National HealthCare Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the same 2013 periods. NHC operates or manages 73 skilled nursing centers with 9,410 beds and provides related senior-care, insurance, management, and property-leasing services.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net operating revenues | $216.6 million | $192.0 million | $427.1 million | $386.4 million |
| Income before non-operating income | $16.1 million | $17.0 million | $33.1 million | $33.0 million |
| Net income | $12.5 million | $14.3 million | $25.7 million | $28.1 million |
| Net income available to common shareholders | $10.3 million | $12.2 million | $21.4 million | $23.8 million |
| Diluted EPS | $0.72 | $0.86 | $1.50 | $1.68 |
| Dividends declared per common share | $0.34 | $0.32 | $0.66 | $0.62 |
- Q2 net patient revenue increased 15.3% to $205.6 million; six-month net patient revenue increased 13.6% to $405.4 million. The 11 recently added skilled nursing facilities contributed $25.8 million to Q2 and $45.7 million to six-month net patient revenue growth.
- Other revenue declined 19.7% in Q2 and 26.6% for six months, mainly reflecting discontinued SeniorTrust/ElderTrust services and a favorable workers’ compensation settlement recorded in 2013.
- Q2 costs and expenses rose 14.5% to $200.5 million. Salaries, wages, and benefits were 58.0% of revenue versus 57.0% a year earlier; other operating costs were 25.7% versus 25.4%. Six-month salaries and benefits were 57.4% of revenue versus 56.0%.
- Income before non-operating income margin was approximately 7.4% in Q2 versus 8.9% in 2013; the six-month margin was approximately 7.7% versus 8.5%. Non-operating income fell to $4.3 million in Q2 and $8.9 million for six months, chiefly from lower equity-method earnings, including Caris.
- Operating cash flow was $27.0 million for six months, down from $47.1 million. The filing attributes much of the decline to a $20.1 million reduction in accrued payroll, primarily timing of 2013 incentive-compensation payments. Capital expenditures were $23.0 million; investing cash use was $25.0 million. Cash and cash equivalents declined by $5.9 million to $75.8 million.
Financial position and liquidity
- At June 30, 2014, total assets were $1.045 billion and stockholders’ equity was $716.8 million. Cash was $75.8 million, marketable securities $117.6 million, and restricted cash and marketable securities were also substantial.
- Long-term debt was $10.0 million; no borrowings were outstanding under the $75 million revolving facility. The company also recorded $38.1 million of capital lease obligations after leasing three Missouri facilities, with $3.0 million current and $35.1 million long-term.
- The revolving facility was due to mature October 22, 2014. Management expected to renew it but reported no lender commitment. Management said cash, marketable securities, operating cash flow, and available borrowing capacity were expected to cover near-term obligations and plans.
- Operating lease commitments totaled $433.3 million; total contractual cash obligations disclosed were $502.0 million, including debt, leases, and construction obligations.
- Marketable equity securities were valued at $117.6 million, of which NHI stock represented $102.0 million, or 86.7%. A hypothetical 10% change in equity prices would change the portfolio’s fair value by about $11.7 million.
Changes, outlook, and risks
- Skilled nursing census averaged 88.7% in Q2 versus 89.2% a year earlier and 89.0% for six months versus 89.5%. Q2 Medicare, Medicaid, and private-pay per diem rates increased, while six-month managed-care rates declined 2.0%.
- Management estimated Medicare sequestration would reduce remaining-2014 revenue by approximately $2.7–$3.2 million overall, including an estimated $2.0–$2.5 million for skilled nursing and $0.7 million for homecare. Management cited a 1.3% FY2014 skilled-nursing payment update and state Medicaid rate increases, while noting outcomes depend on census and payer mix.
- Development plans included facilities under construction in Tennessee and Missouri and anticipated construction starts in Nashville and South Carolina in 2014. No full-year earnings or revenue guidance was provided.
- Professional-liability, workers’ compensation, and health-insurance reserves totaled $111.8 million. NHC and/or managed centers faced 37 professional-liability claims; management warned claims, including unasserted claims, could exceed reserves and coverage.
- A Department of Justice and U.S. Attorney civil investigative demand seeks information on billing and medical necessity for certain rehabilitation therapy services, apparently at Knoxville facilities. NHC said it was cooperating and could not assess the outcome.
- Other risks include government reimbursement and regulatory changes, labor costs and staffing, occupancy pressure, and the ability to renew or refinance credit. The filing reported no material risk-factor changes and effective disclosure controls.
Important facts for investors to verify
- Whether recent facility additions can sustain revenue growth while labor costs and operating expenses rise faster than revenues.
- Renewal terms and availability of the revolving credit facility before its October 2014 maturity.
- Developments in the federal therapy-services investigation and the adequacy of the $111.8 million claims reserves.
- Exposure to NHI equity-price movements and the sustainability of operating cash flow, capital spending, and dividends.