NATIONAL HEALTHCARE CORP (NHC) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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, 2024, we operate or manage 80 skilled nursing facilities with 10,341 1icensed beds, 26 assisted living facilities with 1,413 units, nine independent living facilities, three behavioral health hospitals, 34 homecare agencies, and 33 hospice agencies located in 9 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.
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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 2024 was 88.6% compared to 87.9% in 2023 and 83.8% in 2022.
Due to America’s healthcare labor shortage, 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, 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
The Centers for Medicare and Medicaid Services (“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.
The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of December 31, 2024:
| NHC Ratings | Industry Ratings | ||||||
|---|---|---|---|---|---|---|---|
| Total number of skilled nursing facilities, end of period | 80 | ||||||
| Number of 4 and 5-star rated skilled nursing facilities | 46 | ||||||
| Percentage of 4 and 5-star rated skilled nursing facilities | 57% | 35% | |||||
| Average rating for all skilled nursing facilities, end of period | 3.6 | 2.8 |
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 | ||||
|---|---|---|---|---|---|---|---|---|
| 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 | ||||
| Hospice | New Agency | 1 agency | Morristown, TN | April 2024 | ||||
| Hospice | New Agency | 1 agency | Lawrenceburg, TN | July 2024 | ||||
| Hospice | New Agency | 1 agency | Wytheville, VA | August 2024 | ||||
| Hospice | New Agency | 1 agency | Clinton, TN | October 2024 |
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On August 1, 2024, the Company purchased the White Oak portfolio, including its long-term care pharmacy. The White Oak portfolio consists of 15 skilled nursing facilities, two assisted living facilities, and four independent living facilities. The White Oak operations have 1,928 licensed skilled nursing beds, 48 assisted living units, and 302 independent living units in the states of South Carolina and North Carolina.
Accrued Risk Reserves
Our accrued professional liability and workers’ compensation reserves totaled $103,616,000 and $103,259,000 at December 31, 2024 and 2023, 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, 2024 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Inpatient Services | Homecare and Hospice | All Other | Total | ||||||||||||
| Revenues: | |||||||||||||||
| Net patient revenues | $ | 1,111,300 | $ | 140,459 | $ | – | $ | 1,251,759 | |||||||
| Other revenues | 1,315 | – | 44,863 | 46,178 | |||||||||||
| Government grant income | – | – | 9,445 | 9,445 | |||||||||||
| Net operating revenues and grant income | 1,112,615 | 140,459 | 54,308 | 1,307,382 | |||||||||||
| Costs and Expenses: | |||||||||||||||
| Salaries, wages and benefits | 668,029 | 85,712 | 57,189 | 810,930 | |||||||||||
| Other operating | 280,867 | 25,927 | 14,596 | 321,390 | |||||||||||
| Facility rent | 33,787 | 2,295 | 7,100 | 43,182 | |||||||||||
| Depreciation and amortization | 37,988 | 737 | 3,260 | 41,985 | |||||||||||
| Interest | 4,135 | – | – | 4,135 | |||||||||||
| Total costs and expenses | 1,024,806 | 114,671 | 82,145 | 1,221,622 | |||||||||||
| Income (loss) before non-operating income | 87,809 | 25,788 | (27,837 | ) | 85,760 | ||||||||||
| Non-operating income | – | – | 19,690 | 19,690 | |||||||||||
| Unrealized gains on marketable equity securities | – | – | 30,958 | 30,958 | |||||||||||
| Income before income taxes | $ | 87,809 | $ | 25,788 | $ | 22,811 | $ | 136,408 |
| 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 | 32,542 | 2,172 | 6,811 | 41,525 | |||||||||||
| Depreciation and amortization | 38,172 | 786 | 3,076 | 42,034 | |||||||||||
| Interest | 324 | – | – | 324 | |||||||||||
| Total costs and expenses | 914,876 | 107,097 | 62,437 | 1,084,410 | |||||||||||
| Income (loss) before non-operating income | 42,342 | 24,440 | (9,648 | ) | 57,134 | ||||||||||
| Non-operating income | – | – | 16,660 | 16,660 | |||||||||||
| Unrealized gains on marketable equity securities | – | – | 14,944 | 14,944 | |||||||||||
| Income before income taxes | $ | 42,342 | $ | 24,440 | $ | 21,956 | $ | 88,738 |
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| 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 grant 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 | 32,526 | 2,327 | 6,124 | 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 | 901,673 | 107,025 | 45,144 | 1,053,842 | ||||||||||||
| Income before non-operating income | 10,151 | 21,829 | (84 | ) | 31,896 | |||||||||||
| Non-operating income | – | – | 11,141 | 11,141 | ||||||||||||
| Unrealized losses on marketable equity securities | – | – | (15,806 | ) | (15,806 | ) | ||||||||||
| Income (loss) before income taxes | $ | 10,151 | $ | 21,829 | $ | (4,749 | ) | $ | 27,231 |
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 that excludes the unrealized gains or losses on our marketable equity securities, stock-based compensation expense, operating results for start-up healthcare operations not at full capacity, acquisition related expenses, the recognition of the employee retention credit, gains on sales of unconsolidated companies, gains on the sale of property and equipment, and impairments or recoveries of long-lived assets is helpful in allowing investors to assess the Company’s operations more accurately.
