NATIONAL HEALTHCARE CORPORATION 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, 2019 , we operate or manage 75 skilled nursing facilities with 9,513 1icensed beds, 25 assisted living facilities, five independent living facilities, one behavioral health hospital, and 35 homecare programs located in 10 states. These operations are provided by separately funded and maintained subsidiaries. We have a non-controlling ownership interest in a hospice care business that servicesNHC owned health care centers and others. 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. 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. 27
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Table of Contents 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 2019 was 90.3% compared to 89.8% in 2018 and 90.2% in 2017. 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 in positioning us to be an active participant in the health delivery systems as they develop. Patient-Driven Payment Model
On
CMS' fiscal year 2020 final rule provided for an approximate net 2.4% increase, or$851 million , compared to fiscal year 2019 levels, which was effectiveOctober 1, 2019 . For the quarter endedDecember 31, 2019 , our average Medicare per diem increased 7.6% compared to the same period in 2018. Quality ofPatient Care 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 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. OnApril 24, 2019 , CMS announced several changes to the Five-Star Quality Rating System which included updating thresholds for both the staffing and quality components of the system. CMS estimated the changes will cause 47% of all nursing centers to lose stars in their "Quality" ratings and 33% are expected to lose stars in their "Staffing" ratings. Therefore, approximately 36% of all nursing centers are expected to lose stars in their "Overall" ratings. As anticipated, the implementation of these changes impacted our overall ratings, as well as everyone in the industry.
The tables below summarize
NHC Ratings Industry Ratings Total number of skilled nursing facilities, end of period
75
Number of 4 and 5-star rated skilled nursing facilities 54
Percentage of 4 and 5-star rated skilled nursing
facilities 72% 45%
Average rating for all skilled nursing facilities, end
of period 3.97 3.12
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
Skilled Nursing New Facility 112 beds Columbia, TN January 2017
Assisted Living New Facility 78 units Bluffton, SC March 2017
Assisted Living New Facility 80 units Garden City, SC June 2017
Memory Care Bed Addition 23 beds Murfreesboro, TN July 2017
Skilled Nursing Bed Addition 30 beds Springfield, MO April 2018
Behavioral
Health Hospital Acquisition 14 beds Osage Beach, MO August 2018
Memory Care New Facility 60 beds Farragut, TN January 2019
Memory Care Acquisition 60 beds St. Peters, MO June 2019
Accrued Risk Reserves
Our accrued professional liability and workers' compensation reserves totaled
$96,011,000 and $96,024,000 at December 31, 2019 and 2018, respectively, and are
a primary area of management focus. We have set aside restricted cash and
marketable securities to fund our professional liability and workers'
compensation reserves.
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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
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.
The following tables set forth the Company's consolidated statements of operations by business segment (in thousands):
Year Ended December 31, 2019
Inpatient
Services Homecare 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) from operations 52,189 2,527 (5,678 ) 49,038
Non-operating income - - 26,747 26,747
Unrealized gains on marketable equity
securities - - 12,230 12,230
Income before income taxes $ 52,189 $ 2,527 $ 33,299 $ 88,015
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Year Ended December 31, 2018
Inpatient
Services Homecare All Other Total
Revenues:
Net patient revenues $ 872,912 $ 59,862 $ - $ 932,774
Other revenues 2,494 - 45,081 47,575
Net operating revenues 875,406 59,862 45,081 980,349
Costs and Expenses:
Salaries, wages and benefits 513,647 33,339 35,735 582,721
Other operating 225,133 19,566 9,339 254,038
Facility rent 33,052 1,945 5,926 40,923
Depreciation and amortization 38,372 229 3,293 41,894
Interest 1,504 - 3,193 4,697
Total costs and expenses 811,708 55,079 57,486 924,273
Income (loss) from operations 63,698 4,783 (12,405 ) 56,076
Non-operating income - - 17,670 17,670
Unrealized gains on marketable securities - - 1,138 1,138
Income before income taxes $ 63,698 $ 4,783 $ 6,403 $ 74,884
Year Ended December 31, 2017
Inpatient
Services Homecare All Other Total
Revenues:
Net patient revenues $ 853,662 $ 63,080 $ - $ 916,742
Other revenues 663 - 46,490 47,153
Net operating revenues 854,325 63,080 46,490 963,895
Costs and Expenses:
Salaries, wages and benefits 501,510 33,059 37,474 572,043
