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NATIONAL HEALTHCARE CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Edgar Glimpses
Overview
National HealthCare Corporation , which we also refer to asNHC or the Company, is a leading provider of post-acute care and senior health care services. AtDecember 31, 2021 , we operate or manage 75 skilled nursing facilities with 9,473 1icensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, 34 homecare agencies, and 28 hospice agencies located in 10 states. These operations are provided by separately funded and maintained subsidiaries. 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 13 healthcare properties and lease these properties to third party operators. Impact of COVID-19 In earlyMarch 2020 , COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by theWorld Health Organization . As a provider of healthcare services, we are significantly exposed to the public health and economic effects of the COVID-19 pandemic.NHC's primary objective has remained the same throughout the COVID-19 pandemic: that is to protect the health and safety of our patients, residents, and partners (employees). We continue to follow all guidance from theCenters for Medicare and Medicaid Services ("CMS"), theCenters for Disease Control and Prevention ("CDC"), and state and local health departments to prevent the spread of the disease within our operations. We began our first vaccination clinics in our skilled nursing facilities around the middle ofDecember 2020 . As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations. With the COVID-19 cases significantly declining during the first and second quarters of 2021, the census in our skilled nursing facilities began to increase. Although our census continued to increase in the third and fourth quarters of 2021, the trajectory of our census was slowed due to the spike in the Delta and Omicron variants during the second half of 2021. The pandemic continues to have a material impact on the Company's loss of revenues, operating expenses, and the labor and workforce environment. Our operating expenses remain elevated with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment ("PPE"), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite the continued disruption of COVID-19 to our operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity provides us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress. At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but the developments related to COVID-19 have adversely affected our financial performance in 2021. The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of acute and post-acute healthcare patients cared for across the broader health care systems, the timing and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on our industry and broader economy, including future government stimulus efforts. We have received and may continue to receive payments and advances from the various federal and state initiatives. These legislative initiatives have been beneficial to partially mitigate the impact of the COVID-19 pandemic on our results of operations and financial position to date. The federal and state governments may consider additional stimulus and relief efforts, but we are unable to predict whether any of the additional stimulus measures will be enacted or their impact.
Legislation and Government Stimulus Due to COVID-19
TheU.S. government enacted several laws beginning inMarch 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 is the CARES Act. Through the CARES Act, as well as the PPPCHE, the federal government allocated$178 billion to thePublic Health and Social Services Emergency Fund , which is referred to as theProvider 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 any 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 will be used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded$63,360,000 and$47,505,000 of government stimulus income from the Provider Relief Funds for the years endedDecember 31, 2021 and 2020, 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. 29
