National HealthCare Corporation — Q1 2012 Form 10-Q
Business and period: For the three months ended March 31, 2012, NHC operated or managed 75 long-term care centers with 9,450 beds across 10 states, and provided other services in one additional state. Its services include skilled nursing, assisted living, hospice, homecare, insurance, management, and property leasing.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net operating revenues | $190.1 million | $192.9 million |
| Income before non-operating income | $14.7 million | $25.9 million |
| Income before taxes | $20.6 million | $30.4 million |
| Net income | $12.7 million | $18.7 million |
| Net income available to common stockholders | $10.5 million | $16.6 million |
| Basic / diluted EPS | $0.76 / $0.76 | $1.21 / $1.15 |
| Cash from operations | $3.0 million | $11.4 million |
Net operating revenue declined 1.5%; income before taxes fell 32.3%. The 2011 comparison included a favorable $10.5 million adjustment to accrued risk reserves. Excluding that prior-year benefit, NHC said Q1 2012 pretax income increased 3.3% year over year. Income before non-operating income was approximately 7.8% of revenue, versus 13.4% in Q1 2011; the comparison is materially affected by the reserve adjustment. The effective tax rate was 38.5% in both periods.
At March 31, 2012, total assets were $874.3 million, current assets $371.3 million, and current liabilities $204.9 million. Cash and cash equivalents were $59.7 million; marketable securities were $93.1 million, with a further $53.2 million of restricted cash and $85.2 million of restricted securities. Long-term debt was $10.0 million, with no revolver borrowings. Stockholders’ equity was $629.0 million. Dividends declared were $0.30 per common share and $0.20 per preferred share.
Changes and operating drivers
- Net patient revenue fell 0.8%. The January 2012 assignment of Solaris Hospice to Caris eliminated $3.9 million of prior-year patient revenue; two new assisted-living communities added approximately $1.1 million.
- Average census at owned and leased centers was unchanged at 91.1%. Average Medicare, managed-care, and Medicaid per diem rates declined 4.5%, 3.5%, and 0.8%, respectively.
- Other revenue declined 9.2%, mainly reflecting lower collections of management and accounting fees. Non-operating income rose to $5.9 million from $4.6 million, partly due to increased equity-method earnings from Caris.
- Total expenses increased 5.0%. Salaries, wages, and benefits declined 2.1%, while other operating expenses increased 24.5%, largely because the prior-year period benefited from the $10.5 million reserve adjustment. Excluding that adjustment, other operating expenses would have been broadly comparable.
- Operating cash flow declined to $3.0 million, primarily reflecting a $16.2 million decrease in accrued payroll associated with the timing of incentive-compensation payments. Capital additions were $3.0 million.
Outlook, liquidity, and risks
Management expected 2012 short-term liquidity needs to be met by operating cash flows, cash, marketable securities, and available borrowing capacity. The $75 million revolving facility was undrawn but matured October 25, 2012; management anticipated renewal, but had no lender commitment. Failure to refinance could require use of cash and securities and constrain growth spending. Contractual obligations included $328.6 million of operating leases and $10.0 million of debt principal, due after five years.
Management estimated the 2012 skilled-nursing Medicare rate changes would reduce annual revenue by about $24 million, with therapy requirements adding about $6 million of annual operating costs. Homecare rate changes were estimated to reduce annual revenue by $2.6 million. Tennessee Medicaid reductions were estimated to reduce annual revenue by $2.6 million; a Missouri rate increase was estimated to add $1.7 million annually. NHC said it was pursuing cost savings while maintaining care quality. It also expected to begin construction in 2012 on three skilled-nursing projects, totaling 232 beds.
Key risks include government reimbursement reductions and policy changes, labor and operating costs, maintaining census, and patient-care claims. Accrued risk reserves were $99.7 million; NHC and/or managed centers were defendants in 27 professional-liability claims, and claims could exceed reserves and insurance. The company reported a $13.7 million balance of unrecognized tax benefits and $2.4 million of related accrued interest and penalties. A Tennessee Attorney General civil investigative demand concerning relationships with nonprofit entities was received in 2009; the company said it had responded and complied. The filing reported no material changes to previously disclosed risk factors.
NHC’s equity portfolio included $79.5 million of National Health Investors stock, about 85.5% of its marketable equity securities; a 10% market-price change would affect portfolio fair value by approximately $9.3 million. No formal full-year earnings guidance was provided.
Important facts for investors to verify
- Whether the $10.5 million prior-year reserve benefit explains the apparent earnings decline, and how current reserve estimates evolve.
- Progress on renewal of the $75 million credit facility before its October 2012 maturity.
- Actual reimbursement-rate impacts, census, and cost mitigation compared with management’s estimates.
- Developments in the 27 professional-liability claims and adequacy of the $99.7 million reserve and insurance coverage.
- Valuation and concentration risk in the NHI investment, and realization of subordinated or otherwise unrecognized management fees.