Other operating 221,414 20,855 7,564 249,833
Facility rent 32,744 1,980 5,643 40,367
Depreciation and amortization 38,246 177 4,229 42,652
Interest 1,719 - 3,171 4,890
Total costs and expenses 795,633 56,071 58,081 909,785
Income (loss) from operations 58,692 7,009 (11,591 )
54,110 Non-operating income - - 20,439 20,439 Income before income taxes$ 58,692 $ 7,009 $ 8,848 $ 74,549
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, legal costs and charges related to the settlement of aQui Tam investigation within our Caris hospice partnership, any gains on the acquisition of equity method investments, gains on the sale of healthcare facilities, share-based compensation expense, and tax adjustments with the 2017 U.S. Tax Cuts and Jobs Act. 30
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The operating results for the newly constructed healthcare facilities not at full capacity include the following:
For the year ended
For the year ended
For the year ended
The table below provides reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):
Year Ended December 31,
2019 2018 2017
Net income attributable to National
HealthCare Corporation $ 68,211 $ 58,964 $ 56,205
Non-GAAP adjustments:
Unrealized gains on marketable equity
securities (12,230 ) (1,138 ) -
Legal costs and charges related to Caris'
legal investigation - 8,364 2,889
Operating results for newly opened facilities not at full capacity 712 3,562
7,332
Gain on acquisition of equity method investment (1,975 ) (2,050 ) - Gain on sale of real estate/healthcare facilities - (1,668 ) (1,305 ) Stock-based compensation expense 1,878 1,778
1,678
U.S. Tax Cuts and Jobs Act of 2017 adjustment - (1,434 ) (8,488 ) Provision (benefit) of income taxes on non-GAAP adjustments 3,020 (2,005 ) (4,132 ) Non-GAAP Net Income$ 59,616 $ 64,373 $ 54,179 GAAP diluted earnings per share$ 4.44 $ 3.87 $ 3.69 Non-GAAP adjustments: Unrealized gains on marketable equity securities (0.59 ) (0.06 ) - Legal costs and charges related to Caris' legal investigation - 0.46
0.12
Operating results for newly opened facilities not at full capacity 0.03 0.17
0.29
Gain on acquisition of equity method investment (0.09 ) (0.13 ) - Gain on sale of real estate/healthcare facilities - (0.08 ) (0.05 ) Stock-based compensation expense 0.09 0.08
0.07
U.S. Tax Cuts and Jobs Act of 2017 adjustment - (0.09 ) (0.56 ) Non-GAAP diluted earnings per share$ 3.88 $ 4.22 $ 3.56 Results of Operations
The following table and discussion sets forth items from the consolidated
statements of operations as a percentage of net operating revenues for the years
ended
Percentage of Net Operating Revenues
Year Ended December 31,
2019 2018 2017
Revenues:
Net patient revenues 95.1 % 95.1 % 95.1 %
Other revenues 4.9 4.9 4.9
Net operating revenues 100.0 100.0 100.0
Costs and Expenses:
Salaries, wages and benefits 59.5 59.4 59.4
Other operating 26.9 25.9 25.9
Facility rent 4.1 4.2 4.2
Depreciation and amortization 4.3 4.3 4.4
Interest 0.3 0.5 0.5
Total costs and expenses 95.1 94.3 94.4
Income from operations 4.9 5.7 5.6
Non-operating income 2.7 1.8 2.1
Unrealized gains on marketable equity securities 1.2 0.1 -
Income before income taxes 8.8 7.6 7.7
Income tax provision (2.0 ) (1.6 ) (1.9 )
Net income 6.8 6.0 5.8
Net loss attributable to noncontrolling interest 0.0
0.0 0.0
Net income attributable to common stockholders of
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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.
Period to Period Increase (Decrease)
2019 vs. 2018 2018 vs. 2017
(dollars in thousands) Amount Percent Amount Percent
Revenues:
Net patient revenues $ 15,098 1.6 $ 16,032 1.7
Other revenues 936 2.0 422 0.9
Net operating revenues 16,034 1.6 16,454 1.7
Costs and Expenses:
Salaries, wages and benefits 10,110 1.7 10,678 1.9
Other operating 14,404 5.7 4,205 1.7
Facility rent (405 ) (1.0 ) 556 1.4
Depreciation and amortization 525 1.3 (758 ) (1.8 )
Interest (1,562 ) (33.3 ) (193 ) (3.9 )
Total costs and expenses 23,072 2.5 14,488 1.6
Income from operations (7,038 ) (12.6 ) 1,966 3.6
Non-operating income 9,077 51.4 (2,769 ) (13.5 )
Unrealized gains on marketable equity
securities 11,092 974.7 1,138 -
Income before income taxes 13,131 17.5 335 0.4
Income tax provision (3,854 ) 23.8 (2,682 ) (14.2 )
Net income 9,277 15.8 3,017 5.4
Net loss attributable to
noncontrolling interest (30 ) (11.3 ) (258 ) (49.3 )
Net income attributable to common
stockholders of NHC $ 9,247 15.7 $ 2,759 4.9
2019 Compared to 2018
Results for the year ended December 31, 2019 compared to 2018 include a 1.6%
increase in net operating revenues and a 15.7% increase in net income
attributable to NHC . Excluding the unrealized gains in our marketable equity
securities portfolio and the other non-GAAP adjustments, non-GAAP net income for
the year ended December 31, 2019 was $59,616,000 compared to $64,373,000 for the
2018 year.