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As ofDecember 31, 2021 and 2020, amounts not recognized as income are$9,443,000 and$16,068,000 , respectively, and are reflected in the current liability section of our consolidated balance sheet (provider relief funds). We anticipate incurring additional COVID-19 related expenses or lost revenues in the future; therefore, at this time, we believe we will fully utilize the remaining$9,443,000 of provider relief funds before the reporting requirement deadline that is required by theU.S. HHS. Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. We received approximately$51,253,000 as part of this program. These funds are applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. Recoupment of the accelerated payments began in the second quarter of 2021. As ofDecember 31, 2021 ,$15,022,000 of the accelerated payments remain and is reflected within contract liabilities in the consolidated balance sheet. The CARES Act and subsequent related legislation temporarily suspended Medicare sequestration beginningMay 1, 2020 throughMarch 31, 2022 . The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. BeginningApril 1, 2022 , the sequestration reductions will then be 1% fromApril 1, 2022 throughJune 30, 2022 . The full 2% reduction is scheduled to go back into effectJuly 1, 2022 . The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension, which the sequestration reduction for 2030 has been increased up to 3%. The CARES Act also temporarily permitted employers to defer the deposit and payment of the employer's portion of the social security taxes (6.2% of employee wages) that otherwise would have been due betweenMarch 27, 2020 andDecember 31, 2020 . The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid byDecember 31, 2021 , and the other half byDecember 31, 2022 . AtDecember 31, 2021 , we have deferred$10,545,000 of the Company's share of the social security taxes. We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. For the years endedDecember 31, 2021 and 2020, we have recorded$20,482,000 and$26,179,000 , respectively, in net patient revenues in our consolidated statements of operations for these supplemental Medicaid payments. Executive Summary Earnings To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. Inflationary increases in our costs may cause net earnings from patient services to decline. Occupancy A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities. The overall census in owned and leased skilled nursing facilities for 2021 was 80.6% compared to 83.6% in 2020 and 90.3% in 2019. With the average length of stay decreasing for a skilled nursing patient, as well as the increased availability of assisted living facilities and home and community-based services, the challenge of maintaining desirable patient census levels has been amplified. Management has undertaken a number of steps in order to best position our current and future health care facilities. This includes working internally to examine and improve systems to be most responsive to referral sources and payors. 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 ofPatient 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 of 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. 30
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The tables below summarize
versus the skilled nursing industry as of
NHC Ratings
Industry Ratings
Total number of skilled nursing facilities, end of
period
75 Number of 4 and 5-star rated skilled nursing facilities 55 Percentage of 4 and 5-star rated skilled nursing facilities 73%
45%
Average rating for all skilled nursing facilities, end
of period 4.0 3.2
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
Memory Care New Facility 60 beds Farragut, TN January 2019
Memory Care Acquisition 60 beds St. Peters, MO June 2019
Skilled Nursing Acquisition 166 beds Knoxville, TN February 2020
Assisted Living Bed Addition 20 beds Gallatin, TN September 2020
Skilled Nursing Bed Addition 30 beds Kingsport, TN December 2020
Hospice Acquisition 28 agencies Various June 2021
Behavioral
Health Hospital New Facility 16 beds St Louis, MO Under Construction
Behavior Health
Hospital New Facility 64 beds Knoxville, TN Under Construction
For the two behavioral health hospitals under construction, the two facilities
are expected to begin operations late in the first quarter of 2022 or the
beginning of the second quarter of 2022.
