National HealthCare Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016, compared with the three months ended March 31, 2015, unless otherwise noted. NHC provides senior healthcare services across 10 states, operating or managing long-term care, assisted living, independent living and homecare facilities, as well as insurance, management, accounting and rental operations.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date | Change |
|---|---|---|---|
| Net operating revenues | $229.6 million | $222.4 million | Up 3.2% |
| Income before income taxes | $22.4 million | $21.7 million | Up 3.4% |
| Net income | $13.7 million | $13.2 million | Up 3.5% |
| Net income available to common stockholders | $13.7 million | $11.1 million | Up 23.7%; prior period included $2.2 million preferred dividends |
| Diluted EPS | $0.91 | $0.77 | Up 18.2% |
| Operating income before non-operating income | $17.6 million | $17.4 million | Up 1.1% |
| Operating margin, before non-operating income | 7.7% | 7.8% | Down about 0.2 percentage points |
| Cash from operating activities | $17.7 million | $24.4 million | Down 27.3% |
| Property and equipment additions | $13.4 million | $12.6 million | Up $0.9 million |
| Cash and cash equivalents | $49.2 million | $38.2 million at Dec. 31, 2015 | Up $11.0 million |
| Marketable securities | $125.9 million | $116.2 million at Dec. 31, 2015 | Up $9.7 million |
| Long-term debt | $120.0 million | $120.0 million at Dec. 31, 2015 | Unchanged |
Cash from operations less property and equipment additions was approximately $4.3 million. Cash from operating activities was pressured by working-capital use, notably restricted cash and lower accrued payroll. Total assets were $1.07 billion and stockholders’ equity was $654.6 million at March 31, 2016. Current assets were $296.3 million versus current liabilities of $138.8 million. The company had $110 million outstanding on its $175 million revolving facility, leaving $65 million available. Debt also includes a $10 million note payable to National, due in 2018; the revolving facility matures in 2020.
Facility rent expense was $10.3 million. Capital lease obligations totaled $32.7 million. Future operating lease payments were $373.4 million, and total disclosed contractual cash obligations were $565.7 million, including debt, leases and construction obligations. Common dividends declared were $0.40 per share.
Material changes and management commentary
- Net patient revenue increased 2.9%, supported by same-facility skilled nursing revenue growth and $1.7 million of incremental revenue from two facilities opened in 2015. Other revenue rose 11.0%, primarily from rental income.
- Skilled nursing occupancy at owned and leased facilities averaged 89.9%, compared with 90.3% a year earlier. Composite skilled nursing per diem rates increased 0.4%; Medicare and managed-care rates rose 2.7% and 1.8%, respectively, while Medicaid and private-pay rates rose 1.4% and 2.4%.
- Total costs and expenses increased 3.4%, approximately matching revenue growth. Salaries, wages and benefits rose 3.4%; these costs were 56.6% of revenue versus 56.5%. Interest expense increased to $1.0 million from $0.6 million, attributed to borrowings on the credit line compared with the prior-year quarter.
- Non-operating income rose to $4.8 million from $4.2 million, reflecting higher equity-method earnings, including increased Caris earnings, and investment income.
- Unrealized gains on investments contributed $7.6 million of other comprehensive income, bringing comprehensive income to $21.3 million. The $125.9 million equity-securities portfolio included $108.5 million of National Health Investors stock, about 86% of the portfolio.
Outlook, risks and unusual items
- Development: Management expected a Nashville skilled nursing/assisted living project and a Bluffton, South Carolina assisted living facility to begin operations in Q3 2016; a Garden City assisted living facility and a Columbia, Tennessee replacement skilled nursing center were expected in Q4 2016. Construction obligations were $21.4 million.
- Revenue and reimbursement: Management expected the new 10-year triple-net lease for 11 properties, effective January 1, 2016, to increase annual rental income by approximately $2.3 million versus the prior lease. The company stopped managing a Missouri facility effective March 1 and expected management-fee revenue to decline about $150,000 per quarter for the remaining nine months of 2016. Tennessee Medicaid rate changes were estimated to add about $1.0 million per quarter; Missouri announced retroactive rate increases expected to add about $100,000 per quarter. These are management estimates, not overall earnings guidance; the filing provides no specific full-year earnings guidance.
- Liquidity: Management stated that operating cash flows, cash, marketable securities and available credit were expected to meet near-term obligations and development needs. Future funding and refinancing ability remain dependent on operating performance, reimbursement rates, demand, labor and capital-market conditions.
- Claims and investigations: Accrued risk reserves were $101.7 million, including estimates for reported and incurred-but-unreported claims. NHC and/or managed centers were defendants in 38 professional-liability claims; claims could exceed reserves or insurance. The company continued cooperating with a DOJ/OIG investigation concerning rehabilitation therapy billing and medical necessity, and Caris continued cooperating with government investigations concerning hospice eligibility. Management could not evaluate either outcome and said either could materially affect results or financial condition.
- Other contingencies: NHC had paid $6.8 million following South Carolina Medicaid audit findings and was appealing to recover the amount; no recovery asset was recorded at March 31, 2016. Government healthcare rules and reimbursement are subject to review and interpretation. Approximately 65% of net patient revenue came from Medicare, Medicaid and other government programs.
- Investment and tax exposures: A 10% change in quoted equity prices would change the fair value of equity investments by approximately $12.6 million; NHI concentration is significant. A 1% interest-rate change was estimated to change annual interest cost on variable-rate debt by about $1.2 million. Unrecognized tax benefits were $13.4 million, with a federal tax return for 2012 under examination.
- Accounting: NHC anticipated that the new lease accounting standard would have a material impact on its financial statements; it was still evaluating other recently issued standards. No material changes to disclosed risk factors were reported, and management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether occupancy and per-diem improvements can offset labor, operating-cost and reimbursement pressures.
- Whether operating cash flow improves after the Q1 decline and supports construction spending and dividends.
- Progress, opening dates, costs and ramp-up performance of the facilities under construction.
- Developments in the DOJ/OIG, Caris and South Carolina Medicaid matters, and adequacy of the $101.7 million risk reserves.
- Value and concentration risk of the NHI investment, and available borrowing capacity under credit-facility covenants.
- Impact of lease accounting adoption and changes in government payment policies on reported liabilities, margins and liquidity.