Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
National HealthCare Corporation, which we also refer to as NHC or the Company, is a leading provider of post–acute care and senior health care services. At December 31, 2023, we operate or manage 68 skilled nursing facilities with 8,732 1icensed beds, 26 assisted living facilities with 1,501 units, five independent living facilities, three behavioral health hospitals, 35 homecare agencies, and 30 hospice agencies located in 8 states. In addition, we provide management services, accounting and financial services, and insurance services to third party operators of healthcare properties. We also own the real estate of 10 healthcare properties and lease these properties to third party operators.
Legislation and Government Stimulus Due to COVID-19
The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective was the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated $178 billion to the Public Health and Social Services Emergency Fund, which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.
The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds are used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $0, $11,457,000 and $63,360,000 of government stimulus income from the Provider Relief Funds for the years ended December 31, 2023, 2022 and 2021, respectively. The grant income was determined on a systemic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by HHS.
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Executive Summary
Earnings
To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. During certain inflationary times, our net patient revenues and government reimbursement may not keep pace with inflationary increases in our expenses, which may cause net earnings to decline.
Occupancy
A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census (based on operational beds) in owned and leased skilled nursing facilities for 2023 was 87.9% compared to 83.8% in 2022 and 80.6% in 2021.
The pandemic caused an increased strain on America's healthcare workforce, which has created the challenge of maintaining desirable patient census levels. Management has undertaken a number of steps in order to best position our current and future operations. This includes working internally to examine and improve systems to be most responsive to referral sources and payors, as well as find creative initiatives to retain and attract qualified healthcare professionals. Additionally, NHC is in various stages of partnerships with hospital systems, payors, and other post–acute alliances to better position ourselves so we are an active participant in the delivery of post-acute healthcare services.
Quality of Patient Care
CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.
In July 2022, CMS launched its enhanced Five-Star Quality Rating System which integrates weekend staffing rates for nurses and information on annual turnover among nurses and administrators. The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of December 31, 2023:
NHC Ratings
Industry Ratings
Total number of skilled nursing facilities, end of period
68
Number of 4 and 5-star rated skilled nursing facilities
40
Percentage of 4 and 5-star rated skilled nursing facilities
59%
36%
Average rating for all skilled nursing facilities, end of period
3.6
2.9
Development and Growth
We are undertaking to expand our post–acute and senior health care operations while protecting our existing operations and markets. The following table lists our recent construction and purchase activities.
Type of Operation
Description
Size
Location
Placed in Service
Hospice
Acquisition
28 agencies
Various
June 2021
Homecare
New Agency
1 agency
Anderson, SC
January 2022
Hospice
New Agency
1 agency
Tullahoma, TN
March 2022
Behavioral Health Hospital
New Facility
64 beds
Knoxville, TN
April 2022
Behavioral Health Hospital
New Facility
16 beds
St. Louis, MO
June 2022
Hospice
New Agency
1 agency
Cedar Bluff, VA
March 2023
Skilled Nursing
Acquisition
66 beds
Nashville, TN
May 2023
Homecare
New Agency
1 agency
Tallahassee, FL
May 2023
Assisted Living Facility
New Operations
135 units
Vero Beach, FL
July 2023
Assisted Living Facility
New Operations
95 units
Merritt Island, FL
July 2023
Assisted Living Facility
New Operations
100 units
Stuart, FL
July 2023
Accrued Risk Reserves
Our accrued professional liability and workers’ compensation reserves totaled $103,259,000 and $102,469,000 at December 31, 2023 and 2022, respectively, and are a primary area of management focus. We have set aside restricted cash and restricted marketable securities to fund our professional liability and workers’ compensation reserves.
As to exposure for professional liability claims, we have developed performance measures to bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.
Segment Reporting
The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and behavioral health hospitals; and (2) homecare and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office.
The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company, while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.