Accrued Risk Reserves Our accrued professional liability and workers' compensation reserves totaled$98,048,000 and$99,537,000 atDecember 31, 2021 and 2020, 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 one behavioral health hospital, 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. For additional information on these reportable segments see Note 1 - "Summary of Significant Accounting Policies". 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. 31
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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, 2021
Inpatient Homecare
Services 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 525,756 54,683 49,233 629,672
Other operating 270,202 20,596 12,347 303,145
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
Year Ended December 31, 2020
Inpatient Homecare
Services and Hospice All Other Total
Revenues:
Net patient revenues $ 879,693 $ 52,102 $ - $ 931,795
Other revenues 3,403 - 45,514 48,917
Government stimulus income 47,505 - - 47,505
Net operating revenues and grant income 930,601 52,102 45,514 1,028,217
Costs and Expenses:
Salaries, wages and benefits 538,775 33,104 37,427 609,306
Other operating 261,643 14,689 10,513 286,845
Facility rent 33,090 1,802 5,602 40,494
Depreciation and amortization 38,217 377 3,424 42,018
Interest 1,374 - 25 1,399
Total costs and expenses 873,099 49,972 56,991 980,062
Income (loss) before non-operating
income 57,502 2,130 (11,477 ) 48,155
Non-operating income - - 26,527 26,527
Gain on acquisition of equity method
investment - - 1,707 1,707
Unrealized losses on marketable equity
securities - -
(23,966 ) (23,966 )
Income (loss) before income taxes
32
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Year Ended December 31, 2019
Inpatient Homecare
Services and Hospice All Other Total
Revenues:
Net patient revenues $ 893,201 $ 54,671 $ - $ 947,872
Other revenues 910 - 47,601 48,511
Net operating revenues 894,111 54,671 47,601 996,383
Costs and Expenses:
Salaries, wages and benefits 526,430 33,037 33,364 592,831
Other operating 242,435 17,003 9,004 268,442
Facility rent 32,748 1,854 5,916 40,518
Depreciation and amortization 38,731 250 3,438 42,419
Interest 1,578 - 1,557 3,135
Total costs and expenses 841,922 52,144 53,279 947,345
Income (loss) before non-operating
income 52,189 2,527 (5,678 ) 49,038
Non-operating income - - 24,772 24,772
Gain on acquisition of equity method
investment - - 1,975 1,975
Unrealized gains on marketable equity
securities - - 12,230 12,230
Income before income taxes $ 52,189 $ 2,527 $ 33,299 $ 88,015
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 the newly constructed healthcare facilities not at full capacity, any gains on the acquisition of equity method investments, gains on the sale of healthcare facilities, stock-based compensation expense, and impairments of long-lived assets and notes receivable. The operating results for the newly constructed healthcare facilities not at full capacity for the year endedDecember 31, 2021 include facilities that began operations from 2019 to 2021 (one memory care facility and two behavioral health hospitals that have incurred expenses and expected to open during 2022). The operating results for the newly constructed healthcare facilities not at full capacity for the year endedDecember 31, 2020 include facilities that began operations from 2018 to 2020 (one memory care facility). The operating results for the newly constructed healthcare facilities not at full capacity for the year endedDecember 31, 2019 include facilities that began operations from 2017 to 2019 (one skilled nursing facility, two assisted living facilities, and one memory care facility). 33
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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,
2021 2020 2019
Net income attributable to National
HealthCare Corporation $ 138,590 $ 41,871 $ 68,211
Non-GAAP adjustments:
Unrealized losses (gains) on marketable
equity securities 13,863 23,966 (12,230 )
Gain on sale of real estate/healthcare
facilities - (2,784 ) -
Gain on acquisitions of equity method
investments (95,202 ) (1,707 ) (1,975 )
Stock-based compensation expense 2,620 2,453
1,878
Operating results for newly opened facilities not at full capacity 922 602 712 Impairment of assets 8,225 - - Income tax (benefit) provision on non-GAAP adjustments (6,373 ) (5,858 ) 3,020 Non-GAAP Net Income$ 62,645 $ 58,543 $ 59,616 GAAP diluted earnings per share$ 8.99 $ 2.72 $ 4.44 Non-GAAP adjustments: Unrealized losses (gains) on marketable equity securities 0.67 1.15 (0.59 ) Gain on sale of real estate/healthcare facilities - (0.13 ) - Gain on acquisitions of equity method investments (6.16 ) (0.08 ) (0.09 ) Stock-based compensation expense 0.13 0.12
