National HealthCare Corporation — Q2 2012 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2012; amounts below are in millions unless stated otherwise. NHC operates or manages 75 long-term care centers with 9,460 beds in 10 states, and provides related services in another state, including hospice, assisted and independent living, homecare, insurance, management, accounting and property leasing.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net operating revenues | $187.8 | $190.8 | $377.9 | $383.7 |
| Income before non-operating income | $16.5 | $17.0 | $31.2 | $42.9 |
| Non-operating income | $5.9 | $5.2 | $11.8 | $9.7 |
| Income before taxes | $22.4 | $22.2 | $43.0 | $52.6 |
| Net income | $13.6 | $13.6 | $26.3 | $32.3 |
| Net income available to common stockholders | $11.4 | $11.4 | $22.0 | $28.0 |
| Diluted EPS | $0.82 | $0.83 | $1.57 | $1.97 |
Net income margin (net income divided by net operating revenues) was approximately 7.2% in Q2 2012 versus 7.1% a year earlier, and 7.0% for the first half versus 8.4%. The income-before-non-operating-income margin was 8.8% and 8.9% for the respective quarters, and 8.3% versus 11.2% for the six-month periods.
- Q2 revenue declined 1.6%; patient revenue fell 1.8%, partly reflecting Medicare rate pressure and the transfer of Solaris Hospice operations to Caris. The two new assisted-living communities partially offset the decline.
- Q2 costs and expenses decreased 1.4% to $171.3 million. Lower skilled-nursing costs and the Solaris transfer helped offset higher therapy-service costs. Non-operating income rose 14.6%, primarily from higher Caris equity earnings.
- First-half revenue declined 1.5%; income before taxes fell 18.3% as reported. The comparison was affected by a favorable $10.5 million accrued-risk-reserve adjustment in the first half of 2011. Excluding that prior-year item, NHC said first-half 2012 pretax income would have increased 2.1%.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $30.5 million, up from $27.2 million. Investing used $15.0 million, including $7.5 million for an additional 7.5% Caris interest and $6.2 million in capital spending. Financing used $7.3 million, including $12.7 million in common and preferred dividends. Cash and cash equivalents increased $8.2 million during the period to $69.2 million.
- At June 30, cash was $69.2 million; restricted cash was $52.9 million; marketable equity securities were $97.6 million; and restricted marketable securities were $87.4 million. Current assets were $379.9 million and current liabilities $206.9 million.
- Long-term debt was $10.0 million; no borrowings were outstanding on the $75 million revolving facility. The facility matures October 25, 2012. Management anticipated renewal but disclosed that the lender had not committed to an extension. The unsecured $10 million note to National matures in 2018.
- Accrued risk reserves were $103.7 million, up from $98.7 million at December 31, 2011. Contractual obligations include $320.2 million of operating lease commitments. NHC said cash, marketable securities and available borrowing capacity were expected to support near-term obligations and plans.
Outlook, risks and unusual items
- Management estimated fiscal 2012 Medicare skilled-nursing payment changes would reduce annual revenue by about $24 million, while related therapy requirements would add about $6 million in annual costs. For the first half, the average Medicare per diem rate decreased 6.0% year over year; facility census averaged 89.9%, compared with 90.8%.
- CMS’s fiscal 2013 skilled-nursing update was a 1.8% rate increase, effective October 1, 2012; NHC said its specific financial impact was not yet predictable. Management also estimated annual revenue effects of approximately $2.6 million lower from homecare rate changes, $1.5 million lower from Tennessee Medicaid rates, and $1.72 million higher from a Missouri Medicaid rate increase.
- Management cited ongoing cost-control efforts and plans to begin construction in 2012 on three skilled-nursing projects. It anticipated continuing common and preferred dividends, subject to quarterly board approval; no earnings or cash-flow guidance was provided.
- Healthcare reimbursement and regulation, including possible Medicare reductions beginning in 2013, could pressure results. NHC also cited uncertainty around Medicaid funding, labor and operating costs, competition, census, and refinancing. The company had 27 pending professional-liability claims and warned that claims, including unasserted claims, could exceed reserves and insurance coverage.
- Marketable equity securities included an $83.0 million NHI holding—about 85% of the equity portfolio—with $58.3 million of unrealized gains. First-half comprehensive income included $8.0 million of after-tax other comprehensive income, principally unrealized investment gains. The Solaris business was assigned to Caris, and NHC acquired an additional Caris interest; Caris remained an unconsolidated, non-controlling equity-method investment despite NHC’s 75.1% limited-partner interest.
- NHC reported $14.1 million of unrecognized tax benefits and $2.4 million of related accrued interest and penalties. It estimated $4.3 million of tax benefits could be affected by statute expirations within 12 months. The filing also notes a 2009 Tennessee Attorney General civil investigative demand; NHC said it had responded and complied.
Important facts for investors to verify
- Whether the $75 million revolving facility was renewed or replaced before its October 25, 2012 maturity.
- Subsequent developments in professional-liability claims, reserve estimates, and insurance coverage relative to the $103.7 million accrued reserve.
- Actual Medicare and Medicaid reimbursement changes, census and payer mix, and their effects on operating results and cash flow.
- Caris’s performance and the financial effects of the increased ownership interest and Solaris transfer.
- Changes in the value or concentration of the NHI investment, and the timing and resolution of uncertain tax positions.