NATIONAL HEALTHCARE CORP annual report, FY2013

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National HealthCare Corporation — FY 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; it also presents unaudited Q4 results. Unless otherwise noted, financial amounts below are in millions of dollars.

Business context and reporting period

NHC operates and manages post-acute and senior-care businesses, including skilled nursing, assisted and independent living, rehabilitation, home health, and hospice through a 75.1% non-controlling interest in Caris. At year-end, it operated or managed 69 skilled nursing facilities with 8,943 beds. Skilled nursing facilities averaged 89.2% occupancy in 2013. Net patient revenue represented 93.3% of operating revenue.

Financial performance and condition

  • Revenue: Net operating revenue was $789.0, up 3.7% from $761.0. Net patient revenue rose 4.3% to $735.8; other revenue fell 4.5% to $53.1.
  • Profit: Operating income before non-operating income was $72.1, up 5.6%. Net income was $64.6, up 9.0%; net income available to common shareholders was $55.9, or $4.05 basic and $3.87 diluted EPS, versus $50.6 and $3.65/$3.57 in 2012. Net margin was 8.2% versus 7.8%.
  • Drivers and margins: Revenue gains reflected new or transitioned facilities and higher homecare activity, partly offset by lower occupancy. Wage and benefit costs rose 6.2% to $453.6 and increased to 57.5% of revenue from 56.1%. Operating income before non-operating income was 9.1% of revenue, compared with 9.0%.
  • Non-operating items: Non-operating income increased to $30.1 from $25.2, including a $5.5 gain on recovery of previously written-down notes receivable and $14.2 of equity earnings from unconsolidated investments.
  • Cash flow: Operating cash flow was $102.3, up from $64.4. Investing activities used $56.3, including $43.4 for property and equipment and $21.0 to purchase six nursing-facility properties; financing activities used $31.0. Year-end cash was $81.7, versus $66.7.
  • Liquidity and debt: Current assets were $436.9 and current liabilities $250.4. Available liquidity included $105.0 of marketable securities and a fully undrawn $75.0 revolving facility; $142.0 of restricted marketable securities and $13.9 of restricted cash are not equivalent to unrestricted cash. Debt was $10.0, due in 2018; the revolving facility matured October 22, 2014, with renewal anticipated but not committed at filing.
  • Other balance-sheet items: Total assets were $980.7; equity was $688.1. Accrued risk reserves were $110.6, approximately unchanged year over year. Operating lease commitments totaled $450.4, including $34.2 due within one year.

Material changes versus prior comparable period

  • Revenue growth accompanied by weaker occupancy: skilled nursing occupancy declined to 89.2% from 90.1%; average skilled nursing per diem increased 2.9%. Medicare and managed-care per diems fell 0.2% and 0.5%, while Medicaid and private-pay per diems rose 3.5% and 6.3%.
  • Seven skilled nursing facilities and one assisted-living facility previously managed by NHC transitioned to NHC-operated/leased facilities in September 2013; a new 90-bed Tullahoma facility also opened. These nine operations contributed an estimated $21.4 to patient revenue. Homecare added approximately $5.3.
  • Costs rose 3.5% overall, with wage and benefit expense growth outpacing revenue. Other operating expense declined, aided by favorable risk-reserve experience and cost savings, but included a $4.4 unfavorable CCRC future-service-obligation adjustment.
  • Common dividends declared were $1.26 per share versus $2.20 in 2012, which included a $1.00 special dividend. NHC repurchased 100,000 shares for $4.7 in February 2013; no repurchases were made under the new 2013 authorization by year-end.
  • Adoption of new CCRC refundable-entrance-fee accounting was applied retrospectively. It reclassified refundable fees to liabilities and recorded a future service obligation; reported 2012 net income increased by $1.3 under the adjusted presentation.

Outlook, risks, contingencies, and unusual items

  • Management gave no earnings or revenue guidance. It expected a 2014 effective tax rate of 35%–39% and anticipated renewing the $75.0 revolving credit agreement, without lender commitment disclosed.
  • Planned development included projects under construction and anticipated 2014 starts; completion and opening dates were estimates. Management expects the loss of SeniorTrust-related management and insurance business to reduce annual pretax income by approximately $2.2, or $1.35 after tax.
  • Medicare sequestration reduced 2013 revenue by approximately $3.75 across the company, including about $3.0 at skilled nursing facilities and $0.75 at homecare. Management noted continuing reimbursement uncertainty, Medicaid budget pressure, and the risk that rate increases will not offset labor and other inflation.
  • On December 19, 2013, the DOJ and U.S. Attorney requested information regarding billing and medical necessity for certain Knoxville-area rehabilitation therapy services. NHC said it was cooperating and could not assess the outcome.
  • SeniorTrust/ElderTrust litigation was settled for a $6.65 payment; related 2013 quarterly expenses and a subsequent expense reduction largely offset, and the company reported an immaterial net income-statement impact for 2013. The filing states an approximately $2.505 cumulative net loss from settlement activities.
  • NHC disclosed three possible patient-information incidents involving unencrypted backup media or a stolen laptop; affected patients were notified and corrective measures were reported. The filing does not quantify potential costs or regulatory consequences.
  • Professional liability and workers’ compensation exposure is substantially retained through self-insurance and captive insurers. The company and/or managed centers faced 28 resident injury or wrongful-death claims; claims could exceed reserves or coverage. Key risks also include reimbursement reductions, staffing costs and availability, regulatory enforcement, competition, investment concentration in NHI, and facility and cybersecurity risks.

Most important facts for investors to verify

  • Whether the 2013 earnings improvement is repeatable without the $5.5 notes-recovery gain and favorable risk-reserve effects.
  • Whether occupancy stabilizes and new or transitioned facilities generate returns sufficient to cover higher labor costs, rent, and capital spending.
  • Renewal terms and availability of the revolving credit facility before its October 2014 maturity, and the company’s ability to fund development while maintaining dividends.
  • Developments in the DOJ therapy-billing inquiry, patient-data incidents, and adequacy of the $110.6 risk reserves relative to claims and self-insured exposure.
  • Effects of Medicare/Medicaid reimbursement changes and the expected annual earnings impact from discontinued SeniorTrust-related services.
  • Valuation and concentration risk in the NHI equity investment, reported at $91.5 fair value and representing 87.1% of the equity securities portfolio.