0.09
Operating results for newly opened facilities not at full capacity 0.04 0.03
0.03
Impairment of assets 0.39 - - Non-GAAP diluted earnings per share$ 4.06 $ 3.81 $ 3.88 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
Percentage of Net Operating Revenues
Year Ended December 31,
2021 2020 2019
Revenues:
Net patient revenues 89.9 % 90.6 % 95.1 %
Other revenues 4.2 4.8 4.9
Government stimulus income 5.9 4.6 0.0
Net operating revenues and grant income 100.0 100.0
100.0
Costs and Expenses:
Salaries, wages and benefits 58.6 59.3 59.5
Other operating 28.2 27.9 26.9
Facility rent 3.8 3.9 4.1
Depreciation and amortization 3.8 4.1 4.3
Interest 0.1 0.1 0.3
Impairment of assets 0.8 - -
Total costs and expenses 95.3 95.3 95.1
Income from operations 4.7 4.7 4.9
Non-operating income 1.7 2.6 2.5
Gain on acquisitions of equity method
investments 8.8 0.1 0.2
Unrealized gains (losses) on marketable
equity securities (1.3 ) (2.3 ) 1.2
Income before income taxes 13.9 5.1 8.8
Income tax provision (1.0 ) (1.0 ) (2.0 )
Net income 12.9 4.1 6.8
Net (income) loss attributable to
noncontrolling interest 0.0 0.0 0.0
Net income attributable to common
stockholders of NHC 12.9 % 4.1 % 6.8 %
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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)
2021 vs. 2020 2020 vs. 2019
Amount Percent Amount Percent
Revenues:
Net patient revenues $ 33,747 3.6 % $ (16,077 ) (1.7 )%
Other revenues (3,517 ) (7.2 ) 406 0.8
Government stimulus income 15,855 33.4 47,505 100.0
Net operating revenues and grant income 46,085 4.5 31,834 3.2
Costs and Expenses:
Salaries, wages and benefits 20,366 3.3 16,475 2.8
Other operating 16,300 5.7 18,403 6.9
Facility rent 324 0.8 (24 ) (0.1 )
Depreciation and amortization (1,346 ) (3.2 ) (401 ) (0.9 )
Interest (554 ) (39.6 ) (1,736 ) (55.4 )
Impairment of assets 8,225 100.0 - -
Total costs and expenses 43,315 4.4 32,717 3.5
Income from operations 2,770 0.1 (883 ) (1.8 )
Non-operating income (8,753 ) (33.0 ) 1,755 7.1
Gain on acquisitions of equity method
investments 93,495 5,477.2 (268 ) (13.6 )
Unrealized gains/losses on marketable
equity securities 10,103 42.2 (36,196 ) (296.0 )
Income before income taxes 97,615 186.2 (35,592 ) (40.4 )
Income tax provision (518 ) (5.0 ) 9,606 (47.9 )
Net income 97,097 231.2 (25,986 ) (38.2 )
Net income attributable to
noncontrolling interest (378 ) (317.6 ) (354 ) (150.6 )
Net income attributable to common
stockholders of NHC $ 96,719 231.0 % $ (26,340 ) (38.6 )%
2021 Compared to 2020
Results for the year ended December 31, 2021 compared to 2020 include a 4.5%
increase in net operating revenues and grant income, a 0.1% increase in income
from operations, and a 231.0% increase in net income attributable to NHC . In
2021, if you exclude the $8,225,000 impairment of assets, income from operations
would have increased 22.8% compared to 2020. The large increase in our reported
GAAP net income attributable to NHC compared to 2020 is primarily due to the
gain recorded from the acquisition of Caris, a hospice provider.
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, 2021 was $62,645,000
compared to $58,543,000 for the year ended December 31, 2020 , which is an
increase of 7.0%.
Net operating revenues and grant income
Net patient revenues totaled$965,542,000 , an increase of$33,747,000 , or 3.6%, compared to the prior year. Included in net patient revenues for the year endDecember 31, 2021 and 2020, respectively, is$20,482,000 and$26,179,000 of COVID-19 supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the public health emergency. The overall average census in owned and leased skilled nursing facilities for 2021 was 80.6% compared to 83.6% in 2020. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners, and the difficult workforce and labor environment that has limited our admissions during phases of 2021. The composite skilled nursing facility per diem increased 2.4% in 2021 compared to 2020. Medicare and managed care per diem rates increased 2.0% and 1.3%, respectively, in 2021 compared to 2020. Medicaid and private pay per diem rates increased 2.2% and 2.4%, respectively, in 2021 compared to 2020. InJune 2021 , the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing$39,746,000 for the year endedDecember 31, 2021 compared to 2020. Our homecare operations had an increase in net patient revenues of approximately$5,007,000 for the year endedDecember 31, 2021 compared to 2020. InNovember 2020 , the Company sold a skilled nursing facility located in Town & Country,Missouri . For the year endedDecember 31, 2021 , the sale of this facility decreased net patient revenue by$7,323,000 compared to 2020. 35
