National HealthCare Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the same 2016 periods. NHC operates senior-care facilities and homecare programs, primarily in the southeastern U.S. At quarter-end it operated or managed 76 skilled nursing facilities, 25 assisted living facilities, five independent living facilities and 36 homecare programs. Dollar figures below are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net operating revenue | $239.5 | $227.8 | $478.7 | $457.4 |
| Income before non-operating income | $12.1 | $14.6 | $28.0 | $32.3 |
| Net income attributable to NHC | $10.7 | $11.9 | $23.4 | $25.6 |
| Diluted EPS | $0.70 | $0.78 | $1.54 | $1.68 |
| Dividends declared per share | $0.48 | $0.45 | $0.93 | $0.85 |
- Revenue increased 5.1% in Q2 and 4.7% for the first half, while NHC-attributable net income fell 10.2% and 8.5%, respectively. Operating costs grew faster than revenue: 6.7% in Q2 and 6.0% year to date.
- Q2 salary, wage and benefit expense was 59.6% of revenue versus 59.3% a year earlier; other operating expense was 26.2% versus 25.2%. For the first half, the corresponding ratios were 58.6% versus 58.0% and 26.5% versus 25.9%.
- First-half operating cash flow was $40.3 million, down from $46.4 million. Capital expenditures were $16.7 million versus $36.1 million. Investing activities provided $8.8 million, mainly reflecting net sales of restricted securities; financing activities used $14.1 million, including $13.6 million of dividends paid.
- Cash, cash equivalents and restricted cash totaled $66.6 million at June 30, 2017. Unrestricted cash was $60.8 million; current marketable securities were $148.1 million. Current assets were $328.7 million against current liabilities of $137.0 million.
- Long-term debt was $120 million, including $110 million drawn on a $175 million revolving facility and a $10 million note due January 1, 2018. The facility had $65 million available and matures in October 2020. Capital lease obligations had a $28.5 million present value. Operating lease commitments totaled $330.7 million.
- Total assets were $1.10 billion and stockholders’ equity was $689.5 million. Six-month comprehensive income attributable to NHC was $30.9 million, including $7.5 million of after-tax other comprehensive income, primarily unrealized investment gains.
Material changes and operating drivers
- Skilled nursing census averaged 90.3% in Q2 versus 89.3% a year earlier, and 90.4% for the first half versus 89.6%. Composite skilled nursing per diem rates rose 3.0% in Q2 and 3.2% year to date.
- Newly constructed facilities contributed to revenue growth but generated pre-tax operating losses of approximately $2.0 million in Q2 and $3.8 million in the first half, compared with $0.6 million and $0.3 million, respectively, in 2016. Management’s calculations excluding these losses showed NHC-attributable net income of $11.5 million versus $12.2 million in Q2 and $25.4 million versus $25.8 million year to date.
- Management cited wage pressure, higher operating costs at new facilities and unfavorable self-insurance reserve results as expense pressures. Interest expense also increased, partly due to higher rates on credit-facility borrowings.
- Management realigned reporting to inpatient services, homecare services and “all other” following a CEO leadership change; comparative segment data were recast to the new presentation.
Outlook, risks and unusual items
- NHC expects to fund near-term liquidity needs from operating cash flow, cash, marketable securities and available borrowing capacity. It stated these resources were expected to cover contractual obligations and planned growth over the next 12 months. Management anticipated continuation of quarterly dividends, subject to Board approval.
- A 30-bed skilled nursing addition in Springfield, Missouri was under construction and expected to open in Q4 2017. NHC also planned to pursue certificates of need and evaluate expansion opportunities.
- CMS’s FY2018 skilled nursing final rule provided an approximately 1.0% payment update beginning October 1, 2017. Missouri approved an estimated $1.4 million annual Medicaid rate reduction effective August 1, 2017. NHC estimated a roughly 1.0% reduction to its home health agency payments from the 2017 Medicare rule.
- Government payors represented approximately 65% of net patient revenue. Medicare and Medicaid claims remain subject to review; recorded amounts due to third-party payors were $18.0 million.
- Accrued risk reserves were $94.5 million. NHC and/or managed centers faced 61 professional liability claims; management warned claims, including unasserted claims, could exceed reserves and insurance coverage.
- The DOJ and HHS OIG investigation into certain Tennessee rehabilitation therapy billing remained unresolved. Separately, the U.S. intervened in a False Claims Act case involving Caris hospice eligibility and alleged overpayments; a motion to dismiss was denied, discovery was underway, and trial was set for March 2019. NHC said potential outcomes and liabilities could not be assessed.
- NHC held $148.1 million of marketable equity securities, including $129.1 million of National Health Investors stock—87.2% of the equity portfolio. Management estimated a 10% price change could change portfolio fair value by about $14.8 million. The company reported no other-than-temporary impairment of securities.
- NHC said the forthcoming lease-accounting standard was expected to materially affect its financial statements. Revenue-standard implementation was still being evaluated, including potential effects on CCRC, third-party-payor settlements and bundled or risk-sharing payments.
Important facts for investors to verify
- Whether new facilities improve occupancy and reach profitability, and whether wage and other cost growth moderates.
- Actual cash generation and capital spending relative to dividends and development commitments; confirm the availability and terms of the $65 million undrawn credit capacity.
- Whether the $10 million National note is extended before its January 2018 maturity.
- Developments in the Caris litigation and the DOJ/OIG investigation, including possible financial exposure beyond recorded reserves.
- Changes in Medicare and Medicaid rates, particularly the Missouri reduction, and the effect of reimbursement reforms on patient revenue and margins.
- Market value and concentration risk of the NHI investment, and the adequacy of self-insurance reserves against claims.