The operating results for newly opened facilities or agencies not at full capacity include newly constructed healthcare facilities or agencies that are still considered in the start-up phase, which include two hospice agencies for the year ended December 31, 2024. For the year ended December 31, 2023, included are two behavioral health hospitals, two homecare agencies, and two hospice agencies. For the year ended December 31, 2022, included are two behavioral health hospitals, one hospice agency, and one homecare agency.
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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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Net income attributable to National HealthCare Corporation | $ | 101,927 | $ | 66,798 | $ | 22,445 | ||||||
| Non-GAAP adjustments: | ||||||||||||
| Unrealized (gains) losses on marketable equity securities | (30,958 | ) | (14,944 | ) | 15,806 | |||||||
| Stock-based compensation expense | 4,160 | 2,782 | 2,612 | |||||||||
| Operating results for newly-opened operations not at full capacity | 130 | 2,359 | 5,416 | |||||||||
| Acquisition-related expenses | 3,266 | – | – | |||||||||
| Employee retention credit | (9,445 | ) | – | – | ||||||||
| Gain on sale of unconsolidated company | (1,024 | ) | – | – | ||||||||
| Gain on sale of property and equipment | – | (6,230 | ) | – | ||||||||
| Impairment (recovery) of assets | – | – | (3,728 | ) | ||||||||
| Income tax expense (benefit) on non-GAAP adjustments | 8,806 | 4,169 | (5,228 | ) | ||||||||
| Non-GAAP Net Income | $ | 76,862 | $ | 54,934 | $ | 37,323 | ||||||
| GAAP diluted earnings per share | $ | 6.53 | $ | 4.34 | $ | 1.45 | ||||||
| Non-GAAP adjustments: | ||||||||||||
| Unrealized (gains) losses on marketable equity securities | (1.47 | ) | (0.72 | ) | 0.76 | |||||||
| Stock-based compensation expense | 0.20 | 0.13 | 0.13 | |||||||||
| Operating results for newly-opened operations not at full capacity | 0.01 | 0.10 | 0.26 | |||||||||
| Acquisition-related expenses | 0.16 | – | – | |||||||||
| Employee retention credit | (0.45 | ) | – | – | ||||||||
| Gain on sale of unconsolidated company | (0.05 | ) | – | – | ||||||||
| Gain on sale of property and equipment | – | (0.30 | ) | – | ||||||||
| Impairment (recovery) of assets | – | – | (0.18 | ) | ||||||||
| Non-GAAP diluted earnings per share | $ | 4.93 | $ | 3.55 | $ | 2.42 |
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, 2024, 2023 and 2022.
