Business context and reporting period
National HealthCare Corporation (NHC) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. NHC operates or manages senior-care services, including 68 skilled nursing centers with 8,803 beds in nine states, and provides insurance, management, accounting, and property-leasing services. It also holds a non-controlling interest in hospice business Caris HealthCare.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net operating revenues | $192.0m | $187.7m | $386.4m | $377.7m |
| Income before non-operating income | $17.0m | $16.4m | $33.0m | $31.1m |
| Income before taxes | $23.6m | $22.3m | $46.2m | $42.9m |
| Net income | $14.3m | $13.6m | $28.1m | $26.2m |
| Net income available to common | $12.2m | $11.4m | $23.8m | $21.9m |
| Diluted EPS | $0.86 | $0.81 | $1.68 | $1.57 |
| Operating cash flow | Not separately reported for quarter | $47.1m | $31.3m |
Quarterly net operating revenue rose 2.3%; income before taxes rose 6.0%. For the first half, revenue increased 2.3% and income before taxes 7.9%. Income before non-operating income was 8.9% of revenue in Q2 versus 8.7% a year earlier, and 8.5% for the first half versus 8.2%. Non-operating income was $6.6m for Q2 and $13.3m for the half, primarily reflecting equity-method earnings, investment gains, and interest income.
Net patient revenue increased 2.7% in Q2 and 2.0% for the half. Q2 average census at owned and leased skilled nursing facilities was 89.2%, down from 89.9%; first-half census was 89.5%, down from 90.6%. Q2 Medicare and managed-care per diem rates decreased 0.8% and 3.7%, respectively, while Medicaid and private-pay rates increased 3.0% and 3.3%. For the first half, Medicare and managed-care rates decreased 0.4% and 0.1%; Medicaid and private-pay rates increased 4.0% and 3.5%.
Cash flow, liquidity, and debt
For the six months, operating cash flow was $47.1m, investing cash outflow $21.6m, and financing cash outflow $17.5m. Cash and cash equivalents increased to $74.6m from $66.7m at year-end. Capital expenditures were $20.1m, versus $6.2m in the prior-year period. Financing outflows included $12.8m of common and preferred dividends and $4.7m to repurchase 100,000 common shares.
At June 30, NHC reported $114.1m of marketable securities, $135.2m of restricted marketable securities, and $14.5m of restricted cash. Long-term debt was $10.0m; no amount was drawn on the $75m revolving credit facility. The facility matures October 23, 2013. Management expected renewal but disclosed that the lender had made no commitment. The company stated that cash, marketable securities, operating cash flow, and available borrowing capacity should meet near-term needs. Current liabilities included $114.9m in accrued risk reserves.
Material changes, outlook, and risks
- Results included a $4.15m additional operating expense for settlement of SeniorTrust and ElderTrust litigation; NHC paid SeniorTrust $6.65m. The settlement involved management-service changes and is expected to reduce future results by about $2.2m annually, or $1.35m after tax.
- A non-recurring workers’ compensation insurance settlement added $2.769m of revenue in the first half. A non-recurring Tennessee Medicaid acuity adjustment added $1.635m of revenue in Q2 and the first half.
- Management estimated Medicare sequestration cuts would reduce 2013 second-half revenue by $2.5m–$3.25m overall: $2.0m–$2.75m for skilled nursing and about $0.5m for homecare, assuming other factors remain constant. No full-year earnings guidance was provided.
- NHC planned to purchase six leased skilled nursing centers for $21m, with closing expected in September 2013; the purchase would reduce annual master-lease payments by $2.95m. Growth projects included new and expanded facilities and other developments expected to open in 2013–2014.
- Professional and general liability remains a significant exposure: NHC and/or managed centers were defendants in 32 claims. Management warned that claims, including unasserted claims, could exceed reserves or insurance. Accrued risk reserves were $114.9m, up from $110.3m at year-end.
- Medicare and Medicaid reimbursement, staffing and operating costs, census, regulation, litigation, and refinancing are key risks. NHC estimated a hypothetical 10% change in its $114.1m equity portfolio’s market prices would change fair value by about $11.4m. NHI represented 85.5% of that portfolio ($97.6m); the Q2 unrealized investment loss reduced other comprehensive income.
- Adoption of accounting guidance for refundable CCRC entrance fees was applied retrospectively, reclassifying refundable fees as liabilities and changing the future-service-obligation calculation. Prior periods were adjusted; this is not directly comparable with previously reported figures.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before its October 2013 maturity, and on what terms.
- Whether the one-time insurance and Medicaid revenues, litigation expense, and lost management fees affected subsequent-period performance as expected.
- Developments in the 32 liability claims and whether reserves and insurance remain adequate against potential claims.
- Completion and financing of the $21m center purchase and planned construction commitments.
- How the concentrated NHI investment and related unrealized gains or losses change over time.
- Potential effects of reimbursement changes, sequestration, census, and payer mix on revenue and margins.
- Diluted EPS comparability: 2013 diluted weighted-average shares included assumed conversion of preferred stock, unlike the 2012 comparison, because the preferred shares were anti-dilutive in 2012.