National HealthCare Corporation (NHC) — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; selected fourth-quarter results are noted below. Dollar amounts are in millions unless stated otherwise.
Business context
NHC operates and manages skilled nursing, assisted and independent living, and home health businesses, and has a non-controlling 75.1% interest in hospice provider Caris. At year-end, it operated or managed 74 skilled nursing facilities with 9,462 licensed beds, 18 assisted living centers, five independent living centers, and 36 homecare programs. Healthcare services generated 95.1% of 2014 net operating revenue. Medicare and Medicaid represented 39% and 26% of net patient revenue, respectively.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net operating revenue | $871.7 | $789.0 |
| Income before non-operating income | $68.0 | $72.1 |
| Non-operating income | $17.2 | $30.1 |
| Income before income taxes | $85.2 | $102.2 |
| Net income | $53.4 | $64.6 |
| Net income available to common stockholders | $44.7 | $55.9 |
| Diluted EPS | $3.14 | $3.87 |
| Cash from operating activities | $75.7 | $102.3 |
- Revenue increased 10.5%, led by 12 newly constructed or leased skilled nursing facilities, which contributed $77.4 million to the year-over-year increase, and $8.3 million of growth at same-facility skilled nursing centers.
- Net patient revenue rose 12.7% to $829.3 million; other revenue fell 20.2% to $42.4 million. The latter reflected discontinued SeniorTrust/ElderTrust services and a favorable workers’ compensation settlement in 2013.
- Margins weakened: income before non-operating income was 7.8% of revenue versus 9.2% in 2013; net income margin was 6.1% versus 8.2%. Salaries, wages and benefits rose to 58.5% of revenue from 57.5%.
- Net income declined 17.4%, in part because non-operating income fell 42.9%. Caris equity earnings decreased $6.2 million, and 2013 included a $5.5 million gain from recovery of notes receivable.
- Occupancy in owned and leased skilled nursing facilities was 88.9%, down from 89.2%; the company’s composite skilled nursing per diem increased 0.8%. Assisted living occupancy was 89.6%.
- Operating cash flow declined 26.0% to $75.7 million, with working capital use including higher restricted cash and accounts receivable and lower accrued payroll and risk reserves. Capital spending was $53.3 million, up from $43.4 million.
- Year-end cash and cash equivalents were $69.8 million; marketable securities were $132.5 million, with an additional $158.3 million of restricted marketable securities. The $75 million revolver was undrawn. Long-term debt was $10.0 million; capital lease obligations were $36.6 million.
- Contractual lease commitments were significant: minimum operating lease payments of $416.2 million and capital lease payments of $47.7 million. Total contractual cash obligations, including debt and construction commitments, were $500.2 million.
- Total assets were $1.074 billion and stockholders’ equity was $734.1 million. Accrued risk reserves totaled $106.2 million, down from $110.6 million.
Fourth quarter: Revenue was $226.4 million versus $206.8 million in Q4 2013; net income was $14.8 million versus $16.6 million, and diluted EPS was $0.88 versus $0.99.
Material changes, outlook and risks
- Medicare sequestration reduced 2014 revenue by approximately $5.7 million across skilled nursing and homecare. The FY 2015 skilled nursing Medicare rate update was 2.0%; the 2015 home health rule reduced overall payments by 0.3% from 2014 levels.
- Management expected Tennessee Medicaid reimbursement changes to increase pretax income by approximately $3.0 million annually in FY 2015, and estimated South Carolina rate changes would increase revenue by approximately $1.8 million annually. Management also expected 2015 tax expense at an effective rate of 35%–39%.
- Management cited labor inflation and difficulty maintaining occupancy as concerns. Skilled nursing census has declined for three consecutive years, amid competition from assisted living and home- and community-based care.
- Planned development included a Sumner County, Tennessee skilled nursing and assisted living facility expected to open in Q1 2015; a St. Peters, Missouri memory care project expected in Q4 2015; and a Nashville skilled nursing/assisted living project expected in Q2 or Q3 2016. Additional South Carolina assisted living construction was scheduled to begin in Q1 2015.
- The $75 million revolving credit agreement matures October 21, 2015. NHC anticipated renewal, but disclosed that the lender had not committed to it. The company stated current cash, securities and borrowing capacity should cover near-term obligations and plans.
- Two government investigations were disclosed: a DOJ/OIG inquiry into billing and medical necessity of certain Tennessee skilled nursing rehabilitation services, and a state/federal investigation into Caris hospice patient eligibility. NHC said it was cooperating and could not assess outcomes.
- NHC and/or managed centers faced 34 professional liability claims as of year-end. The company is substantially self-insured and warned that claims could exceed reserves or coverage. Reimbursement reductions, regulatory sanctions, staffing shortages, and market and interest-rate risks are also material exposures.
- The company repurchased 125,000 common shares for $7.0 million in August 2014 under a $25 million authorization expiring August 31, 2015. It declared $1.34 per common share in 2014 dividends; future dividends are not assured.
Most important facts for investors to verify
- Whether occupancy, same-facility revenue and per diem trends stabilize, and whether new facilities contribute profitably as they mature.
- Whether rising labor and operating costs continue to outpace revenue growth and pressure margins and operating cash flow.
- Actual outcomes and potential financial exposure from the DOJ/OIG and Caris hospice investigations, and the adequacy of the $106.2 million risk reserves.
- Renewal terms and availability of the revolver before its October 2015 maturity, alongside substantial lease and construction commitments.
- Caris operating performance and the concentration of NHC’s equity portfolio in NHI: NHI represented $114.1 million, or 86.1%, of equity securities at year-end.