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Other revenues in 2021 were$45,400,000 , a decrease of$3,517,000 , or 7.2%, as further detailed in Note 5 of the consolidated financial statements. Other revenues in 2021 include rental revenues of$22,717,000 ($22,768,000 in 2020), management and accounting service fees of$17,139,000 ($17,147,000 in 2020), and insurance services revenue of$5,019,000 ($5,447,000 in 2020). InNovember 2020 , we sold a skilled nursing facility in Town & Country,Missouri , and recorded a gain on the sale of the transaction of$2,748,000 . For the years endedDecember 31, 2021 and 2020, respectively, we recorded$63,360,000 and$47,505,000 in government stimulus income related to funds received from theProvider Relief Fund . AtDecember 31, 2021 , we have not recognized as income$9,443,000 of Provider Relief Funds that are reflected in the current liability section of our consolidated balance sheet (provider relief funds) and anticipate using these funds in 2022. See Note 2 for additional information. Total costs and expenses Total costs and expenses for 2021 increased$43,315,000 , or 4.4%, to$1,023,377,000 from$980,062,000 in 2020. In total, we incurred$21,555,000 and$47,674,000 of COVID-19 related expenses for the years endedDecember 31, 2021 and 2020, respectively. The COVID-19 related expenses primarily consisted of: (1) personal protective equipment and sanitizers/infection control supplies; (2) incentive compensation paid to our frontline partners/employees; and (3) COVID-19 testing of our patients and partners/employees. In 2021, we also incurred asset impairment expenses of$8,225,000 for the impairment and write-down of long-lived assets (leasehold improvements) and a credit impairment on a note receivable. Both of these impairment of assets items are due to the operating environment caused by COVID-19. Salaries, wages and benefits, the largest operating costs of the company, increased$20,366,000 , or 3.3%, to$629,672,000 from$609,306,000 . Our salaries and wages were 58.6% and 59.3% of net operating revenues and grant income for 2021 and 2020, respectively. Our Caris acquisition inJune 2021 increased salaries, wages, and benefits$20,754,000 for the year endedDecember 31, 2021 compared to 2020. We incurred COVID-related incentive pay (or combat pay) in the amount of$11,010,000 for the year endedDecember 31, 2021 compared to$15,224,000 for 2020. We continue to face tremendous workforce and labor shortages within all of our operations, which increases wage pressure and inflation in regards to retaining and attracting qualified healthcare partners (employees). With the workforce environment being so challenging, the largest expense increase from a labor standpoint is in our agency nurse staffing. But, since the agency nurse staffing personnel are not our employees (partners), this expense is categorized below in "other operating expenses". Other operating expenses increased$16,300,000 , or 5.7%, to$303,145,000 for 2021 compared to$286,845,000 in 2020. These costs were 28.2% and 27.9% of net operating revenues and grant income for 2021 and 2020, respectively. For the years endedDecember 31, 2021 and 2020, respectively, we incurred$10,545,000 and$32,450,000 in COVID-19 related expenses in purchasing personal protective equipment, sanitizers and infection control supplies, and lab and testing supplies. As mentioned in the previous paragraph, we continue to use additional agency nurse staffing due to the challenging workforce environment. For the year endedDecember 31, 2021 , our agency nurse staffing expenses were$35,533,000 compared to$11,479,000 for the 2020 year. Our Caris acquisition increased other operating expenses$8,368,000 for the year endedDecember 31, 2021 compared to 2020.