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The following tables set forth the Company’s consolidated statements of operations by business segment (in thousands ):
Year Ended December 31, 2023
Inpatient
Services
Homecare
and Hospice
All Other
Total
Revenues:
Net patient revenues
$
956,077
$
131,537
$
–
$
1,087,614
Other revenues
1,141
–
52,789
53,930
Net operating revenues
957,218
131,537
52,789
1,141,544
Costs and Expenses:
Salaries, wages and benefits
589,279
80,610
42,455
712,344
Other operating
254,559
23,529
10,095
288,183
Facility rent
33,787
2,172
5,566
41,525
Depreciation and amortization
38,172
786
3,076
42,034
Interest
324
–
–
324
Total costs and expenses
916,121
107,097
61,192
1,084,410
Income (loss) before non-operating income
41,097
24,440
(8,043
)
57,134
Non-operating income
–
–
16,660
16,660
Unrealized gains on marketable equity securities
–
–
14,944
14,944
Income before income taxes
$
41,097
$
24,440
$
23,201
$
88,738
Year Ended December 31, 2022
Inpatient
Services
Homecare
and Hospice
All Other
Total
Revenues:
Net patient revenues
$
900,231
$
128,854
$
–
$
1,029,085
Other revenues
136
–
45,060
45,196
Government stimulus income
11,457
–
–
11,457
Net operating revenues and grant income
911,824
128,854
45,060
1,085,738
Costs and Expenses:
Salaries, wages and benefits
580,707
77,688
27,774
686,169
Other operating
251,355
26,319
11,698
289,372
Facility rent
32,956
2,327
5,694
40,977
Depreciation and amortization
36,522
691
3,276
40,489
Interest
563
–
–
563
Recovery of assets
–
–
(3,728
)
(3,728
)
Total costs and expenses
902,103
107,025
44,714
1,053,842
Income before non-operating income
9,721
21,829
346
31,896
Non-operating income
–
–
11,141
11,141
Unrealized losses on marketable equity securities
–
–
(15,806
)
(15,806
)
Income (loss) before income taxes
$
9,721
$
21,829
$
(4,319
)
$
27,231
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Year Ended December 31, 2021
Inpatient
Services
Homecare
and Hospice
All Other
Total
Revenues:
Net patient revenues
$
868,687
$
96,855
$
–
$
965,542
Other revenues
386
–
45,014
45,400
Government stimulus income
63,360
–
–
63,360
Net operating revenues and grant income
932,433
96,855
45,014
1,074,302
Costs and Expenses:
Salaries, wages and benefits
557,604
59,226
49,233
666,063
Other operating
238,354
16,053
12,347
266,754
Facility rent
32,819
2,064
5,935
40,818
Depreciation and amortization
36,890
443
3,339
40,672
Interest
845
–
–
845
Impairment of assets
4,497
–
3,728
8,225
Total costs and expenses
871,009
77,786
74,582
1,023,377
Income (loss) before non-operating income
61,424
19,069
(29,568
)
50,925
Non-operating income
–
–
17,774
17,774
Gain on acquisition of equity method investment
–
–
95,202
95,202
Unrealized losses on marketable equity securities
–
–
(13,863
)
(13,863
)
Income before income taxes
$
61,424
$
19,069
$
69,545
$
150,038
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. Therefore, the Company believes this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information should exclude the following items: the unrealized gains or losses on our marketable equity securities, operating results for start-up healthcare operations not at full capacity, any gains on the acquisition of equity method investments, gains on the sale of property and equipment, stock-based compensation expense, and impairments or recoveries of long-lived assets and notes receivable.
The operating results for the start-up operations not at full capacity include the following: for the year ended December 31, 2023, included are operations that began from 2021 to 2023, which is two behavioral health hospitals, two homecare agencies, and two hospice agencies. For the year ended December 31, 2022, included are facilities that began operations from 2020 to 2022, which is two behavioral health hospitals, one hospice agency, and one homecare agency. For the year ended December 31, 2021, included are facilities that began operations from 2019 to 2021, which is two behavioral health hospitals and one memory care facility.
