National HealthCare Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. NHC operates or manages senior-care facilities and provides related services. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net patient revenue | $199.8 | $178.4 | +12.0% |
| Other revenue | $10.8 | $15.9 | -32.5% |
| Net operating revenue | $210.5 | $194.4 | +8.3% |
| Income before non-operating income | $17.0 | $16.0 | +6.2% |
| Non-operating income | $4.6 | $6.6 | -30.9% |
| Net income | $13.2 | $13.8 | -4.2% |
| Net income available to common shareholders | $11.1 | $11.6 | -5.0% |
| Diluted EPS | $0.78 | $0.82 | -4.9% |
| Operating cash flow | $15.1 | $24.8 | -39.0% |
Costs and expenses rose 8.5% to $193.5 million. Salaries, wages and benefits increased 11.8% to $119.7 million, primarily reflecting recently added facilities. Income before non-operating income was 8.1% of revenue, compared with 8.2% a year earlier; net income margin declined to 6.3% from 7.1%. The effective tax rate was 38.6%, versus 39.0%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $84.1 million at March 31, 2014; unrestricted marketable securities were $113.5 million. Restricted cash and securities totaled a further $157.2 million.
- Current assets were $452.3 million and current liabilities $248.2 million, a current ratio of approximately 1.82.
- Long-term debt was $10.0 million, with no revolver borrowings. Capital lease obligations were $38.8 million, including $3.0 million current. NHC recorded $39.0 million of leased buildings and personal property during the quarter.
- Operating cash flow was $15.1 million; investing activities used $12.2 million, including $9.3 million in property and equipment additions. Financing activities used $0.6 million. Cash increased $2.4 million during the quarter.
- The $75 million revolving credit facility matures October 22, 2014. Management anticipated renewal, but reported no lender commitment. The filing says available cash, securities and borrowing capacity should meet near-term needs.
- Quarterly common dividends declared were $0.32 per share, up from $0.30; preferred dividends were $2.2 million. The $25 million repurchase authorization remained unused at quarter-end.
Material changes and operating developments
- Revenue growth was largely driven by 11 newly operated skilled nursing facilities, which contributed $19.9 million of additional net patient revenue. NHC also began leasing and operating three Missouri facilities in March and assumed management of a 121-bed Missouri facility.
- Other revenue fell $5.2 million. The comparison reflected discontinued SeniorTrust/ElderTrust services and a $2.3 million favorable workers’ compensation settlement recorded in Q1 2013. The prior-year quarter also included a $4.5 million SeniorTrust/ElderTrust lawsuit settlement charge in other operating expenses.
- Non-operating income declined mainly because equity earnings from Caris, NHC’s hospice investment, fell $1.7 million.
- Average census at owned and leased skilled nursing facilities was 89.2%, versus 89.7%. Medicare, Medicaid and private-pay per diem rates increased 0.8%, 2.4% and 7.5%, respectively; managed-care rates declined 4.1%.
- Available-for-sale securities generated $5.8 million of after-tax other comprehensive income. NHI shares represented approximately $98.6 million, or 86.8%, of the equity securities portfolio; their unrealized gains are subject to market-price movements.
Outlook, risks and contingencies
- Management estimated Medicare sequestration would reduce revenue during the remaining nine months of 2014 by approximately $4.0–$4.5 million overall: $3.0–$3.5 million for skilled nursing and about $1.0 million for homecare. The 2014 SNF payment update was 1.3%; actual impact depends on census and payer mix.
- Management estimated 2014 quarterly Medicaid revenue increases of about $450,000 in Tennessee, $385,000 in South Carolina and $250,000 in Missouri; Missouri also recorded $533,000 of retroactive revenue for the prior period. These estimates and future reimbursement remain subject to government policy and payment decisions.
- Development plans included a geriatric psychiatric hospital projected to open in Q2 2014 and additional facility construction. These plans depend on execution, approvals and funding.
- Accrued risk reserves were $112.3 million, principally for self-insured health, workers’ compensation and professional/general liability claims. NHC and/or managed centers faced 33 professional-liability claims; claims could exceed reserves or insurance coverage.
- A DOJ and U.S. Attorney civil investigative demand seeks information about billing and medical necessity for certain rehabilitative therapy services, apparently at Knoxville facilities. NHC said it was cooperating and could not assess the outcome.
- Unrecognized tax benefits were $12.9 million, with $2.3 million in related accrued interest and penalties. NHC estimated a possible $2.3 million decrease in unrecognized benefits from lapses of statutes of limitations over the following 12 months.
- Other risks include Medicaid under-reimbursement, regulatory changes, labor and operating costs, and refinancing risk. The $140.1 million fixed-income portfolio is exposed to market rates, while the NHI equity concentration creates significant share-price exposure.
Important facts for investors to verify
- Whether the revolving credit facility was renewed on acceptable terms before its October 2014 maturity.
- Whether added and leased facilities improve revenue and margins enough to offset labor, rent, development spending and reimbursement cuts.
- Developments in the DOJ investigation and professional-liability claims, including whether reserves and coverage remain adequate.
- Changes in Medicare and Medicaid reimbursement, census and payer mix, and collection of management fees whose realization is uncertain.
- Performance and fair value of the concentrated NHI investment and the resulting effects on equity and comprehensive income.