The overall average census in our owned and leased skilled nursing facilities
for 2019 was 90.3% compared to 89.8% in 2018. Although our census increased in
2019, we had a decline in Medicare patients (offset by Managed Care and Medicaid
patients), which decreased our operating margins in our skilled nursing
facilities. The composite skilled nursing facility per diem increased 0.3% in
2019 compared to 2018. Medicare per diem rates increased 1.8% in 2019 compared
to 2018 and Managed Care per diem rates decreased 0.4% in 2019 compared to 2018.
Medicaid and private pay per diem rates increased 3.0% and 1.9%, respectively,
in 2019 compared to 2018.
Net patient revenues totaled $947,872,000 , an increase of $15,098,000 , or 1.6%,
compared to the prior year. The largest driver of the net patient revenue
increase in 2019 was the Company's Institutional Special Needs Plan "(I-SNP").
Beginning January 1, 2019 , the I-SNP began offering and providing insurance and
healthcare services in the state of Tennessee . Our I-SNP, which is called NHC
Advantage, is a managed care insurance company that enrolls Medicare Advantage
eligible individuals who are patients in our skilled nursing facilities. We
believe the I-SNP benefits our patients by providing nurse practitioners and
care-coordination teams that continue to enhance the patient-centered experience
and our quality of care. We also believe our progressive improvement to patient
care will continue to drive positive financial results for the Company. For the
year ended December 31, 2019 , the I-SNP increased net patient revenues
approximately $10,867,000 compared to 2018.
The Company has opened one skilled nursing facility, two assisted living
facilities, and a memory care facility from the years 2017 to 2019. These
facilities continue to stabilize and increased net patient revenues
approximately $3,891,000 compared to the same period a year ago. In August
2018 , the Company acquired a controlling ownership interest in a 14-bed
behavioral health hospital. For the 2019 year, the hospital increased net
patient revenues by approximately $3,017,000 compared to 2018. The remaining
increase in our net patient revenues is primarily due to the per diem increases
in our existing skilled nursing facility and assisted living operations. Our
homecare operations had a decline in net patient revenues of approximately
$5,190,000 compared to the same period a year ago. Our homecare net patient
revenue decline was primarily due to volume declines, as well as an unfavorable
payor mix change with less Medicare patients and an increase of managed care
patients. In October 2018 , we sold a skilled nursing facility in Madisonville,
Kentucky . The sale of this facility decreased net patient revenues $5,098,000
compared to the same period a year ago.
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Other revenues in 2019 were$48,511,000 , an increase of$936,000 , or 2.0%, as further detailed in Note 3 of the consolidated financial statements. Other revenues in 2019 include rental revenues of$22,641,000 ($22,262,000 in 2018), management and accounting service fees of$18,533,000 ($15,175,000 in 2018), and insurance services revenue of$6,209,000 ($7,084,000 in 2018). InOctober 2018 , we sold a skilled nursing facility inMadisonville, Kentucky and recorded a gain on the sale of the transaction of$1,668,000 .