Facility rent expense decreased
and amortization decreased 3.2% to
Interest expense decreased
At
Other income Non-operating income in 2021 decreased$8,753,000 , or 33.0% to$17,744,000 , as further detailed in Note 6 of the consolidated financial statements. The decrease is due to ourJune 2021 acquisition of Caris. From the respective acquisition date, we no longer record any equity in earnings from our Caris investment. Caris' financial information (revenues and expenses) is now included in the Company's consolidated financial statements. InJune 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. InFebruary 2020 , a gain of$1,707,000 was recorded on the acquisition of the remaining ownership interest of a 166-bed skilled nursing facility inKnoxville, Tennessee . We previously held a noncontrolling interest (25%) in the facility. Upon acquiring the remaining ownership interest, we valued our previously held equity position based upon the facility's fair value. We recorded unrealized losses in the amount of$13,863,000 for the decrease in fair value of our marketable equity securities portfolio for the year endedDecember 31, 2021 . The marketable equity securities portfolio consists of publicly traded healthcare REIT's, with NHI comprising approximately 67% of the market value of the portfolio atDecember 31, 2021 . Income taxes The income tax provision for 2021 is$10,951,000 (an effective income tax rate of 7.3%). The income tax provision and effective tax rate for 2021 were favorably impacted by the nontaxable revaluation gain related to the Caris acquisition resulting in a benefit to the provision of$19,758,000 or 12.5% of income before income taxes. The income tax provision and effective tax rate for 2021 were also favorably impacted by the statute of limitation expirations resulting in a benefit to the provision of$1,901,000 or 1.3% of income before taxes in 2021. The income tax provision for 2020 is$10,433,000 (an effective income tax rate of 19.9%). The income tax provision and effective tax rate for 2020 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of$2,366,000 or 4.5% of income before taxes in 2020. 36
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Table of Contents 2020 Compared to 2019 Results for the year endedDecember 31, 2020 compared to 2019 include a 3.2% increase in net operating revenues and grant income and a 38.6% decrease in net income attributable toNHC . In 2020, the decrease in net income attributable toNHC is primarily driven by the unrealized losses in our marketable equity securities portfolio. Excluding the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year endedDecember 31, 2020 was$58,543,000 compared to$59,616,000 for the 2019 year.
Net operating revenues and grant income
Net patient revenues totaled$931,795,000 , a decrease of$16,077,000 , or 1.7%, compared to the prior year. Included in net patient revenues for the year endDecember 31, 2020 , is$26,179,000 of COVID-19 supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the public health emergency. The overall average census in owned and leased skilled nursing facilities for 2020 was 83.6% compared to 90.3% in 2019. The decline in census is due to COVID-19 and the lack of new admissions from our acute care providers and referral partners. The composite skilled nursing facility per diem increased 7.0% in 2020 compared to 2019. Medicare per diem rates increased 10.1% in 2020 compared to 2019 and Managed Care per diem rates increased 3.2% in 2020 compared to 2019. Medicaid and private pay per diem rates increased 11.4% and 2.7%, respectively, in 2020 compared to 2019. Our Medicare per diem rates have benefited from the new case-mix reimbursement model of PDPM, which was implemented onOctober 1, 2019 . The CARES Act also temporarily suspended Medicare sequestration beginningMay 1, 2020 throughDecember 31, 2020 . The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. SinceMarch 2020 , our Medicaid per diem rates benefited from many of the states paying a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID-19 public health emergency. InFebruary 2020 , the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility inKnoxville, Tennessee . For the year endedDecember 31, 2020 , this skilled nursing facility increased net patient revenues approximately$11,299,000 compared to 2019. Our homecare operations had a decline in net patient revenues of approximately$2,569,000 for the year endedDecember 31, 2020 as compared to 2019. Our homecare net patient revenue decline was primarily due to volume declines in the first and second quarter due to COVID-19. Other revenues in 2020 were$48,917,000 , an increase of$406,000 , or 0.8%, as further detailed in Note 5 of the consolidated financial statements. Other revenues in 2020 include rental revenues of$22,768,000 ($22,641,000 in 2019), management and accounting service fees of$17,147,000 ($18,533,000 in 2019), and insurance services revenue of$5,447,000 ($6,209,000 in 2019). InNovember 2020 , we sold a skilled nursing facility in Town & Country,Missouri , and recorded a gain on the sale of the transaction of$2,748,000 .
For the year ended
stimulus income related to funds received from the
Relief Funds that are reflected in the current liability section of our
consolidated balance sheet (provider relief funds).
