NATIONAL HEALTHCARE CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   Forward–Looking Statements   References throughout this document to the Company include National HealthCare Corporation and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.   This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.   Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:     ● national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;         ● the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;         ● changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;   23 Table of Contents     ● liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 15: Contingencies and Commitments);         ● the uncertainty of the extent, duration and effects of the COVID-19 pandemic and the response of governments         ● the ability to attract and retain qualified personnel;         ● the availability and terms of capital to fund acquisitions and capital improvements;         ● the ability to refinance existing debt on favorable terms;         ● the competitive environment in which we operate;         ● the ability to maintain and increase census levels; and         ● demographic changes.   See the notes to the quarterly financial statements, and “Item 1. Business” in our 2020 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web site at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.     Overview   National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. We operate or manage, through certain affiliates, 75 skilled nursing facilities with a total of 9,463 licensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital and 35 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a non-controlling ownership interest in a hospice care business that services NHC owned health care centers and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 10 states and are located primarily in the southeastern United States.     Impact of COVID-19   In early March 2020, COVID-19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The COVID-19 virus spread rapidly, with every state in the United States (“U.S.”) having confirmed cases. The rapid spread resulted in authorities around the U.S. implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. 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 the Centers for Medicare and Medicaid Services (“CMS”), the Centers for Disease Control and Prevention (“CDC”), and state and local health departments to prevent the spread of the disease within our operations.    The financial results for the three months ending March 31, 2021 have been materially impacted by COVID-19 with census in our skilled nursing facilities averaging 76.8% during the first quarter of 2021 compared with 91.4% for the three months ending March 31, 2020. For the first time since the beginning of the COVID-19 pandemic, the census in our skilled nursing facilities increased approximately 3.5% from January 1, 2021 through March 31, 2021. We began our first vaccination clinics in our skilled nursing facilities around the middle of December 2020. As of March 31, 2021, each of our 75 skilled nursing facilities have hosted at least three vaccination clinics onsite for our patients and partners (employees). 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.  Despite the COVID-19 cases significantly declining during the first quarter of 2021, our operating expenses remained 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 COVID-19 disrupting 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.   24 Table of Contents   At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but we expect the developments related to COVID-19 to adversely affect 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   The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID-19 pandemic. The new laws impacted healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Through the CARES Act, as well as the Paycheck Protection Program and Health Care Enhancement Act ("PPPCHE"), the federal government has allocated $178 billion to the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID-19.       During the three months ending March 31, 2021, we received additional disbursements from the Provider Relief Fund which totaled $30,191,000. These funds 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 $22,749,000 of government stimulus income from the Provider Relief Funds for the three months ended March 31, 2021.  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 the U.S. Department of Health and Human Services (“HHS”).   As of March 31, 2021, amounts not recognized as income are $23,510,000 and are reflected in the current liability section of our interim condensed 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 that we will fully utilize the remaining $23,510,000 of provider relief funds before the reporting requirement deadlines outlined by HHS.   Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. We received approximately $51,253,000 as part of this program. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. Recoupment of the accelerated payments began in the second quarter of 2021. As of March 31, 2021, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheet as the related performance obligations have not been completed.   