Total costs and expenses for 2019 increased
Salaries, wages and benefits, the largest operating costs of the company, increased$10,110,000 , or 1.7%, to$592,831,000 from$582,721,000 . Our salaries and wages were 59.5% and 59.4% of net operating revenues for 2019 and 2018, respectively. The primary reason for salaries, wages and benefits increasing is due to our existing skilled nursing facilities and the continued wage pressure in most of the markets in which we operate. The newly opened operations (one skilled nursing facility, two assisted living facilities, and one memory care facility) increased salaries, wages and benefits by approximately$2,129,000 compared to a year ago. The behavioral health hospital that we acquired inAugust 2018 increased salaries and wages expense of$1,695,000 in 2019 compared to the same period a year ago. These salaries and wage increases in 2019 were offset by theOctober 2018 disposition of theMadisonville, Kentucky skilled nursing facility ($3,040,000 ). Other operating expenses increased$14,404,000 , or 5.7%, to$268,442,000 for 2019 compared to$254,038,000 in 2018. These costs were 26.9% and 25.9% of net operating revenues for 2019 and 2018, respectively. The majority of the increase in other operating expenses in 2019 compared to a year ago is due to theJanuary 1, 2019 start of our I-SNP insurance plan, NHC Advantage. For the year endingDecember 31, 2019 , the I-SNP increased other operating expenses approximately$11,612,000 compared to the same period a year ago. The behavioral health hospital that we acquired inAugust 2018 increased other operating expenses$1,404,000 in 2019 compared to the same period a year ago. TheOctober 2018 disposition of theMadisonville, Kentucky skilled nursing facility decreased other operating expenses in the amount of$2,974,000 in 2019 compared to 2018.
Facility rent expense decreased
Interest expense decreased$1,562,000 to$3,135,000 in 2019 from$4,697,000 in 2018. The decrease in interest expense is due from our long-term debt being paid down during 2019. AtDecember 31, 2019 , we had$10,000,000 outstanding on our credit facility. Non-operating income in 2019 increased$9,077,000 , or 51.4% to$26,747,000 , as further detailed in Note 4 of the consolidated financial statements. The increase in non-operating income is primarily due from our equity in earnings investment in our Caris hospice operations. During 2018, Caris recorded a charge to earnings of$8,500,000 for the settlement of aQui Tam investigation, of which 75.1% is included in the Company's earnings. In total, with the$8.5 million settlement and legal expenses, Caris' 2018 earnings negatively impactedNHC's non-operating income by$8,364,000 . There were no such charges or legal expenses in Caris for 2019. There were also gains on acquisitions of equity method investments in both the 2019 and 2018 years. InJune 2019 , a gain of$1,975,000 was recorded on the acquisition of the remaining ownership interest of a 60-bed memory care facility inSt. Peters, Missouri . We previously held a noncontrolling interest in the facility. Upon acquiring the remaining ownership interest, we valued the business and our previously held equity position based upon the facility's fair value. InJuly 2018 , a gain of$2,050,000 was recorded on the acquisition of a controlling financial interest in a 14-bed behavioral health hospital inOsage Beach, Missouri . We previously held a non-controlling ownership interest. Upon acquiring the controlling ownership interest, we valued the business and our previously held equity position based upon the hospital's fair value. We recorded unrealized gains in the amount of$12,230,000 for the increase in fair value of our marketable equity securities portfolio for the year endedDecember 31, 2019 . The marketable equity securities portfolio consists of publicly traded healthcare REIT's, with NHI comprising approximately 87% of the market value of the portfolio atDecember 31, 2019 . 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. The income tax provision for 2018 is$16,185,000 (an effective income tax rate of 21.6%). The income tax provision and effective tax rate for 2018 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of$2,222,000 or 3.0% of income before taxes in 2018. 33
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Table of Contents 2018 Compared to 2017 Results for the year endedDecember 31, 2018 compared to 2017 include a 1.7% increase in net operating revenues and a 4.9% increase in net income attributable toNHC . Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the year endedDecember 31, 2018 was$64,373,000 compared to$54,179,000 for the 2017 year. The overall average census in owned and leased skilled nursing facilities for 2018 was 89.8% compared to 90.2% in 2017. The composite skilled nursing facility per diem increased 1.2% in 2018 compared to 2017. Medicare per diem rates increased 0.3% in 2018 compared to 2017 and Managed Care per diem rates decreased 2.0% in 2018 compared to 2017. Medicaid and private pay per diem rates increased 2.9% and 3.0%, respectively, in 2018 compared to 2017. Net patient revenues totaled$932,774,000 , an increase of$16,032,000 , or 1.7%, compared to the prior year. The newly constructed healthcare facilities placed in service from 2016 to 2018 (which is two skilled nursing facilities and three assisted living facilities) continue to mature and increased net patient revenues$6,457,000 compared to a year ago. InAugust 2018 , the Company acquired a controlling ownership interest in a 14-bed behavioral health hospital. For the five months since the acquisition of this entity, the hospital has generated approximately$2,496,000 in net patient revenue. The remaining increase in our net patient revenues is primarily due to the per diem increases in our existing skilled nursing facility operations. Other revenues in 2018 were$47,575,000 , an increase of$422,000 , or 0.9%, as further detailed in Note 3 of the consolidated financial statements. Other revenues in 2018 include rental revenues of$22,262,000 ($21,957,000 in 2017), management and accounting service fees of$15,175,000 ($16,169,000 in 2017), and insurance services revenue of$7,084,000 ($8,003,000 in 2017). InOctober 2018 , we sold a skilled nursing facility inMadisonville, Kentucky and recorded a gain on the sale of the transaction of$1,669,000 .