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The table below provides reconciliations of GAAP to non-GAAP items ( dollars in thousands, except per share data ):
Year Ended December 31,
2023
2022
2021
Net income attributable to National HealthCare Corporation
$
66,798
$
22,445
$
138,590
Non-GAAP adjustments:
Unrealized (gains) losses on marketable equity securities
(14,944
)
15,806
13,863
Gain on sale of property and equipment
(6,230
)
–
–
Gain on acquisition of equity method investment
–
–
(95,202
)
Stock-based compensation expense
2,782
2,612
2,620
Operating results for newly-opened operations not at full capacity
2,359
5,416
922
Impairment (recovery) of assets
–
(3,728
)
8,225
Income tax expense (benefit) on non-GAAP adjustments
4,169
(5,228
)
(6,373
)
Non-GAAP Net Income
$
54,934
$
37,323
$
62,645
GAAP diluted earnings per share
$
4.34
$
1.45
$
8.99
Non-GAAP adjustments:
Unrealized (gains) losses on marketable equity securities
(0.72
)
0.76
0.67
Gain on sale of property and equipment
(0.30
)
–
–
Gain on acquisition of equity method investment
–
–
(6.16
)
Stock-based compensation expense
0.13
0.13
0.13
Operating results for newly-opened operations not at full capacity
0.10
0.26
0.04
Impairment (recovery) of assets
–
(0.18
)
0.39
Non-GAAP diluted earnings per share
$
3.55
$
2.42
$
4.06
Results of Operations
The following table and discussion set forth items from the consolidated statements of operations as a percentage of net operating revenues and grant income for the years ended December 31, 2023, 2022 and 2021.
Percentage of Net Operating Revenues
Year Ended December 31,
2023
2022
2021
Revenues:
Net patient revenues
95.3
%
94.8
%
89.9
%
Other revenues
4.7
4.2
4.2
Government stimulus income
–
1.0
5.9
Net operating revenues and grant income
100.0
100.0
100.0
Costs and Expenses:
Salaries, wages and benefits
62.4
63.2
62.0
Other operating
25.2
26.6
24.8
Facility rent
3.6
3.8
3.8
Depreciation and amortization
3.7
3.7
3.8
Interest
0.1
0.1
0.1
Impairment (recovery) of assets
–
(0.3
)
0.8
Total costs and expenses
95.0
97.1
95.3
Income from operations
5.0
2.9
4.7
Non–operating income
1.5
1.0
1.7
Gain on acquisition of equity method investment
–
–
8.8
Unrealized gains (losses) on marketable equity securities
1.3
(1.4
)
(1.3
)
Income before income taxes
7.8
2.5
13.9
Income tax provision
(2.1
)
(0.7
)
(1.0
)
Net income
5.7
1.8
12.9
Net loss attributable to noncontrolling interest
0.2
0.3
0.0
Net income attributable to common stockholders of NHC
5.9
%
2.1
%
12.9
%
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The following table sets forth the increase or (decrease) in certain items from the consolidated statements of operations as compared to the prior period (dollars in thousands) .
Period to Period Increase (Decrease)
2023 vs. 2022
2022 vs. 2021
Amount
Percent
Amount
Percent
Revenues:
Net patient revenues
$
58,529
5.7
%
$
63,543
6.6
%
Other revenues
8,734
19.3
(204
)
(0.4
)
Government stimulus income
(11,457
)
(100.0
)
(51,903
)
(81.9
)
Net operating revenues and grant income
55,806
5.1
11,436
1.1
Costs and Expenses:
Salaries, wages and benefits
26,175
3.8
20,106
3.0
Other operating
(1,189
)
(0.4
)
22,618
8.5
Facility rent
548
1.3
159
0.4
Depreciation and amortization
1,545
3.8
(183
)
(0.4
)
Interest
(239
)
(42.5
)
(282
)
(33.4
)
Impairment (recovery) of assets
3,728
100.0
(11,953
)
(145.3
)
Total costs and expenses
30,568
2.9
30,465
3.0
Income from operations
25,238
79.1
(19,029
)
(37.4
)
Non–operating income
5,519
49.5
(6,633
)
(37.3
)
Gain on acquisition of equity method investment
–
–
(95,202
)
(100.0
)
Unrealized gains (losses) on marketable equity securities
30,750
194.5
(1,943
)
(14.0
)
Income before income taxes
61,507
225.9
(122,807
)
(81.9
)
Income tax provision
(16,196
)
(223.3
)
3,697
33.8
Net income
45,311
226.8
(119,110
)
(85.6
)
Net (income) loss attributable to noncontrolling interest
(958
)
(38.8
)
2,965
596.6
Net income attributable to common stockholders of NHC
$
44,353
197.6
%
$
(116,145
)
(83.8
)%
2023 Compared to 2022
Results for the year ended December 31, 2023 compared to 2022 include a 5.1% increase in net operating revenues and grant income. The net operating revenues increase was primarily driven by the continued occupancy increase in our skilled nursing facilities, as well as increases in skilled nursing per diems from some of our governmental payors. Excluding the government stimulus income and the seven skilled nursing facilities in Massachusetts and New Hampshire in which we ceased operations in September 2022, same-facility net operating revenues increased 11.3% as compared to the same period a year ago.