The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through March 31, 2021. On April 14, 2021, Congress extended the Medicare sequestration suspension period to December 31, 2021.   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 be due between March 27, 2020 and December 31, 2020. The provision requires that the deferred taxes be paid over a two-year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. At March 31, 2021, we have deferred $21,153,000 of the Company’s share of the social security taxes.  At March 31, 2021, half of the payroll tax deferral is included in accrued payroll in the current liabilities section of the consolidated balance sheet and the other half of the payroll tax deferral is included in other noncurrent liabilities within our consolidated balance sheet.    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 three months ended March 31, 2021, we have recorded $3,955,000 in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.       25 Table of Contents         Summary of Goals and Areas of Focus   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 the three months ending March 31, 2021 was 76.8% compared to 91.4% for the same period a year ago. For the first time since the beginning of the COVID-19 pandemic, the census in our skilled nursing facilities increased approximately 3.5% from January 1, 2021 through March 31, 2021.     Due to the pandemic, 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 of Patient Care   CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers compare skilled nursing facilities more easily. The Five-Star Quality Rating System gives each skilled nursing operation a rating ranging between one and five stars in various categories (five stars being the best). The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.   The tables below summarize NHC's overall performance in these Five-Star ratings versus the skilled nursing industry as of March 31, 2021:       NHC Ratings     Industry Ratings   Total number of skilled nursing facilities, end of period     75           Number of 4 and 5-star rated skilled nursing facilities     59           Percentage of 4 and 5-star rated skilled nursing facilities     79%       49%   Average rating for all skilled nursing facilities, end of period     4.14       3.27     Development and Growth   We are undertaking to expand our senior care operations while protecting our existing operations and markets. The following table lists our recent development activities.   Type of Operation     Description     Size     Location     Placed in Service   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   Behavioral Health Hospital     New Facility     16 beds     St. Louis, MO     Under Construction   Behavioral Health Hospital     New Facility     64 beds     Knoxville, TN     Under Construction                                 Accrued Risk Reserves   Our accrued professional liability and workers’ compensation reserves totaled $101,481,000 at March 31, 2021 and are a primary area of management focus. We have set aside restricted cash and cash equivalents and marketable securities to fund our estimated professional liability and workers’ compensation liabilities.   26 Table of Contents   As to exposure for professional liability claims, we have developed performance certification criteria to measure and 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.     Government Reimbursement Programs   Medicare – Skilled Nursing Facilities   On July 31, 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates and policy changes for skilled nursing facilities, which began October 1, 2020. The fiscal year 2021 final rule provided for an approximate 2.2% increase, or $750 million, compared to fiscal year 2020 levels. The final rule continues to reflect the commitment to shifting Medicare payments from volume to value, with the continued implementation of PDPM and value-based purchasing to improve interoperability, operational quality, and safety.     The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. On December 27, 2020, the Consolidated Appropriations Act of 2021 further suspended the 2.0% payment adjustment through March 31, 2021. On April 14, 2021, Congress extended the Medicare sequestration suspension period to December 31, 2021.   On April 8, 2021, CMS released a proposed rule outlining fiscal year 2022 Medicare payment rates and policy changes for skilled nursing facilities, which would begin October 1, 2021. The fiscal year 2022 proposed rule provided for an approximate 1.3% increase, or $444 million, compared to 2021 levels.   For the first three months of 2021, our average Medicare per diem rate for skilled nursing facilities increased 6.3% as compared to the same period in 2020.    Medicaid – Skilled Nursing Facilities   Effective July 1, 2020 and for the fiscal year 2021, the state of Tennessee implemented specific individual nursing facility increases. We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately $1,500,000, or $375,000 per quarter.   Effective October 1, 2020 and for the fiscal year 2021, the state of South Carolina implemented specific individual nursing facility rate changes. We estimate the resulting increase in revenue for the 2021 fiscal year will be approximately $3,600,000 annually, or $900,000 per quarter.   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 three months ended March 31, 2021, we have recorded $3,955,000 in net patient revenues in our interim condensed consolidated statements of operations for these supplemental Medicaid payments.   