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.   25 Table of Contents   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;         ● liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 17: 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 9,473 licensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, 35 homecare agencies, and 28 hospice agencies. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. 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. 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.    We began our first vaccination clinics in our skilled nursing facilities around the middle of December 2020. As the vaccination clinics progressed and as the vaccine became more accessible, we began to see a significant decline in COVID-19 cases among our operations.  With the COVID-19 cases significantly declining during the first and second quarters of 2021, the census in our skilled nursing facilities began to increase. The census in our skilled nursing facilities has risen every month in the first and second quarters of 2021 and increased approximately 7.5% from January 1, 2021 through June 30, 2021.    26 Table of Contents   Despite the COVID-19 cases significantly declining during the first and second quarters of 2021, our operating expenses remain elevated with incentive compensation being paid to our frontline partners, as well as increased costs of personal protective equipment (“PPE”), sanitizers and cleaning supplies, and COVID-19 testing of our patients and partners. Despite the continued disruption of COVID-19 to our operations, our capital and financial resources, including our overall liquidity, remain strong. Our liquidity provides us with significant flexibility to maintain the strength of our balance sheet in periods of uncertainty or stress.   At this time, we are not able to quantify the impact that the COVID-19 pandemic will have on our future financial results, but 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 CARES Act. Through the CARES Act, as well as the Paycheck Protection Program and Health Care Enactment Act, 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.       The Provider Relief Fund grants come with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID-19. The Company recorded $15,126,000 and $24,648,000 of government stimulus income from the Provider Relief Funds for the three months ended June 30, 2021 and 2020, respectively. The Company recorded $37,875,000 and $24,648,000 of government stimulus income from the Provider Relief Funds for the six months ended June 30, 2021 and 2020, respectively.  The grant income was determined on a systemic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by HHS.   As of June 30, 2021, amounts not recognized as income are $10,429,000 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 $10,429,000 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. We received approximately $51,253,000 as part of this program. These funds are applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. Recoupment of the accelerated payments began in the second quarter of 2021. As of June 30, 2021, $40,121,000 of the accelerated payments remain and is reflected within contract liabilities in the interim condensed consolidated balance sheet.   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 June 30, 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 June 30, 2021, we have deferred $21,153,000 of the Company’s share of the social security taxes.    27 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 six months ending June 30, 2021 was 78.9% compared to 87.9% for the same period a year ago. For the three months ended June 30, 2021, overall census in our owned and leased skilled nursing facilities was 81.1%% compared to 84.3% in the second quarter of 2020. The census in our skilled nursing facilities for the second quarter of 2021 increased approximately 4% from April 1, 2021 through June 30, 2021. The census in our skilled nursing facilities increased approximately 7.5% from January 1, 2021 through June 30, 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 June 30, 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     60           Percentage of 4 and 5-star rated skilled nursing facilities     80 %     47 % Average rating for all skilled nursing facilities, end of period     4.15       3.21     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   Hospice     Acquisition     28 agencies     Various     June 2021   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 $101,850,000 at June 30, 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.   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.   28 Table of Contents   Government Reimbursement Programs   Medicare – Skilled Nursing Facilities   On July 29, 2021, CMS released a final rule outlining fiscal year 2022 Medicare payment rates and policy changes for skilled nursing facilities, which begins October 1, 2021. The fiscal year 2022 rule results in an increase of approximately $410 million in Medicare Part A payments to SNFs in 2022.  This estimate reflects an update to payment rates of 1.2%, which is based on a 2.7% SNF market basket update, less a 0.8% forecast error adjustment and a 0.7% productivity adjustment. These impact figures do not incorporate the SNF Value-Based Program reductions that are estimated to be $184.3 million in FY2022.   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 reflected 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 June 30, 2021. On April 14, 2021, Congress extended the Medicare sequestration suspension period to December 31, 2021.   