for redeemed shares, funded with cash and about $110m of credit-facility borrowings; some preferred shares converted into common shares. NHC said eliminating preferred dividends was expected to increase annual cash flow by approximately $5.5m–$6.5m.
- Operating cash flow declined from $102.3m in 2013 to $75.7m in 2014 and $74.0m in 2015. In 2015, working capital used $24.3m, including increases in restricted cash and receivables and lower amounts due to third-party payors.
- Non-operating income was $18.1m, up from $17.2m in 2014 but below $30.1m in 2013, which included a $5.5m gain on recovery of notes receivable. Caris equity earnings declined to $5.8m from $6.7m.
Outlook, risks and unusual items
- Management expected a 2016 effective tax rate of 35%–39%. It planned to seek Certificates of Need for additional beds and assess private-pay expansion opportunities. Several facilities under construction were expected to open in the third or fourth quarter of 2016.
- A new 10-year triple-net lease for 11 owned properties began January 1, 2016 and was expected to add approximately $2m in annual rental income. CMS’s 2016 skilled nursing payment update was approximately +1.2%; the 2016 home health payment rule was estimated to reduce agency payments by 1.5%.
- Major risks include Medicare and Medicaid rate or policy changes, labor availability and wage inflation, competition and occupancy, regulatory enforcement, and liability claims. Most professional liability and workers’ compensation exposure is retained through self-insurance and captive insurers; claims and estimates could exceed reserves or coverage.
- The company disclosed a DOJ/U.S. Attorney investigation into billing and medical necessity for certain rehabilitation therapy services at Tennessee facilities, and a separate government investigation of Caris hospice patient eligibility. NHC and Caris said they were cooperating; outcomes could not be evaluated and could materially affect results or financial condition.
- South Carolina Medicaid cost-report audit findings for 11 facilities were under administrative appeal. NHC had made paybacks and reduced amounts due to third-party payors by approximately $6.8m; the matter remained unresolved.
- NHC’s equity portfolio was concentrated in National Health Investors (NHI): its $99.3m position represented 85.4% of equity securities. A 10% equity-market price change would alter the portfolio’s fair value by approximately $11.6m.
- The company recorded $16.3m of unrecognized tax benefits and related interest and penalties at year-end; $5.8m of permanent-difference tax positions was excluded from contractual obligations because payment timing could not be estimated.
Key facts for investors to verify
- Developments, potential financial exposure and any subsequent updates concerning the DOJ therapy-billing investigation and Caris hospice investigation.
- Progress and possible financial impact of South Carolina Medicaid audit appeals, including paybacks and any further adjustments.
- Claims trends, actuarial assumptions and adequacy of the $98.5m accrued risk reserves relative to retained and insured liability exposure.
- Operating cash flow, working-capital collections, construction spending and the company’s ability to fund lease, debt, dividend and development commitments.
- Actual occupancy, staffing costs and reimbursement rates, particularly Medicaid and home health, against management’s outlook and CMS changes.
- Value and concentration risk of the NHI investment, and compliance with credit-facility covenants after the preferred-stock redemption.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2015.