Total costs and expenses for 2018 increased
Salaries, wages and benefits, the largest operating costs of the company, increased$10,678,000 , or 1.9%, to$582,721,000 from$572,043,000 . Our salaries and wages were 59.4% of net operating revenues for both the 2018 and 2017 years. The newly constructed healthcare facilities placed in service during 2016 to 2018 increased salaries, wages and benefits by$1,453,000 compared to a year ago. The newly acquired behavioral health hospital increased in salaries and wages by$1,116,000 in 2018. The remaining increase in salaries, wages and benefits in 2018 is due to the increase in our existing skilled nursing facilities and the continued wage pressure in certain markets in which we operate. Other operating expenses increased$4,205,000 , or 1.7%, to$254,038,000 for 2018 compared to$249,833,000 in 2017. These costs were 25.9% of net operating revenues for both the 2018 and 2017 years. The newly constructed healthcare facilities placed in service during 2016 to 2018 increased other operating expenses by$2,183,000 compared to a year ago. The newly acquired behavioral health hospital increased other operating expenses by$914,000 in 2018.
Facility rent expense increased
Interest expense decreased$193,000 to$4,697,000 in 2018 from$4,890,000 in 2017. The decrease in interest expense is due from our long-term debt being paid down during 2018. AtDecember 31, 2018 , we had$55 million outstanding on our credit facility.
Non-operating income in 2018 decreased
Our equity in earnings investment in our Caris hospice operations. During 2018, Caris recorded a charge to earnings of$8,500,000 for the settlement of aQui Tam investigation, of which 75.1% is included in the Company's earnings. In total, with the$8.5 million settlement and legal expenses, Caris' earnings negatively impactedNHC's non-operating income by$8,364,000 for the year endedDecember 31, 2018 . For the year endedDecember 31, 2017 , Caris had legal expenses in connection with the Qui Tam investigation that negatively impactedNHC's non-operating income by$2,889,000 . InJuly 2018 , a gain of$2,050,000 was recorded on the acquisition of a controlling financial interest in a 14-bed behavioral health hospital inOsage Beach, Missouri . We previously held a non-controlling ownership interest and equity method investment in this hospital. Upon acquiring the controlling ownership interest, we valued the business and our previously held equity position based upon the hospital's fair value. 34
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EffectiveJanuary 1, 2018 , we adopted new accounting pronouncement ASU No. 2016-01, "Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)". This guidance requires that the change in the fair value of our marketable equity securities be recognized in net income instead of other comprehensive income. Therefore, we recorded unrealized gains in the amount of$1,138,000 for the increase in fair value of our marketable equity securities portfolio for the year endedDecember 31, 2018 . The marketable equity securities portfolio consists of publicly-traded healthcare REIT's, with NHI comprising approximately 88% of the market value of the portfolio atDecember 31, 2018 . The income tax provision for 2018 is$16,185,000 (an effective income tax rate of 21.6%). The income tax provision and effective tax rate for 2018 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of$2,222,000 or 3.0% of income before taxes in 2018. The income tax provision for 2017 was$18,867,000 (an effective income tax rate of 25.3%). We recorded a tax benefit of$8,488,000 during the fourth quarter of 2017 due to theU.S. tax reform legislation. This estimated benefit was due from the revaluation of our net deferred tax liabilities based on the new lower federal corporate income tax rate. The income tax provision and effective tax rate for 2017 were also favorably impacted by statute of limitation expirations resulting in a benefit to the provision of$1,753,000 or 2.4% of income before taxes in 2017.