For the year ended December 31, 2023, GAAP net income attributable to NHC was $66,798,000 compared to net income of $22,445,000 for the same period in 2022. Excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income was $54,934,000 for the year ended December 31, 2023 compared to $37,323,000 for the same period a year ago. The increase in non-GAAP earnings for the year ended December 31, 2023 compared to the same period in the prior year was primarily due to the continued occupancy increase in our skilled nursing facilities, skilled nursing per diem increases from some of our government payors, and the continued reduction of nurse agency staffing expense within our operations.
Net operating revenues and grant income
Net patient revenues totaled $1,087,614,000 an increase of $58,529,000, or 5.7%, compared to the prior year. Included in net patient revenues for the years ended December 31, 2023 and 2022, respectively, is $20,214,000 and $19,442,000 of supplemental Medicaid payments that were received to help mitigate the inflationary labor and medical supplies costs caused by the pandemic.
The overall average census in owned and leased skilled nursing facilities for 2023 was 87.9% compared to 83.8% in 2022. The composite skilled nursing facility per diem increased 6.7% in 2023 compared to 2022. Medicare and managed care per diem rates increased 3.3% and 5.9%, respectively, in 2023 compared to 2022. Medicaid and private pay per diem rates increased 9.4% and 5.5%, respectively, in 2023 compared to 2022.
New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase of $25,821,000 in net patient revenues for the year ended December 31, 2023 compared to the same period last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in net patient revenues decreasing $48,820,000 for the year ended December 31, 2023 compared to the same period last year.
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Other revenues in 2023 were $53,930,000, an increase of $8,734,000, or 19.3%, as further detailed in Note 4 to our consolidated financial statements. In 2023, we contributed land to a newly-formed limited liability company resulting in an equity interest in the new entity. The fair value of the land contributed to the entity was $8,000,000 and the related cost basis in the land was $1,770,000, which resulted in a gain of $6,230,000.
For the years ended December 31, 2023 and 2022, respectively, we recorded $0 and $11,457,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund.
Total costs and expenses
Total costs and expenses for 2023 increased $30,568,000, or 2.9%, to $1,084,410,000 from $1,053,842,000 in 2022.
Salaries, wages, and benefits increased $26,175,000, or 3.8%, to $712,344,000 from $686,169,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 62.4% compared to 63.2% for the years ended December 31, 2023 and 2022, respectively. We continue to face workforce and labor shortages within all of our operations. The labor and workforce shortages have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. For the year ended December 31, 2023 our agency nurse staffing expenses decreased $30,682,000, or approximately 44.5%, compared to the same period a year ago.
New operations, which include one skilled nursing facility acquired May 1, 2023, three assisted living facilities that we began operating on July 1, 2023, two behavioral health hospitals, two hospice agencies and two homecare agencies, have attributed to an increase in salaries, wages, and benefits of $13,565,000 for the year ended December 31, 2023 compared to the same period last year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire, which resulted in salaries, wages, and benefits decreasing $31,920,000 for the year ended December 31, 2023 compared to the same period last year.