Percentage of Net Operating Revenues
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Revenues: | ||||||||||||
| Net patient revenues | 95.8 | % | 95.3 | % | 94.8 | % | ||||||
| Other revenues | 3.5 | 4.7 | 4.2 | |||||||||
| Government grant income | 0.7 | – | 1.0 | |||||||||
| Net operating revenues and grant income | 100.0 | 100.0 | 100.0 | |||||||||
| Costs and Expenses: | ||||||||||||
| Salaries, wages and benefits | 62.0 | 62.4 | 63.2 | |||||||||
| Other operating | 24.6 | 25.2 | 26.6 | |||||||||
| Facility rent | 3.3 | 3.6 | 3.8 | |||||||||
| Depreciation and amortization | 3.2 | 3.7 | 3.7 | |||||||||
| Interest | 0.3 | 0.1 | 0.1 | |||||||||
| Impairment (recovery) of assets | – | – | (0.3 | ) | ||||||||
| Total costs and expenses | 93.4 | 95.0 | 97.1 | |||||||||
| Income from operations | 6.6 | 5.0 | 2.9 | |||||||||
| Non–operating income | 1.4 | 1.5 | 1.0 | |||||||||
| Unrealized gains (losses) on marketable equity securities | 2.4 | 1.3 | (1.4 | ) | ||||||||
| Income before income taxes | 10.4 | 7.8 | 2.5 | |||||||||
| Income tax provision | (2.6 | ) | (2.1 | ) | (0.7 | ) | ||||||
| Net income | 7.8 | 5.7 | 1.8 | |||||||||
| Net income (loss) attributable to noncontrolling interest | 0.0 | 0.2 | 0.3 | |||||||||
| Net income attributable to common stockholders of NHC | 7.8 | % | 5.9 | % | 2.1 | % |
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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)
| 2024 vs. 2023 | 2023 vs. 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Percent | Amount | Percent | |||||||||||||
| Revenues: | ||||||||||||||||
| Net patient revenues | $ | 164,145 | 15.1 | % | $ | 58,529 | 5.7 | % | ||||||||
| Other revenues | (7,752 | ) | (14.4 | ) | 8,734 | 19.3 | ||||||||||
| Government grant income | 9,445 | 100.0 | (11,457 | ) | (100.0 | ) | ||||||||||
| Net operating revenues and grant income | 165,838 | 14.5 | 55,806 | 5.1 | ||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Salaries, wages and benefits | 98,586 | 13.8 | 26,175 | 3.8 | ||||||||||||
| Other operating | 33,207 | 11.5 | (1,189 | ) | (0.4 | ) | ||||||||||
| Facility rent | 1,657 | 4.0 | 548 | 1.3 | ||||||||||||
| Depreciation and amortization | (49 | ) | (0.1 | ) | 1,545 | 3.8 | ||||||||||
| Interest | 3,811 | 1,176.2 | (239 | ) | (42.5 | ) | ||||||||||
| Impairment (recovery) of assets | – | – | 3,728 | 100.0 | ||||||||||||
| Total costs and expenses | 137,212 | 12.7 | 30,568 | 2.9 | ||||||||||||
| Income from operations | 28,626 | 50.1 | 25,238 | 79.1 | ||||||||||||
| Non–operating income | 3,030 | 18.2 | 5,519 | 49.5 | ||||||||||||
| Unrealized gains (losses) on marketable equity securities | 16,014 | 107.2 | 30,750 | 194.5 | ||||||||||||
| Income before income taxes | 47,670 | 53.7 | 61,507 | 225.9 | ||||||||||||
| Income tax provision | (10,872 | ) | (46.4 | ) | (16,196 | ) | (223.3 | ) | ||||||||
| Net income | 36,798 | 56.4 | 45,311 | 226.8 | ||||||||||||
| Net (income) loss attributable to noncontrolling interest | (1,669 | ) | (110.5 | ) | (958 | ) | (38.8 | ) | ||||||||
| Net income attributable to common stockholders of NHC | $ | 35,129 | 52.6 | % | $ | 44,353 | 197.6 | % |
2024 Compared to 2023
Net operating revenues and grant income for the year ended December 31, 2024 totaled $1,307,382,000 compared to $1,141,544,000 for the year ended December 31, 2023, an increase of 14.5%. The net operating revenues increase was primarily driven by the August 1, 2024 acquisition of White Oak Manor ("White Oak").
For the year ended December 31, 2024, GAAP net income attributable to NHC was $101,927,000 compared to net income of $66,798,000 for the same period in 2023. Excluding the unrealized gains and losses in our marketable equity securities portfolio and other non-GAAP adjustments, adjusted net income was $76,862,000 for the year ended December 31, 2024 compared to $54,934,000 for the same period a year ago. The increase in non-GAAP earnings for the year ended December 31, 2024 compared to 2023 was primarily due to the skilled nursing per diem increases from some of our government payors, the continued reduction of nurse agency staffing expense within our operations, and the White Oak operations being accretive to earnings.
On August 1, 2024, the Company purchased the White Oak portfolio, including its long-term care pharmacy. The White Oak portfolio consists of 15 skilled nursing facilities, two assisted living facilities, and four independent living facilities. The White Oak operations have 1,928 licensed skilled nursing beds, 48 assisted living units, and 302 independent living units in the states of South Carolina and North Carolina.
Net operating revenues and grant income
Net patient revenues totaled $1,251,759,000 in 2024, an increase of $164,145,000, or 15.1%, compared to 2023.
