National Healthcare Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Amounts are in millions of dollars, except per-share data. NHC provides senior healthcare services, including skilled nursing, assisted and independent living, behavioral health, homecare, insurance, management, and property leasing.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net operating revenue | $248.3 | $243.0; up 2.2% |
| Net patient revenue | $236.1 | $231.7; up 1.9% |
| Operating income | $15.8 | $15.9 |
| Operating margin | 6.4% | 6.5% |
| Net income attributable to NHC | $21.3 | Net loss of $2.8 |
| Diluted earnings per share | $1.39 | Loss of $0.18 |
| Non-GAAP net income / diluted EPS | $17.0 / $1.11 | $16.4 / $1.08 |
| Cash provided by operating activities | $11.6 | $13.3 |
| Capital expenditures | $5.9 | $7.1 |
| Cash, cash equivalents and restricted cash at quarter-end | $54.7 | $66.7 at March 31, 2018 |
| Long-term debt | $55.0 | $55.0 at December 31, 2018 |
| Dividend declared per common share | $0.50 | $0.48 |
Business performance and changes
- Skilled nursing census averaged 90.2%, compared with 89.6% in Q1 2018. Inpatient revenue rose to $221.6 million from $216.4 million; homecare revenue declined to $14.5 million from $15.3 million.
- Medicaid and private-pay skilled nursing per-diem rates increased 3.2% and 2.9%, respectively, while Medicare was essentially flat and managed-care rates declined 1.5%. The overall composite skilled-nursing per diem decreased 0.4%.
- Revenue included approximately $3.6 million from NHC Advantage, the company’s Tennessee institutional special needs plan launched January 1, 2019, and $1.6 million from a behavioral health hospital acquired in August 2018. The October 2018 sale of a Kentucky skilled nursing facility reduced year-over-year revenue by approximately $1.6 million.
- Total expenses grew 2.4%, faster than revenue. Other operating expense rose 6.5%, including about $3.7 million associated with the new insurance plan. Salaries, wages and benefits rose 0.9%; as a share of revenue they decreased to 56.9% from 57.7%.
- Reported earnings improved sharply in part because marketable equity securities produced a $6.8 million unrealized gain, versus a $15.5 million unrealized loss in Q1 2018. Non-operating income also improved, reflecting Caris hospice investment earnings and the absence of the prior-year Qui Tam settlement-related charge. NHC’s non-GAAP net income increased 3.6%.
Cash, debt and liquidity
- Operating cash flow was $11.6 million, down 12.8%. Working-capital needs used $13.0 million; cash distributions from unconsolidated investments were $0.03 million, versus $2.3 million a year earlier. Cash flow less capital expenditures was approximately $5.7 million.
- Investing activities used $2.9 million; financing activities used $8.9 million, principally $7.6 million of dividends and $0.9 million of share repurchases. Cash, cash equivalents and restricted cash decreased $0.2 million during the quarter.
- At March 31, cash and cash equivalents were $38.2 million, marketable equity securities were $147.1 million, and current assets were $327.1 million against current liabilities of $170.0 million. Restricted cash and restricted debt securities are separately reported and should not be treated as unrestricted cash.
- The $55.0 million variable-rate credit facility matures in October 2020, with $55.0 million available to borrow. A 1% rate change would affect annual interest cost by approximately $0.55 million. Management said available cash, securities, operating cash flows, and borrowing capacity are expected to meet liquidity needs and obligations over the next 12 months.
- Adoption of lease accounting guidance on January 1, 2019 added $220.1 million of operating lease right-of-use assets and $220.1 million of operating lease liabilities. Comparative 2018 balance-sheet amounts were not restated. Finance lease obligations were $24.9 million; operating and finance lease obligations are in addition to the reported $55.0 million long-term debt.
Outlook, risks and unusual items
- The filing provides no formal full-year earnings guidance. Management expected an approximately 26% corporate income tax rate for 2019, excluding nondeductible expenses.
- CMS’s new skilled-nursing Patient-Driven Payment Model was scheduled to take effect October 1, 2019, replacing the existing case-mix methodology. Management also described changes to skilled-nursing quality ratings that could lower future ratings. Home-health payment methodology changes were scheduled for 2020. These shifts may affect reimbursement and operations.
- Medicaid reimbursement may not cover the full cost of care. Management cited occupancy, labor availability and cost, competition, government payment and regulatory changes, and access to capital as business risks.
- Accrued risk reserves were $98.5 million. NHC and/or managed centers were defendants in 63 professional-liability claims; the company warned that asserted and unasserted claims could exceed reserves or insurance and materially affect results.
- A wholly owned subsidiary faces a False Claims Act Qui Tam action alleging incorrect National Drug Code reporting; the government declined to intervene, damages sought are unspecified, and NHC intends to defend the case. The filing also warns of potential regulatory fines, penalties, and exclusion from government healthcare programs.
- The equity portfolio is concentrated: NHI stock represented approximately $128.1 million, or 87%, of marketable equity securities. A hypothetical 10% market-price change would alter the portfolio’s fair value by approximately $14.7 million; related unrealized gains affect reported earnings.
Important facts for investors to verify
- Whether occupancy, per-diem rates, and the new NHC Advantage plan sustain revenue growth while managing its associated expenses.
- How earnings and valuation look excluding unrealized investment gains and other non-GAAP adjustments, and the sensitivity of results to NHI’s share price.
- Whether operating cash generation can support capital spending, dividends, and growth while the credit facility approaches its October 2020 maturity.
- Developments in the 63 professional-liability claims, risk-reserve estimates, and the NSS Qui Tam litigation.
- The financial and operational effects of the PDPM, home-health payment changes, and CMS quality-rating revisions.