Other operating expenses decreased $1,189,000, or 0.4%, to $288,183,000 for the year ended December 31, 2023 compared to $289,372,000 for the prior year. Other operating expenses as a percentage of net operating revenues and grant income was 25.2% and 26.7% for the years ended December 31, 2023 and 2022, respectively. The ten new operations listed above attributed to an increase in other operating expenses of $9,082,000 for the year ended December 31, 2023 compared to the same period last year. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $15,025,000 for the year ended December 31, 2023 compared to the prior year. We continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.
Facility rent expense increased $548,000, or 1.3%, to $41,525,000. Depreciation and amortization increased 3.8% to $42,034,000. Interest expense decreased $239,000 to $324,000 in 2023 from $563,000 in 2022. At December 31, 2023, we have no outstanding long-term debt.
Other income
Non–operating income increased by $5,519,000, or 49.5% to $16,660,000 compared to the prior year, as further detailed in Note 5 to our consolidated financial statements.
We recorded unrealized gains in the amount of $14,944,000 for the increase in fair value of our marketable equity securities portfolio for the year ended December 31, 2023. The marketable equity securities portfolio consists mainly of publicly-traded healthcare REIT’s and other blue-chip public companies held within our insurance companies.
Income taxes
The income tax provision for 2023 is $23,450,000 (an effective income tax rate of 26.4%).
2022 Compared to 2021
Results for the year ended December 31, 2022 compared to 2021 include a 1.1% increase in net operating revenues and grant income. The net operating revenues and grant income increase is primarily driven by the June 2021 acquisition of Caris hospice and the continued occupancy increase in our skilled nursing facilities. These increases were offset by the reduction in government stimulus income of $51.9 million for the year ended December 31, 2022 compared to 2021.
For the year ended December 31, 2022, GAAP net income attributable to NHC was $22,445,000 compared to net income of $138,590,000 for the same period in 2021. The large decrease in our reported GAAP net income for 2022 was primarily due to the $95.2 million gain recorded in 2021 from the acquisition of Caris. Excluding the gain on the Caris acquisition, as well as the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year ended December 31, 2022 was $37,323,000 compared to $62,645,000 for the year ended December 31, 2021. The decrease in adjusted net income for the year ended December 31, 2022 compared to 2021 is primarily due to the $51.9 million less government stimulus income recorded during the 2022 period. We also continue to incur inflationary wage pressures within all areas of our operations.
Net operating revenues and grant income
Net patient revenues totaled $1,029,085,000, an increase of $63,543,000, or 6.6%, compared to the prior year. Included in net patient revenues for the year ended December 31, 2022 and 2021, respectively, is $19,442,000 and $20,482,000 of supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the pandemic.
The overall average census in owned and leased skilled nursing facilities for 2022 was 83.8% compared to 80.6% in 2021. The composite skilled nursing facility per diem increased 2.3% in 2022 compared to 2021. Medicare and managed care per diem rates increased 2.3% and 6.0%, respectively, in 2022 compared to 2021. Medicaid and private pay per diem rates increased 3.0% and 4.7%, respectively, in 2022 compared to 2021.
In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $31,566,000 for the year ended December 31, 2022 compared to the prior year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in net patient revenues decreasing $18,732,000 for the year ended December 31, 2022 compared to the prior year.
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Other revenues in 2022 were $45,196,000, a decrease of $204,000, or 0.4%, as further detailed in Note 4 to our consolidated financial statements.
For the years ended December 31, 2022 and 2021, respectively, we recorded $11,457,000 and $63,360,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund.
Total costs and expenses
Total costs and expenses for 2022 increased $30,465,000, or 3.0%, to $1,053,842,000 from $1,023,377,000 in 2021.