For the first three months of 2021, our average Medicaid per diem increased 8.5% compared to the same period in 2020.   We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures and also look for adequate funding sources, including provider assessments. There are several pieces of legislation that include provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities.   Medicare – Homecare Programs   In November 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2021 will increase in aggregate by 1.9%, or $390 million. The increase reflects the effects of the 2.0% home health payment update percentage and a 0.1% decrease due to reductions made by the rural add-on policy. The rule also updates the home health wage index, limiting any decrease in a geographic area’s wage index value to no more than 5% next year.   27 Table of Contents   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 our 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 2 – 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 table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands ):         Three Months Ended March 31, 2021       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 203,242     $ 13,613     $ -     $ 216,855   Other revenues     98       -       11,271       11,369   Government stimulus income     22,749       -       -       22,749   Net operating revenues and grant income     226,089       13,613       11,271       250,973                                     Costs and expenses:                                 Salaries, wages, and benefits     128,809       8,408       7,913       145,130   Other operating     64,810       2,942       2,401       70,153   Rent     8,194       431       1,438       10,063   Depreciation and amortization     9,263       87       811       10,161   Interest     244       -       -       244   Total costs and expenses     211,320       11,868       12,563       235,751                                     Income/(loss) from operations     14,769       1,745       (1,292 )     15,222   Non-operating income     -       -       6,260       6,260   Unrealized gains on marketable equity securities     -       -       7,059       7,059                                     Income before income taxes   $ 14,769     $ 1,745     $ 12,027     $ 28,541           Three Months Ended March 31, 2020       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 230,987     $ 13,108     $ -     $ 244,095   Other revenues     435       -       11,594       12,029   Net operating revenues     231,422       13,108       11,594       256,124                                     Costs and expenses:                                 Salaries, wages and benefits     135,215       8,316       3,938       147,469   Other operating     65,105       3,819       2,744       71,668   Rent     8,378       457       1,497       10,332   Depreciation and amortization     9,571       54       813       10,438   Interest     382       -       30       412   Total costs and expenses     218,651       12,646       9,022       240,319                                     Income from operations     12,771       462       2,572       15,805                                     Non-operating income     -       -       8,146       8,146   Unrealized losses on marketable equity securities     -       -       (60,392 )     (60,392 )                                   Income/(loss) before income taxes   $ 12,771     $ 462     $ (49,674 )   $ (36,441 )   28 Table of Contents   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, operating results for the newly constructed healthcare facilities not at full capacity, share-based compensation expense, and any gains on the acquisitions of equity method investments is helpful in allowing investors to more accurately access the Company’s operations.   The operating results for the newly constructed healthcare facilities not at full capacity for the three months ended March 31, 2021 include facilities that began operations from 2019 to 2021, which is one memory care facility. For the three months ended March 31, 2020, included are facilities that began operations from 2018 to 2020, which is one memory care facility.   The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):       Three Months Ended March 31       2021     2020                     Net income/(loss) attributable to National Healthcare Corporation   $ 21,267     $ (26,852 ) Non-GAAP adjustments:                 Unrealized (gains)/losses on marketable equity securities     (7,059 )     60,392   Gain on acquisitions of equity method investments     -       (1,707 ) Operating results for newly opened facilities not at full capacity     245       203   Share-based compensation expense     496       466   Provision (benefit) of income taxes on non-GAAP adjustments     1,643       (15,432 ) Non-GAAP Net income   $ 16,592     $ 17,070                                       GAAP diluted earnings per share   $ 1.38     $ (1.76 ) Non-GAAP adjustments:                 Unrealized (gains)/losses on marketable equity securities     (0.33 )     2.92   Gain on acquisitions of equity method investments     -       (0.08 ) Operating results for newly opened facilities not at full capacity     0.01       0.01   Share-based compensation expense     0.02       0.02   Non-GAAP diluted earnings per share   $ 1.08     $ 1.11     29 Table of Contents   Results of Operations   The following table and discussion set forth items from the interim condensed consolidated statements of operations as a percentage of net operating revenues and grant income for the three months ended March 31, 2021 and 2020.   