The overall average census in owned and leased skilled nursing facilities for 2024 was 88.6% compared to 87.9% in 2023. The composite skilled nursing facility per diem increased 6.8% in 2024 compared to 2023. Medicare and managed care per diem rates increased 5.0% and 0.7%, respectively, in 2024 compared to 2023. Medicaid and private pay per diem rates increased 8.6% and 12.3%, respectively, in 2024 compared to 2023.
White Oak, with five months of operations since the acquisition date, attributed to an increase of $96,052,000 in net patient revenues for the year ended December 31, 2024 compared to 2023. On March 1, 2024, the Company exited a lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in net patient revenues decreasing $26,929,000 for the year ended December 31, 2024 compared to the prior year. Also included in net patient revenues for the years ended December 31, 2024 and 2023, respectively, is $12,749,000 and $20,214,000 of supplemental Medicaid payments that were received to help mitigate the healthcare workforce crisis and the inflationary labor market.
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Other revenues in 2024 were $46,178,000, a decrease of $7,752,000, or 14.4%, as further detailed in Note 4 to our consolidated financial statements. In December 2023, we contributed land to a newly-formed limited liability company resulting in an equity interest in the new joint venture. 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.
During the year ended December 31, 2024, the Company recognized $9,445,000 related to the Employee Retention Credit (“ERC”) that was established by the CARES Act and intended to help businesses retain their workforce and avoid layoffs during the pandemic. The ERC provided a per employee credit to eligible businesses based on a percentage of qualified wages and health insurance benefits paid to employees. During the second quarter of 2024, all conditions related to the assistance were met and the credit was recognized as government grant income.
Total costs and expenses
Total costs and expenses were $1,221,622,000 for 2024, an increase of $137,212,000, or 12.7%, from $1,084,410,000 in 2023.
Salaries, wages, and benefits increased $98,586,000, or 13.8%, to $810,930,000 from $712,344,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 62.0% compared to 62.4% for the years ended December 31, 2024 and 2023, respectively.
The White Oak operations attributed to an increase of $63,223,000 in salaries, wages, and benefits for the year ended December 31, 2024 compared to the prior year. On March 1, 2024, the Company exited the lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in salaries, wages, and benefits decreasing $20,169,000 for the year ended December 31, 2024 compared to the prior year.
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. For the year ended December 31, 2024 our agency nurse staffing expenses decreased $19,962,000, or approximately 66.2%, compared to the same period a year ago.
Other operating expenses increased $33,207,000, or 11.5%, to $321,390,000 for the year ended December 31, 2024 compared to $288,183,000 for the prior year. Other operating expenses as a percentage of net operating revenues and grant income was 24.6% and 25.2% for the years ended December 31, 2024 and 2023, respectively.
The White Oak operations attributed to an increase of $20,554,000 in other operating expenses for the year ended December 31, 2024 compared to the prior year. On March 1, 2024, the Company exited the lease and transferred the operations of two skilled nursing facilities (included assisted living units) and one memory care facility located in Missouri. The exiting of these operations resulted in other operating expenses decreasing $7,101,000 for the year ended December 31, 2024 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 $1,657,000, or 4.0%, to $43,182,000. Depreciation and amortization decreased 0.1% to $41,985,000. Interest expense increased $3,811,000 to $4,135,000 in 2024 from $324,000 in 2023. At December 31, 2024, we have outstanding long-term debt of $137,000,000 due to the White Oak acquisition. In 2023, we didn't have any outstanding long-term debt.
Other income
Non–operating income increased by $3,030,000, or 18.2% to $19,690,000 compared to the prior year, as further detailed in Note 5 to our consolidated financial statements.
We recorded unrealized gains in the amount of $30,958,000 for the increase in fair value of our marketable equity securities portfolio for the year ended December 31, 2024. 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 2024 is $34,322,000 (an effective income tax rate of 25.2%).
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2023 Compared to 2022
Net operating revenues and grant income for the year ended December 31, 2023 totaled $1,141,544,000 compared to $1,085,738,000 for the year ended December 31, 2022, an increase of 5.1%. Excluding the government grant 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% in 2023 as compared to the prior year. The net operating revenues increase was primarily driven by the continued occupancy increase in our skilled nursing facilities and increases in skilled nursing per diems from some of our governmental payors.
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 in the prior year. 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 in 2023, an increase of $58,529,000, or 5.7%, compared to the prior year.
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 prior 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 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.
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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 December 2023, we contributed land to a newly-formed limited liability company resulting in an equity interest in the new joint venture. 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 grant 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 prior year.
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 prior 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 prior 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 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 $15,025,000 for the year ended December 31, 2023 compared to the prior year.
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%).