Salaries, wages, and benefits increased $20,106,000, or 3.0%, to $686,169,000 from $666,063,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 63.2% compared to 62.0% for the years ended December 31, 2022 and 2021, respectively. Our Caris acquisition in June 2021 increased salaries, wages, and benefits $19,040,000 for the year ended December 31, 2022 compared to 2021. We continue to face workforce and labor shortages within all of our operations, which increases wage pressure in regards to retaining and attracting qualified healthcare partners (employees). The labor and workforce challenges have resulted in us contracting with agency nurse staffing companies. The agency nurse staffing companies charge inflated hourly rates; therefore, we are working diligently to find solutions to reduce and eliminate the agency nurse staffing within our healthcare operations. For the year ended December 31, 2022, our agency nurse staffing expenses were $68,875,000 compared to $36,391,000 for the 2021 year. In September 2022, the Company transferred the operations of seven skilled nursing facilities located in Massachusetts and New Hampshire resulting in salaries, wages, and benefits decreasing $18,053,000 for the year ended December 31, 2022 compared to the prior year.
Other operating expenses increased $22,618,000, or 8.5%, to $289,372,000 for the year ended December 31, 2022 compared to $266,754,000 for the prior year. Other operating expenses as a percentage of net operating revenues and grant income was 26.7% and 24.8% for the years ended December 31, 2022 and 2021, respectively. Our Caris acquisition increased other operating expenses $10,190,000 for the year ended December 31, 2022 compared to the prior year. The transfer of the operations of the seven skilled nursing facilities located in Massachusetts and New Hampshire, as noted above, resulted in other operating expenses decreasing $6,859,000 for the year ended December 31, 2022 compared to the prior year. We incurred increased expenses from our professional liability actuarial report in the fourth quarter of 2022 compared to the prior year of $3,284,000. We also continue to face inflationary pressures in certain categories within other operating expenses as well, such as food/dietary supplies and drugs/pharmaceutical supplies.
Facility rent expense increased $159,000, or 0.4%, to $40,977,000. Depreciation and amortization decreased 0.4% to $40,489,000. Interest expense decreased $282,000 to $563,000 in 2022 from $845,000 in 2021. At December 31, 2022, we have no outstanding long-term debt.
During 2022, we had a note receivable recovery of $3,728,000.
Other income
Non–operating income decreased by $6,633,000, or 37.3% to $11,141,000 compared to the prior year, as further detailed in Note 5 to our consolidated financial statements. The decrease in our non-operating income is due to the June 2021 acquisition of Caris. Prior to the June 2021 acquisition date, Caris was our most significant equity method investment with a 75.1% non-controlling ownership interest. From the respective acquisition date, Caris’ financial information is now included in the Company’s consolidated financial statements and is no longer accounted for as an equity method investment.
In June 2021, a gain of $95,202,000 was recorded on the acquisition of the remaining ownership interest of Caris. We previously held a noncontrolling interest in the partnership. Upon acquiring the remaining ownership interest in Caris, we valued the business and our previously held equity position (75.1%) based upon Caris' fair value at the acquisition date.
We recorded unrealized losses in the amount of $15,806,000 for the decrease in fair value of our marketable equity securities portfolio for the year ended December 31, 2022. The marketable equity securities portfolio consists mainly of publicly-traded healthcare REIT’s and other blue-chip public companies held within our insurance companies.
Income taxes
The income tax provision for 2022 is $7,254,000 (an effective income tax rate of 26.6%).
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Liquidity, Capital Resources and Financial Condition
Sources and Uses of Funds
Our primary sources of cash include revenues from the operations of our healthcare operations, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare operations, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.
The following is a summary of our sources and uses of cash flows (dollars in thousands) :
Year Ended
One Year Change
Year Ended
One Year Change
12/31/23
12/31/22
$
%
12/31/22
12/31/21
$
%
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period
$
74,865
$
119,743
$
(44,878
)
(37.5
)
$
119,743
$
158,502
$
(38,759
)
(24.5
)
Cash provided by operating activities
111,216
8,742
102,474
1,172.2
8,742
62,394
(53,652
)
(86.0
)
Cash used in investing activities
(17,568
)
(5,978
)
(11,590
)
(193.9
)
(5,978
)
(65,889
)
59,911
90.9
Cash used in financing activities
(42,545
)
(47,642
)
5,097
10.7
(47,642
)
(35,264
)
(12,378
)
(35.1
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
125,968
$
74,865
$
51,103
68.3
$
74,865
$
119,743
$
(44,878
)
(37.5
)
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Operating Activities
Net cash provided by operating activities for the year ended December 31, 2023 was $111,216,000 as compared to $8,742,000 and $62,394,000 for the years ended December 31, 2022 and 2021, respectively. Cash provided by operating activities consisted of net income of $65,288,000 and adjustments for non–cash items of $33,625,000. There was cash provided by working capital in the amount of $17,396,000 for the year ended December 31, 2023 compared to cash used for working capital needs in the amount of $73,697,000 in 2022.
Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, recovery of assets, deferred taxes, and stock compensation.
Investing Activities
Net cash used in investing activities totaled $17,568,000 for the year ended December 31, 2023, as compared to $5,978,000 and $65,889,000 for the years ended December 31, 2022 and 2021, respectively. Cash used for property and equipment additions was $27,901,000, $30,200,000, and $39,399,000 for the years ended December 31, 2023, 2022 and 2021, respectively. On May 1, 2023, we acquired the assets of a 66-bed skilled nursing facility in Nashville, Tennessee for approximately $2,700,000. In 2023, the Company had investments in unconsolidated companies of $4,661,000, of which the primary investment is a multi-family development in Franklin, Tennessee. Proceeds from the sale of marketable securities, net of purchases, resulted in cash proceeds of $17,895,000 and $16,168,000 in 2023 and 2022, respectively. For the year ended December 31, 2022, the Company collected notes receivable of $3,879,000 and received proceeds from the sale of property and equipment of $4,175,000.
Financing Activities
Net cash used in financing activities totaled $42,545,000, $47,642,000, and $35,264,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Principal payments made under finance lease obligations was $4,985,000, $4,695,000, and $4,423,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Dividends paid to common stockholders was $35,560,000, $34,604,000, and $32,030,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Proceeds from the issuance of common stock totaled $313,000, $2,114,000, and $3,441,000 for 2023, 2022 and 2021, respectively. We repurchased common shares outstanding in the amount of $2,482,000, $9,903,000, and $836,000 for the years ended December 31, 2023, 2022, and 2021, respectively.
Short – term liquidity
We expect to meet our short–term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, we have current cash on hand of $107,076,000 and unrestricted marketable equity and debt securities of $116,544,000. We also have unencumbered real estate, as well the borrowing capacity on our $50 million credit facility, that can be used to meet our contractual obligations and growth and development plans in the next twelve months.
Long – term liquidity
We expect to meet our long–term liquidity requirements primarily from our cash flows from operating activities, our current cash on hand of $107,076,000, our unrestricted marketable equity and debt securities of $116,544,000, and our borrowing capacity on the $50 million credit facility. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At December 31, 2023, we do not have any long-term debt.
Our ability to obtain long-term debt to meet our long–term contractual obligations and to finance our operating requirements, growth and development plans will depend upon our future performance, which will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for health care, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets, as well as many unforeseen factors.
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Contingencies
See Note 17 to the consolidated financial statements for additional information on pending litigation and other contingencies.
Guarantees
At December 31, 2023, we have no agreements to guarantee the debt obligations of other parties.
We have no outstanding letters of credit. We may or may not in the future elect to use financial derivative instruments to hedge interest rate exposure in the future. At December 31, 2023, we did not participate in any such financial instruments.
New Accounting Pronouncements
The Company did not adopt any new accounting standards during 2023.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period.
Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:
Net Patient Revenues and Accounts Receivable
Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, home health care services, hospice services and behavioral health services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.
The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered. Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.
The Company determines the transaction price based on established billing rates reduced by explicit price concessions provided to third party payors. Explicit price concessions are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses consolidated statements of operations
Revenue Recognition – Third Party Payors
Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved.
In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our original estimates of reimbursements and subsequent revisions are reflected in operations in the period in which the revisions are made often due to final determination or the period of payment no longer being subject to audit or review.
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Accrued Risk Reserves
We are self–insured for risks related to workers’ compensation and general and professional liability insurance. We have two wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.
Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.
We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.