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 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
12/31/19 12/31/18 $ % 12/31/18 12/31/17 $ %
Cash, cash
equivalents,
restricted cash,
and restricted
cash equivalents
at beginning of
period $ 54,920 $ 67,421 $ (12,501 ) (18.5 ) Cash provided by operating activities 100,103 98,435 1,668 1.7
98,435 94,466 3,969 4.2
Cash used in investing activities (14,265 ) (33,662 ) 19,397 57.6
(33,662 ) (9,560 ) (24,102 ) (252.1 )
Cash used in financing activities (79,748 ) (77,274 ) (2,474 ) (3.2 ) (77,274 ) (49,074 ) (28,200 ) (57.5 ) Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period$ 61,010 $ 54,920 $ 6,090 11.1$ 54,920 $ 67,421 $ (12,501 ) (18.5 ) Operating Activities Net cash provided by operating activities for the year endedDecember 31, 2019 was$100,103,000 as compared to$98,435,000 and$94,466,000 for the years endedDecember 31, 2018 and 2017, respectively. Cash provided by operating activities consisted of net income of$67,976,000 and adjustments for non-cash items of$24,400,000 . There was cash provided by working capital in the amount of$3,952,000 for the year endedDecember 31, 2019 compared to cash used for working capital needs of$4,001,000 in 2018. We also received cash distributions from our unconsolidated investments of$3,902,000 for the year endedDecember 31, 2019 compared to$5,241,000 for 2018. There were also gains on sales of restricted marketable debt securities of$127,000 for the year endedDecember 31, 2019 compared to$18,000 for the same period in 2018. Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains on our marketable equity securities, deferred taxes, stock compensation, and a gain on the acquisition of a 60-bed memory care facility inSt. Peters, Missouri in which we previously held a noncontrolling ownership interest. 35
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Table of Contents Investing Activities Cash used in investing activities totaled$14,265,000 for the year endedDecember 31, 2019 , as compared to$33,662,000 and$9,560,000 for the years endedDecember 31, 2018 and 2017, respectively. Cash used for property and equipment additions was$26,400,000 ,$29,772,000 , and$32,347,000 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Sales of restricted marketable debt securities, net of purchases, resulted in positive cash flow of$32,029,000 in 2019; compared to purchases of restricted marketable debt securities, net of sales, resulting in a net use of cash of$8,772,000 in 2018. Additionally, in 2019, we had investments in notes receivable of$5,462,000 and cash used for the acquisition of a 60-bed memory care facility inSt. Peters, Missouri , of$15,589,000 . In 2018, we had cash proceeds from the sale of a skilled nursing facility inMadisonville, Kentucky of$4,300,000 . Financing Activities Net cash used in financing activities totaled$79,748,000 ,$77,274,000 and$49,074,000 for the years endedDecember 31, 2019 , 2018, and 2017, respectively. During 2019 and 2018,$45,000,000 of cash was used for principal payments on long-term debt compared to$20,000,000 in 2017. Dividends paid to common stockholders were$31,208,000 ,$29,827,000 , and$28,237,000 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Proceeds from the issuance of common stock totaled$2,346,000 in 2019 compared to$2,865,000 and$2,524,000 for 2018 and 2017, respectively. The Company repurchased 10,396 shares of its common stock for a total cost of$872,000 in 2019 and 14,506 shares of its common stock for a total cost of$867,000 in 2018.
Table of Contractual Cash Obligations
Our contractual cash obligations for periods subsequent toDecember 31, 2019 are as follows (in thousands): Less than 1-3 3-5 More than Contractual Obligations Total 1 year Years Years 5 Years Current maturities of long-term debt$ 10,000 $ 10,000 $ - $ - $ - Construction obligations 1,556 1,556 - - - Operating and finance leases 270,285 40,769
80,505 74,861 74,150
Total contractual cash 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$50,334,000 , marketable securities of$152,453,000 and as needed, our borrowing capacity on the credit facility, 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$50,334,000 , marketable securities of$152,453,000 , and our borrowing capacity on the credit facility. AtDecember 31, 2019 , the outstanding balance on the credit facility is$10,000,000 ; therefore, leaving$50,000,000 available for future borrowings. The maturity date on the credit facility isOctober 7, 2020 . The credit facility is available for general corporate purposes, including working capital and acquisitions. Our ability to refinance the credit agreement, 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. Contingencies Impact of Inflation Inflation has remained relatively low during the past three years. However, rates paid under the Medicare and Medicaid programs do not necessarily reflect all inflationary changes and are subject to cuts unrelated to inflationary costs. Therefore, there can be no assurance that future rate increases will be sufficient to offset future inflation increases in our labor and other health care service costs. 36
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See Note 16 to the consolidated financial statements for additional information on pending litigation and other contingencies.
Guarantees
At
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, 2019 , 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, and home health care 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.
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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. Significant estimation is required in determining the reserves, particularly the assumptions of the severity of asserted claims and the quantity and severity of unknown 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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