National Healthcare Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed November 5, 2013. NHC operates or manages senior-care facilities and related services. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net operating revenues | $195.8 | $189.3 | $582.2 | $567.0 |
| Income before non-operating income | $19.3 | $16.6 | $52.3 | $47.7 |
| Non-operating income | $11.2 | $6.8 | $24.4 | $18.5 |
| Income before taxes | $30.4 | $23.4 | $76.7 | $66.3 |
| Net income | $19.9 | $17.2 | $48.0 | $43.4 |
| Net income available to common shareholders | $17.7 | $15.0 | $41.5 | $36.9 |
| Diluted EPS | $1.19 | $1.04 | $2.88 | $2.62 |
- Q3 revenue rose 3.4% and pretax income rose 30.2%; nine-month revenue rose 2.7% and pretax income rose 15.7%. Net income margin was approximately 10.2% in Q3 versus 9.1%, and 8.2% for nine months versus 7.7%.
- Net patient revenue increased 4.3% in Q3 and 2.8% for nine months. Q3 growth included $5.2 million from seven newly leased facilities. Nine-month results also included a $1.6 million one-time Tennessee Medicaid acuity adjustment and $4.2 million of higher homecare revenue.
- Salaries, wages and benefits rose $6.9 million in Q3 and $12.1 million for nine months, reflecting new facilities, therapy and homecare costs, and wage increases. Nine-month other operating expense was nearly flat year over year.
- Non-operating income included a $5.5 million gain from recovery of previously written-down notes receivable. Nine-month results also benefited from greater Caris hospice equity earnings; investment income was lower than in the prior year.
- Q3 and nine-month effective tax rates were 34.7% and 37.4%, respectively, compared with 26.5% and 34.5%. The 2013 rates included a $1.6 million tax benefit from statute-of-limitations expirations.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $90.2 million, up from $61.3 million. The increase reflected working-capital movements, including higher accrued payroll and risk reserves and collection of a prior-year federal tax receivable; restricted cash and receivables partly offset this.
- Investing cash outflow was $44.1 million, including $34.0 million of property additions and the $21.0 million purchase of six skilled nursing facilities, partly offset by note collections and securities activity. Financing cash outflow was $24.3 million, including $19.5 million of common and preferred dividends and $4.7 million of share repurchases.
- At September 30, cash was $88.4 million, unrestricted marketable securities $108.2 million, and restricted cash and securities $154.0 million. Current assets were $439.9 million and current liabilities $255.9 million. Total assets were $976.0 million.
- Debt was $10.0 million; no borrowings were outstanding under the $75 million revolving facility. On October 23, 2013, NHC extended the facility, which matures October 22, 2014. Renewal beyond that date was anticipated but not committed.
- Operating lease commitments totaled $458.9 million, including $34.2 million due within one year. NHI facility rent expense was $27.3 million for the first nine months.
- Common dividends declared were $0.32 per share in Q3 and $0.94 per share for nine months. A new $25 million repurchase authorization began August 1, 2013; no repurchases under it had occurred by September 30.
Material changes, outlook and risks
- NHC began leasing and operating seven Massachusetts and New Hampshire facilities on September 1. It also bought six facilities from NHI for $21 million; the purchase reduces annual master-lease payments by $2.95 million. The new seven-facility lease has a 15-year term and $3.45 million annual base rent, with specified escalation provisions.
- The ElderTrust/SeniorTrust settlement produced a $5.2 million operating-expense credit in Q3 after a $5.2 million expense in Q1; the filing says the settlement’s net impact for the first nine months was immaterial. The loss of Missouri and Kansas management and related fees is expected to reduce annual results by about $2.2 million, or $1.35 million after tax.
- Management reported average skilled-nursing census of 89.5% for both Q3 and nine months, versus 89.7% and 90.3%, respectively, in 2012. Nine-month Medicare and managed-care per-diem rates fell 0.3% and 0.5%; Medicaid and private-pay rates rose 3.5% and 5.2%.
- Medicare sequestration cuts began April 1. Management estimated approximately $2.5 million of revenue impact for the first nine months of 2013 and estimated a further $1.25–$1.625 million impact for the remaining three months of 2013, assuming other factors remain constant. The FY2014 skilled-nursing Medicare rate update was 1.3%; company impact depends on census and payer mix. No formal earnings guidance is provided.
- Key exposures include government reimbursement and regulatory changes, labor and census trends, self-insured professional liability, and investment-market risk. NHC and/or managed centers faced 30 personal-injury or wrongful-death claims; management warned claims could exceed reserves and insurance. Accrued risk reserves were $118.7 million.
- Two possible patient-information breaches involving unencrypted backup tapes were reported in Q3, one at an owned facility and one at a managed facility; affected patients were notified and security measures revised.
- NHC’s $108.2 million equity portfolio was concentrated in NHI stock ($92.8 million, or 85.7%); a hypothetical 10% market-price move would change portfolio fair value by about $10.8 million. Nine-month other comprehensive income included a $2.0 million loss, largely reflecting investment valuation changes.
- Effective January 1, 2013, NHC retrospectively adopted accounting guidance for refundable CCRC entrance fees. The change reclassified refundable fees as liabilities and reduced opening retained earnings by $3.5 million; 2012 comparative results were adjusted.
Important facts for investors to verify
- How much of reported earnings growth is repeatable, given the $5.5 million note-recovery gain, the tax benefit, and settlement-related Q3 credit?
- Whether labor costs, occupancy, payer mix and Medicare/Medicaid rate changes support continued operating improvement.
- The adequacy of $118.7 million in accrued risk reserves relative to open and potential claims, insurance limits and future claim trends.
- Whether NHC renews or refinances the revolving facility before October 22, 2014, and how substantial lease commitments affect flexibility.
- The performance and valuation risk of the concentrated NHI investment, and the practical availability of restricted cash and securities for operating needs.
- The expected earnings and cash-flow effects of the ElderTrust/SeniorTrust relationship changes, new leases, facility acquisitions and planned development spending.