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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 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 | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 12/31/24 | 12/31/23 | $ | % | 12/31/23 | 12/31/22 | $ | % | |||||||||||||||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | $ | 125,968 | $ | 74,865 | $ | 51,103 | 68.3 | % | $ | 74,865 | $ | 119,743 | $ | (44,878 | ) | (37.5 | )% | |||||||||||||||
| Cash provided by operating activities | 107,303 | 111,216 | (3,913 | ) | (3.5 | ) | 111,216 | 8,742 | 102,474 | 1,172.2 | ||||||||||||||||||||||
| Cash used in investing activities | (236,693 | ) | (17,568 | ) | (219,125 | ) | (1,247.3 | ) | (17,568 | ) | (5,978 | ) | (11,590 | ) | (193.9 | ) | ||||||||||||||||
| Cash provided by / (used in) financing activities | 100,344 | (42,545 | ) | 142,889 | 335.9 | (42,545 | ) | (47,642 | ) | 5,097 | 10.7 | |||||||||||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $ | 96,922 | $ | 125,968 | $ | (29,046 | ) | (23.1 | )% | $ | 125,968 | $ | 74,865 | $ | 51,103 | 68.3 | % |
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Operating Activities
Net cash provided by operating activities for the year ended December 31, 2024 was $107,303,000 as compared to $111,216,000 and $8,742,000 for the years ended December 31, 2023 and 2022, respectively. Cash provided by operating activities consisted of net income of $102,086,000 and adjustments for non–cash items of $32,027,000. There was cash used for working capital needs in the amount of $25,717,000 for the year ended December 31, 2024, which was primarily driven by the White Oak acquisition. In 2023, there was cash provided by working capital in the amount of $17,396,000.
Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized losses on our marketable equity securities, gain on the sale of an unconsolidated company, deferred taxes, and stock compensation.
Investing Activities
Net cash used in investing activities totaled $236,693,000 for the year ended December 31, 2024, as compared to $17,568,000 and $5,978,000 for the years ended December 31, 2023 and 2022, respectively. On August, 1, 2024, the acquisition of White Oak resulted in cash used of $215,896,000, as described in Note 2 to our consolidated financial statements. Cash used for property and equipment additions was $27,600,000, $27,901,000, and $30,200,000 for the years ended December 31, 2024, 2023 and 2022, respectively. For the year ended December 31, 2024, we contributed capital of $14,298,000 to a joint venture, multi-family development that is under construction in Franklin, Tennessee. In January 2024, the Company sold its 50% joint venture ownership interest in a homecare agency resulting in proceeds from the sale of $2,100,000. Proceeds from the sale of marketable securities, net of purchases, resulted in cash proceeds of $16,913,000, $17,895,000, and $16,168,000 in 2024, 2023, and 2022, respectively.
Financing Activities
Net cash provided by financing activities totaled $100,344,000 for the year ended December 31, 2024. Net cash used in financing activities totaled $42,545,000 and $47,642,000 for the years ended December 31, 2023 and 2022, respectively. The funding for the White Oak acquisition was provided by the Company’s cash on hand and borrowings of $150,000,000. During the third and fourth quarters of 2024, cash of $13,000,000 was used to pay down the outstanding principal balance of the long-term debt. Dividends paid to common stockholders was $36,964,000, $35,560,000, and $34,604,000 for the years ended December 31, 2024, 2023 and 2022, respectively. Proceeds from the issuance of common stock totaled $14,268,000, $313,000, and $2,114,000 for 2024, 2023 and 2022, respectively. We repurchased common shares outstanding in the amount of $13,502,000, $2,482,000, and $9,903,000 for the years ended December 31, 2024, 2023, and 2022, respectively. Principal payments made under finance lease obligations was $860,000, $4,985,000, and $4,695,000 for the years ended December 31, 2024, 2023, and 2022, respectively. The finance lease obligations terminated during the first quarter of 2024.
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 $76,121,000 and unrestricted marketable equity securities of $140,064,000. We also have unencumbered real estate and the borrowing capacity on our $50 million available line of credit. We believe these various resources are adequate 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 $76,121,000, our unrestricted marketable equity securities of $140,064,000, and our borrowing capacity on the $50 million available line of credit. We also have substantial value in our unencumbered real estate assets, which could potentially be used as collateral in future borrowing opportunities.
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. Our future performance 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, 2024, 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, 2024, we did not participate in any such financial instruments.
New Accounting Pronouncements
See Note 1 to the consolidated financial statements for the impact of any new accounting standards.
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 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. 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.