Total costs and expenses Total costs and expenses for 2020 increased$32,717,000 , or 3.5%, to$980,062,000 from$947,345,000 in 2019. In total, we incurred$47,674,000 of COVID-19 related expenses for the year endedDecember 31, 2020 . The COVID-19 related expenses primarily consisted of: (1) personal protective equipment and sanitizers/infection control supplies; (2) incentive compensation paid to our frontline partners/employees; and (3) COVID-19 testing of our patients and partners/employees. Salaries, wages and benefits, the largest operating costs of the company, increased$16,475,000 , or 2.8%, to$609,306,000 from$592,831,000 . Our salaries and wages were 59.3% and 59.5% of net operating revenues and grant income for 2020 and 2019, respectively. The primary reason for salaries and wages increasing is due to the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. For the year endedDecember 31, 2020 , we incurred approximately$15,224,000 in incentive compensation paid to our employees/partners related to COVID-19. For the year endedDecember 31, 2020 , we also incurred approximately$6,094,000 in salaries and wages from the skilled nursing facility that we acquired inFebruary 2020 , compared to the same period of 2019. Other operating expenses increased$18,403,000 , or 6.9%, to$286,845,000 for 2020 compared to$268,442,000 in 2019. These costs were 27.9% and 26.9% of net operating revenues and grant income for 2020 and 2019, respectively. For the year endedDecember 31, 2020 , we incurred$32,450,000 in COVID-19 related expenses in purchasing personal protective equipment, sanitizers and infection control supplies, and lab and testing supplies. Excluding the COVID-19 related expenses, other operating expenses have decreased$14,047,000 , or 5.2%, for the year endedDecember 31, 2020 compared to 2019. 37
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Facility rent expense decreased
and amortization decreased 0.9% to
Interest expense decreased$1,736,000 to$1,399,000 in 2020 from$3,135,000 in 2019. The decrease in interest expense is due from our long-term debt being paid off in the second quarter of 2020. AtDecember 31, 2020 , we have no outstanding long-term debt. Other income
Non-operating income in 2020 increased
further detailed in Note 6 of the consolidated financial statements. The
majority of the increase was the result of increased earnings from our
investment in
InFebruary 2020 , a gain of$1,707,000 was recorded on the acquisition of the remaining ownership interest of a 166-skilled nursing facility inKnoxville, Tennessee . We previously held a noncontrolling interest (25%) in the facility. Upon acquiring the remaining ownership interest, we valued our previously held equity position based upon the facility's fair value. We recorded unrealized losses in the amount of$23,966,000 for the decrease in fair value of our marketable equity securities portfolio for the year endedDecember 31, 2020 . The marketable equity securities portfolio consists of publicly traded healthcare REIT's, with NHI comprising approximately 85% of the market value of the portfolio atDecember 31, 2020 . Income taxes The income tax provision for 2020 is$10,433,000 (an effective income tax rate of 19.9%). The income tax provision and effective tax rate for 2020 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of$2,366,000 or 4.5% of income before taxes in 2020. The income tax provision for 2019 is$20,039,000 (an effective income tax rate of 22.8%). The income tax provision and effective tax rate for 2019 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of$2,064,000 or 2.3% of income before taxes in 2019.
Liquidity, Capital Resources and Financial Condition
Sources and Uses of Funds
Our primary sources of cash include revenues from the healthcare and senior
living facilities we operate, homecare and hospice services, rental income,
management and accounting services and insurance services. Our primary uses of
cash include salaries, wages and benefits, operating costs of the healthcare
facilities, the cost of additions and improvements to our real property, rent
expenses, and dividend distributions. These sources and uses of cash are
reflected in our 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
12/31/21 12/31/20 $ % 12/31/20 12/31/19 $ %
Cash, cash
equivalents,
restricted cash,
and restricted
cash equivalents
at beginning of
period $ 158,502 $ 61,010 $ 97,492 159.8
Cash provided by operating activities 62,394 203,259 (140,865 ) (69.3 ) 203,259 100,103 103,156 103.1 Cash used in investing activities (65,889 ) (63,878 ) (2,011 ) (3.1 ) (63,878 ) (14,265 ) (49,613 ) (347.8 ) Cash used in financing activities (35,264 ) (41,889 ) 6,625 15.8 (41,889 ) (79,748 ) 37,859 47.5 Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period$ 119,743 $ 158,502 $ (38,759 ) (24.5 )$ 158,502 $ 61,010 $ 97,492 159.8 38
