National HealthCare Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise stated. NHC operates or manages 73 long-term care centers with 9,221 beds across 10 states, with additional services in another state.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net operating revenues | $194.4 million | $190.1 million | +2.3% |
| Income before non-operating income | $16.0 million | $14.7 million | +8.8% |
| Non-operating income | $6.6 million | $5.9 million | +12.8% |
| Income before income taxes | $22.6 million | $20.6 million | +9.9% |
| Net income | $13.8 million | $12.7 million | +9.1% |
| Net income available to common stockholders | $11.6 million | $10.5 million | +11.0% |
| Diluted EPS | $0.82 | $0.75 | +9.3% |
| Operating cash flow | $24.8 million | $3.5 million | +$21.3 million |
Net patient revenue increased 1.3% to $178.4 million; other revenue rose 14.4% to $15.9 million. Income before non-operating income was 8.2% of revenue, versus 7.7% in Q1 2012; net margin was 7.1%, versus 6.7%. The effective tax rate was 39.0%, compared with 38.5%.
Balance sheet, cash flow and capital
- At March 31, 2013, cash and cash equivalents were $73.8 million; marketable securities were $123.6 million and restricted marketable securities were $134.8 million. Current assets were $440.7 million against current liabilities of $237.6 million.
- Total assets were $949.8 million and stockholders’ equity was $668.8 million. Long-term debt was $10.0 million; no revolver borrowings were outstanding, and $75.0 million was available under the facility.
- Operating cash flow was $24.8 million; investing activities used $6.8 million and financing activities used $10.9 million. Operating cash flow benefited from working-capital movements, including increases in accrued risk reserves and deferred revenue, partly offset by restricted cash growth.
- Capital expenditures were $6.4 million. NHC repurchased 100,000 shares for $4.7 million and paid $6.4 million in preferred and common dividends.
- The filing lists $505.2 million of contractual cash obligations, including $463.4 million of operating lease obligations, a $21.0 million asset purchase commitment and $9.6 million of construction obligations.
Material changes and unusual items
- Average census at owned and leased centers declined to 89.7% from 91.1%. Medicare per diem rates decreased 0.1%; managed care, Medicaid and private-pay rates increased 3.5%, 5.0% and 3.7%, respectively.
- Q1 results included a $4.15 million charge for the SeniorTrust/ElderTrust litigation settlement. Other revenue included a $2.267 million one-time workers’ compensation insurance settlement benefit. Both affected year-over-year comparisons.
- Effective January 1, 2013, NHC retrospectively adopted accounting guidance for refundable continuing-care entrance fees. The change reclassified refundable fees as liabilities and recorded a future-service obligation; 2012 comparative figures were adjusted. The filing reports a $10.8 million refundable entrance-fee liability and a $1.8 million future-service obligation at March 31, 2013.
- Comprehensive income was $23.2 million, including $9.4 million of other comprehensive income, principally reflecting unrealized investment gains.
Outlook, risks and contingencies
- NHC estimated the April 1, 2013 Medicare sequestration cuts would reduce 2013 revenue by $3.75 million to $4.875 million for the remaining nine months, including $3.0 million to $4.125 million at skilled nursing facilities and about $0.75 million in homecare. The company cautioned that other government spending cuts could also adversely affect results.
- The April 26 settlement requires a $6.65 million payment to SeniorTrust, subject to court approval; NHC recorded $4.15 million of additional expense in Q1. The settlement does not include an admission of wrongdoing. NHC estimated the related changes to management, accounting and rental relationships would adversely affect annual results and cash flow by about $4.0 million pre-tax, or $2.5 million after tax.
- The $75 million revolving facility matures October 23, 2013. NHC anticipated renewal but had no lender commitment as of the filing; failure to refinance could constrain growth and require use of cash and securities.
- Accrued risk reserves were $114.4 million, primarily for self-insured health, workers’ compensation and professional/general liability claims. NHC and/or managed centers faced 39 professional-liability claims; claims could exceed reserves or insurance coverage.
- Marketable equity securities were concentrated in National Health Investors: its $106.7 million fair value represented 86.3% of NHC’s equity portfolio. The filing estimates a 10% market-price change would change equity-investment fair value by about $12.4 million.
- NHC was defendants in 39 professional-liability claims and disclosed $12.4 million of unrecognized tax benefits, plus accrued interest and penalties. It did not expect significant changes in unrecognized tax benefits over the next 12 months other than estimated statute-of-limitations lapses.
- Management reported disclosure controls were effective at March 31, 2013 and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- How much of the sharp improvement in operating cash flow reflects sustainable operations versus timing and working-capital movements.
- The realized financial effect of Medicare sequestration, census trends and the anticipated annual revenue and cash-flow impact of the settlement-related operating changes.
- Whether the revolving credit facility is renewed before its October 2013 maturity and on what terms.
- Developments in professional-liability claims, reserve adequacy, and the settlement’s payment and court-approval status.
- The valuation and concentration exposure of the NHI investment, including the impact of market-price changes on earnings and equity.
- The filing’s cover page states that shares outstanding were measured as of May 2, 2012, although the report was signed in May 2013; verify the intended date.