Percentage of Net Operating Revenues and Grant Income       Three Months Ended March 31       2021     2020   Net operating revenues and grant income     100.0 %     100.0 % Costs and expenses:                 Salaries, wages, and benefits     57.8       57.5   Other operating     28.0       28.0   Facility rent     4.0       4.0   Depreciation and amortization     4.0       4.1   Interest     0.1       0.2   Total costs and expenses     93.9       93.8   Income from operations     6.1       6.2   Non–operating income     2.5       3.2   Unrealized gains/(losses) on marketable equity securities     2.8       (23.6 ) Income/(loss) before income taxes     11.4       (14.2 ) Income tax (provision) benefit     (2.9 )     3.7   Net income/(loss)     8.5       (10.5 ) Net income attributable to noncontrolling interest     0.0       0.0   Net income/(loss) attributable to stockholders of NHC     8.5 %     (10.5 %)   Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020   Results for the quarter ended March 31, 2021 compared to the first quarter of 2020 include a 2.0% decrease in net operating revenues and grant income and a 3.7% decrease in income from operations. Excluding the unrealized gains in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months ended March 31, 2021 was $16,592,000 compared to $17,070,000 for the first quarter of 2020, which is a decrease of 2.8%.   Net operating revenues and grant income   Net patient revenues decreased $27,240,000, or 11.2%, compared to the same period last year. Included in net patient revenues for the three months ending March 31, 2021 and 2020 is $3,955,000 and $1,674,000, respectively, of COVID-19 supplemental Medicaid payments that were received to help mitigate the incremental costs in fighting the public health emergency.   The total census at owned and leased skilled nursing facilities for the quarter averaged 76.8%, compared to an average of 91.4% for the same quarter a year ago. For the first time since the beginning of the COVID-19 pandemic, the census in our skilled nursing facilities increased approximately 3.5% from January 1, 2021 through March 31, 2021. Our Medicare per diem rates increased 6.3% and managed care per diem rates increased 3.1% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 8.5% and decreased 1.6%, respectively, compared to the same quarter a year ago. Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 6.9% compared to the same quarter a year ago.   In February 2020, the Company acquired the remaining 75% ownership interest in a 166-bed skilled nursing facility in Knoxville, Tennessee. For the three months ended March 31, 2021, this skilled nursing facility increased net patient revenues approximately $1,670,000 compared to the first quarter of 2020. In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri. For the three months ended March 31, 2021, the sale of this facility decreased net patient revenue by $2,233,000 compared to the first quarter of 2020.   Other revenues decreased $660,000, or 5.5%, compared to the same quarter last year, as further detailed in Note 5 to our interim condensed consolidated financial statements.   During the three months ended March 31, 2021, we recorded $22,749,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.     30 Table of Contents   Total costs and expenses   Total costs and expenses for the three months ended March 31, 2021 compared to the same period of 2020 decreased $4,568,000, or 1.9%, to $235,751,000 from $240,319,000.   Salaries, wages, and benefits decreased $2,339,000, or 1.6%, to $145,130,000 from $147,469,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 57.8% compared to 57.6% for the three months ended March 31, 2021 and 2020, respectively. The primary reason for salaries and wages decreasing was the continued initiative of controlling expenses among our operations to mitigate our occupancy decline among our skilled nursing and assisted living facilities. The expense controlling measures were offset by the incentive compensation, or "combat pay", paid to our frontline partners in fighting the COVID-19 pandemic. We incurred approximately $3,348,000 and $827,000 in incentive compensation related to COVID-19 for the three months ended March 31, 2021 and 2020, respectively. Excluding the COVID-19 related compensation, our salaries, wages, and benefits decreased 3.3% for the three months ended March 31, 2021 compared to the first quarter of 2020.     Other operating expenses decreased $1,515,000, or 2.1%, to $70,153,000 for the 2021 period compared to $71,668,000 for the 2020 period. Other operating expenses as a percentage of net operating revenues and grant income was 28.0% for the three months ended March 31, 2021 and 2020, respectively. During the first quarter of 2021 and 2020, we incurred approximately $5,153,000 and $948,000, respectively, in COVID-19 related expenses in purchasing personal protective equipment, nursing supplies, and lab and testing supplies.  The expense controlling efforts have helped mitigate the increase in other operating expenses due to COVID-19.  