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Table of Contents Operating Activities Net cash provided by operating activities for the year endedDecember 31, 2021 was$62,394,000 as compared to$203,259,000 and$100,103,000 for the years endedDecember 31, 2020 and 2019, respectively. Cash provided by operating activities consisted of net income of$139,087,000 and adjustments for non-cash items of$42,269,000 . There was cash used for working capital in the amount of$40,738,000 for the year endedDecember 31, 2021 compared to cash provided by working capital needs of$110,403,000 in 2020. The large swings in working capital between 2021 and 2020 are primarily from the liquidity that we received from theCARES Act/Provider Relief Fund payments and the Medicare Accelerated Payment Program in 2020. InApril 2021 , the government began recouping the Medicare Accelerated Payments and we repaid$36,231,000 during 2021. We also received less cash funding from theProvider Relief Fund in 2021. We received cash distributions from our unconsolidated investments of$6,314,000 for the year endedDecember 31, 2021 compared to$10,050,000 for 2020. Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, deferred taxes, stock compensation, gain on the sale of a skilled nursing facility, gains on the acquisition of equity method investments, and impairments of long-lived assets and notes receivable. Investing Activities Cash used in investing activities totaled$65,889,000 for the year endedDecember 31, 2021 , as compared to$63,878,000 and$14,265,000 for the years endedDecember 31, 2020 and 2019, respectively. Cash used for property and equipment additions was$39,399,000 ,$21,873,000 , and$26,400,000 for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Purchases of marketable securities, net of sales, resulted in a net use of cash of$6,267,000 and$43,860,000 in 2021 and 2020, respectively. The acquisition of Caris resulted in cash used of$28,713,000 in 2021. In 2020, the acquisition of the 166-bed skilled nursing facility inKnoxville, Tennessee resulted in cash used of$6,648,000 and proceeds from the sale of a skilled nursing facility resulted in cash proceeds of$6,750,000 . The company collected notes receivable of$8,840,000 and$2,483,000 for the years endedDecember 31, 2021 and 2020, respectively. Financing Activities Net cash used in financing activities totaled$35,264,000 ,$41,889,000 , and$79,748,000 for the years endedDecember 31, 2021 , 2020, and 2019, respectively. Principal payments made under finance lease obligations was$4,423,000 and$4,166,000 for the years endedDecember 31, 2021 and 2020, respectively. Dividends paid to common stockholders was$32,030,000 ,$31,921,000 , and$31,208,000 for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Proceeds from the issuance of common stock totaled$3,440,000 in 2021 compared to$1,756,000 and$2,346,000 for 2020 and 2019, respectively. Cash used for repayments on the Company's credit facility was a net$10,000,000 for the year endedDecember 31, 2020 . During 2019,$45,000,000 of cash was used for principal payments on long-term debt. Contractual Obligations The Company has certain contractual obligations, primarily operating leases, finance leases, and construction obligations. See Note 8 - Long Term Leases for details regarding our operating and finance leases. See Note 12 - Property and Equipment for details regarding our construction obligations. 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, our current cash on hand of$107,607,000 and marketable securities of$148,418,000 are expected to be adequate to meet our contractual obligations, operating liquidity, and our 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$107,607,000 , and marketable securities of$148,418,000 . We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. AtDecember 31, 2021 , 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. Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to our business and financial position. 39
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Table of Contents Contingencies
See Note 18 to the consolidated financial statements for additional information
on pending litigation and other contingencies.
Guarantees
At
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. AtDecember 31, 2020 , we did not participate in any such financial investments.
New Accounting Pronouncements
See Note 1 to the consolidated financial statements for the impact of new
accounting standards.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 and hospice 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. The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third party payors. Contractual adjustments 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. Subsequent changes resulting from a patient's ability to pay are recorded as bad debt expense, which is included as a component of other operating expenses in the 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. The Medicare PPS methodology requires that
patients be assigned based on the acuity level of the patient to determine the
amount that is paid to us for patient services. The assignment of patients to
the various categories is subject to post-payment review by Medicare and Managed
Care intermediaries 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.
40
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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. Accrued Risk Reserves We are self-insured for risks related to health insurance and have 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. It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which 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.
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