National HealthCare Corporation — Q3 2011 Form 10-Q
Business and period: The company operates or manages long-term care centers and provides hospice, homecare, assisted and independent living, insurance, management, accounting, and property-leasing services. It reported the quarter and nine months ended September 30, 2011; financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenues | $197.1 | $178.6 | $580.8 | $528.8 |
| Income before non-operating income | $17.9 | $14.3 | $60.9 | $41.1 |
| Income before taxes | $23.1 | $19.7 | $75.7 | $56.1 |
| Net income | $17.2 | $15.1 | $49.5 | $37.3 |
| Net income available to common stockholders | $15.0 | $12.9 | $43.0 | $30.8 |
| Basic / diluted EPS | $1.09 / $1.05 | $0.95 / $0.95 | $3.13 / $3.02 | $2.25 / $2.25 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $53.8 | $45.8 |
Margins: Income before non-operating income was 9.1% of revenue in Q3 2011 versus 8.0% a year earlier, and 10.5% for the first nine months versus 7.8%. Net income margin was 8.7% in Q3 versus 8.4%, and 8.5% year to date versus 7.1%.
Cash flow and liquidity: Nine-month investing cash use was $17.8 million and financing cash use was $11.3 million. Cash and cash equivalents rose to $53.2 million from $28.5 million at year-end 2010. At September 30, the company also held $80.1 million of marketable securities and $49.1 million of restricted cash. Current assets were $343.4 million and current liabilities $206.4 million. Management said cash, marketable securities, operating cash flow, and available borrowing capacity should meet near-term needs.
Debt and obligations: Long-term debt was $10.0 million, consisting of a variable-rate note due 2018; no amount was drawn on the $75 million revolving facility. The facility maturity was extended to October 25, 2012, and renewal was anticipated but not committed. Contractual obligations totaled $357.2 million, including $345.4 million of operating leases.
Material changes and operating drivers
- Q3 revenue grew 10.4% and pretax income 17.2% year over year; nine-month revenue grew 9.8% and pretax income 35.0%.
- Patient revenue increased 10.2% in Q3 and 10.4% year to date. Higher Medicare and managed-care per-diem rates, acquired or newly opened facilities, and increased management-fee collections contributed. Average census at owned and leased centers declined to 90.5% in Q3 from 92.1%, and to 90.7% year to date from 92.0%.
- Costs and expenses increased 9.0% in Q3 and 6.6% year to date. Salaries, staffing at expanded operations, therapist costs, and facility rent were significant drivers. Nine-month costs also benefited from favorable accrued-risk-reserve results.
- Diluted EPS was below basic EPS in 2011 because the convertible preferred shares were dilutive; preferred dividends were included in diluted earnings calculations.
Outlook, risks, and unusual items
- Medicare: CMS’s FY2012 skilled-nursing payment rule reduced PPS payments by a net 11.1%. Management estimated an annual revenue impact of about $24 million, or $6 million quarterly, and was assessing cost savings while emphasizing care quality. Hospice rate increases were estimated to add about $0.3 million annually; home-health payment reductions were estimated to reduce revenue by about $3.4 million annually.
- Medicaid: South Carolina’s rate reduction was estimated to reduce revenue by about $0.37 million quarterly. Tennessee announced a 4.25% reduction effective January 1, 2012, estimated to reduce revenue by about $0.65 million quarterly.
- Expansion: Two assisted-living projects opened in Q2 2011. The company expected to begin construction on skilled-nursing facilities in Tullahoma and Hendersonville and continued to evaluate market expansion.
- Claims and contingencies: Accrued risk reserves were $96.3 million. The company and/or managed centers were defendants in 28 professional-liability claims; management warned claims could exceed reserves and insurance. A Tennessee Attorney General civil investigative demand concerning business relationships with nonprofit entities was received in 2009; the company said it had responded and complied.
- Tax and compensation items: Q3 tax expense benefited by $3.2 million from statute-of-limitations expirations. Nine-month stock-based compensation was $2.3 million versus $0.2 million a year earlier, including accelerated vesting expense. Unrecognized tax benefits were $13.9 million, with $3.1 million of accrued interest and penalties.
- Investment concentration: $68.7 million of the $80.1 million equity-securities portfolio was NHI stock. Management estimated a 10% share-price change would alter the portfolio’s fair value by about $8.0 million.
- Management identified changing government reimbursement, labor and operating costs, census, litigation, regulation, competition, and access to capital as risks. It gave no broad earnings guidance in the filing.
Important facts for investors to verify
- Whether census, patient mix, and cost actions can offset the estimated Medicare reductions and announced state Medicaid cuts.
- Trends in professional-liability claims, the adequacy of the $96.3 million reserve, and the availability of insurance coverage.
- The value and concentration risk of the NHI investment, including any changes in its fair value.
- Renewal or refinancing of the revolving credit facility before its October 2012 maturity, and the company’s ability to fund lease and growth commitments.
- Whether tax benefits from statute expirations recur; Q3 and year-to-date earnings include such benefits, so reported results may not indicate the ongoing tax rate.