Excluding the COVID-19 related expenses, other operating expenses decreased $5,720,000, or 8.1%, for the three months ended March 31, 2021 compared to the first quarter of 2020.   Other income   Non–operating income decreased by $1,886,000 compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.   Income taxes   The income tax provision for the three months ended March 31, 2021 is $7,233,000 (an effective income tax rate of 25.3%). Excluding certain items, we expect our corporate (federal and state) income tax rate for 2021 to be approximately 26.0%.    Noncontrolling interest   The noncontrolling interest in subsidiaries is presented within total equity of the Company’s consolidated balance sheets. The company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.     Liquidity, Capital Resources, and Financial Condition   Our primary sources of cash include revenues from the operations of our healthcare and senior living facilities, management and accounting services, rental income, and investment income. Our primary uses of cash include salaries, wages and other operating costs of our healthcare and senior living facilities, the cost of additions to and acquisitions of real property, facility rent expenses, and dividend distributions. These sources and uses of cash are reflected in our interim condensed consolidated statements of cash flows and are discussed in further detail below.   The following is a summary of our sources and uses of cash flows (dollars in thousands) :       Three Months Ended March 31     Three Month Change       2021     2020           %   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     12,589       7,754       4,835       62.4                                     Cash used in investing activities     (5,852 )     (16,225 )     10,373       63.9                                     Cash used in/(provided by) financing activities     (9,148 )     31,641       (40,789 )     (128.9 )                                   Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period   $ 156,091     $ 84,180     $ 71,911       85.4     31 Table of Contents   Operating Activities   Net cash provided by operating activities for the three months ended March 31, 2021 was $12,589,000 as compared to $7,754,000 in the same period last year. Cash provided by operating activities consisted of net income of $21,308,000 and adjustments for non–cash items of $2,283,000. There was cash used for working capital needs in the amount of $16,899,000 for three months ended March 31, 2021 compared to $19,547,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $5,897,000 during the three months ended March 31, 2021, compared to $2,349,000 for the same period a year ago.   Included in the adjustments for non-cash items are depreciation expense, equity in earnings of unconsolidated investments, unrealized gains/losses on our marketable equity securities, deferred taxes, stock compensation, and a gain on the acquisition of a 166-bed skilled nursing facility in Knoxville, Tennessee during the first quarter of 2020 in which we previously held a noncontrolling ownership interest.   Investing Activities   Net cash used in investing activities totaled $5,852,000 for the three months ended March 31, 2021 compared to $16,225,000 for the three months ended March 31, 2020. Cash used for property and equipment additions was $4,327,000 and $6,628,000 for the three months ended March 31, 2021 and 2020, respectively. The Company collected notes receivable of $255,000 and $376,000 for the three months ended March 31, 2021 and 2020, respectively. Purchases of marketable securities, net of sales, resulted in cash used of $1,780,000 and $2,950,000 for the three months ended March 31, 2021 and 2020. The acquisition of the 166-bed skilled nursing facility in Knoxville, Tennessee resulted in cash used of $6,648,000 for the three months ended March 31, 2020.   Financing Activities     Net cash used in financing activities totaled $9,148,000 for the three months ended March 31, 2021 compared to net cash provided by financing activities of $31,641,000 for the three months ended March 31, 2020. We made principal payments under our finance lease obligations in the amount of $1,081,000 and $1,019,000 for the three months ended March 31, 2021 and 2020, respectively. Cash used for dividend payments to common stockholders totaled $7,987,000 in the current year period compared to $7,968,000 for the same period a year ago. We made borrowings under our credit facility of $40,000,000 during the three months ended March 31, 2020.   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 $134,107,000 and our marketable securities of $184,738,000 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 $134,107,000 and our marketable securities of $184,738,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At March 31, 2021, we do not have any long-term debt.   Our ability to meet our long–term contractual obligations, and to finance our operating requirements and growth 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 healthcare, 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.     Commitment and Contingencies   Governmental Regulations   Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid, and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID-19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.       32 Table of Contents