National HealthCare Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. NHC operates or manages senior-care facilities and homecare programs across 10 states, with operations concentrated in the southeastern U.S. It reported 74 long-term care centers, 21 assisted-living facilities, five independent-living facilities and 36 homecare programs.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net operating revenues | $231.3 million | $225.4 million | $688.6 million | $672.7 million |
| Income before income taxes | $15.7 million | $18.3 million | $57.6 million | $59.8 million |
| Net income | $11.1 million | $12.6 million | $36.7 million | $38.2 million |
| Net income available to common stockholders | $11.1 million | $10.4 million | $36.7 million | $31.7 million |
| Diluted EPS | $0.73 | $0.72 | $2.41 | $2.21 |
| Operating income before non-operating income, as % of revenue | 4.6% | 6.1% | 6.2% | 7.0% |
Quarterly revenue rose 2.6%, while pretax income fell 14.4%; nine-month revenue rose 2.4% and pretax income declined 3.6%. Higher common earnings and EPS versus 2015 reflect, in part, redemption of preferred stock in November 2015, which eliminated preferred dividends. Q3 2016 net income included a $1.3 million tax benefit from statute-of-limitations expirations; Q3 2015 had a $1.7 million benefit.
Cash from operations was $49.3 million for the first nine months, down from $63.3 million. Capital expenditures were $50.5 million, versus $39.0 million. Cash and cash equivalents ended at $19.2 million, down from $38.2 million at year-end 2015. Marketable securities were $147.0 million, with additional restricted cash and securities. Total debt was $120.0 million: $110.0 million drawn on a $175.0 million revolving facility and a $10.0 million term note. The facility had $65.0 million available and matures in October 2020. Capital lease obligations totaled $31.1 million.
Drivers and material changes
- Q3 skilled-nursing census averaged 89.3%, versus 89.7% a year earlier; nine-month census was 89.5%, versus 90.0%. Overall skilled-nursing per diem rates increased 1.7% for Q3 and 0.9% for the nine-month period.
- New facilities contributed to revenue growth but remained loss-making: five facilities generated pretax operating losses of $3.0 million in Q3 and $5.5 million year to date. Excluding these losses, management said pretax income would have declined 4.1% for Q3 and increased 1.2% year to date compared with 2015.
- Q3 salaries, wages and benefits rose 3.9%; the expense ratio increased to 60.7% of revenue from 60.0%, including $1.5 million of higher health-insurance expense from unfavorable claims. Nine-month wage and benefit costs rose 3.2%.
- Other revenue increased 25.9% in Q3 and 14.7% year to date, mainly from management fees and rental income. Some management-fee growth came from sporadic interior-design work. A new 10-year triple-net lease covering 11 properties is expected to add about $2.3 million of annual rental income versus the prior lease.
- Common dividends declared were $0.45 per share in Q3 and $1.30 per share for the nine months. NHC repurchased 130,000 shares for $8.2 million in August; a new $25 million authorization began September 1, with no purchases reported under that plan through the filing.
Outlook, risks and contingencies
NHC gave no specific company-wide earnings or revenue guidance. It expected three projects under construction at September 30 to begin operations in late Q4 2016 or early Q1 2017. Management stated that cash flows, cash on hand, marketable securities and available credit were expected to meet near-term obligations and development plans. The company expects to continue common dividends, subject to quarterly Board approval.
- Government reimbursement and regulation are key risks. Medicare, Medicaid and other government programs account for approximately 65% of net patient revenue. Management cited ongoing shifts toward home- and community-based care, value-based and bundled payment models, and pressure on Medicaid rates and funding.
- Accrued risk reserves were $97.6 million. NHC and/or managed centers faced 35 professional-liability claims; claims, including unasserted claims, could exceed insurance and reserves and materially affect results.
- The DOJ and HHS investigation concerning rehabilitative-therapy billing and medical necessity remained unresolved; NHC said it could not assess the outcome.
- After quarter-end, on October 11, 2016, the U.S. intervened in a False Claims Act case against Caris, in which NHC holds a 75.1% non-controlling interest. The complaint alleges hospice billing for ineligible patients and seeks treble damages and civil penalties. Caris denies the allegations; NHC said potential liability could not yet be assessed.
- NHC had paid $6.8 million following South Carolina Medicaid audit findings and was pursuing appeals. No asset for potential recovery was recorded at September 30, 2016.
- The $147.0 million equity portfolio included $128.0 million of NHI stock, approximately 87% of the portfolio. A 10% market-price change would alter the fair value of equity investments by about $14.7 million. Variable-rate debt exposure was $120.0 million; a 1% rate change would affect annual interest cost by approximately $1.2 million.
Important facts for investors to verify
- Whether census, reimbursement rates and facility ramp-up improve enough to offset labor, insurance and other cost increases.
- Developments and possible financial exposure in the DOJ therapy investigation, the Caris litigation and South Carolina Medicaid appeals.
- Adequacy of the $97.6 million risk reserves and the performance of NHC’s self-insurance programs.
- Cash generation relative to elevated development spending, dividends, lease commitments and revolving-credit borrowings.
- Market value and concentration risk in NHI stock and the effect of interest-rate changes on debt and investments.