For the first six months of 2021, our average Medicare per diem rate for skilled nursing facilities increased 4.2% 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 supplemental Medicaid payments to help mitigate the incremental costs resulting from the COVID-19 public health emergency. We have recorded $7,094,000 and $3,858,000 in net patient revenues for these supplemental Medicaid payments for the three months ended June 30, 2021 and 2020, respectively. We have recorded $11,049,000 and $5,532,000 in net patient revenues for these supplemental Medicaid payments for the six months ended June 30, 2021 and 2020, respectively.   For the first six months of 2021, our average Medicaid per diem increased 8.4% 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.   In June 2021, CMS released its proposed rule outlining fiscal year 2022 Medicare payment rates. CMS projects payments to home health agencies in fiscal year 2022 will increase in aggregate by 1.7%, or $310 million, based on proposed policies. Additionally, CMS proposed plans to expand the Home Health Value-Based Purchasing (HHVBP) model nationwide by the start of 2022. The CMS Innovation Center developed the HHVBP demonstration in an effort to create financial incentives for better quality of care.   29 Table of Contents   Medicare – Hospice   In July 2020, CMS released its final rule outlining fiscal year 2021 Medicare payment rates. CMS issued a rate increase of 2.4%, or $540 million, effective October 1, 2020. The hospice cap amount for the 2021 cap year is equal to the FY 2020 cap amount updated by the FY 2021 hospice payment update percentage of 2.4 percent, or $30,683.93.   In Apil 2021, CMS released its proposed rule outlining fiscal year 2022 Medicare payment rates. CMS issued a proposed rule to update hospice payment rates for fiscal year 2022 with a 2.3%, or $530 million, net increase to payments as compared to FY 2021. This includes a 2.5% market basket update and a 0.2 percentage point cut for productivity.   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 and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources.   The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 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 June 30, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues:                                 Net patient revenues   $ 218,860     $ 18,116     $ -     $ 236,976   Other revenues     97       -       10,959       11,056   Government stimulus income     15,126       -       -       15,126   Net operating revenues and grant income     234,083       18,116       10,959       263,158                                     Costs and expenses:                                 Salaries, wages, and benefits     128,573       10,482       17,749       156,804   Other operating     65,129       3,991       2,923       72,043   Rent     8,278       454       1,438       10,170   Depreciation and amortization     9,227       94       810       10,131   Interest     215       -       -       215   Total costs and expenses     211,422       15,021       22,920       249,363                                     Income (loss) from operations     22,661       3,095       (11,961 )     13,795   Non-operating income     -       -       5,586       5,586   Gain on acquisition of equity method investment     -       -       95,202       95,202   Unrealized losses on marketable equity securities     -       -       (6,489 )     (6,489 )                                   Income before income taxes   $ 22,661     $ 3,095     $ 82,338     $ 108,094     30 Table of Contents       Three Months Ended June 30, 2020       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 214,387     $ 11,284     $ -     $ 225,671   Other revenues     127       -       11,196       11,323   Government stimulus income     22,622       2,026       -       24,648   Net operating revenues and grant income     237,136       13,310       11,196       261,642                                     Costs and expenses:                                 Salaries, wages, and benefits     136,380       7,963       12,571       156,914   Other operating     63,999       4,342       2,520       70,861   Rent     8,380       446       1,494       10,320   Depreciation and amortization     9,626       106       813       10,545   Interest     366       -       87       453   Total costs and expenses     218,751       12,857       17,485       249,093                                     Income (loss) from operations     18,385       453       (6,289 )     12,549   Non-operating income     -       -       5,954       5,954   Unrealized gains on marketable equity securities     -       -       20,053       20,053                                     Income before income taxes   $ 18,385     $ 453     $ 19,718     $ 38,556         Six Months Ended June 30, 2021       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 422,103     $ 31,728     $ -     $ 453,831   Other revenues     195       -       22,230       22,425   Government stimulus income     37,875       -       -       37,875   Net operating revenues and grant income     460,173       31,728       22,230       514,131                                     Costs and expenses:                                 Salaries, wages, and benefits     257,383       18,890       25,661       301,934   Other operating     129,938       6,934       5,324       142,196   Rent     16,472       884       2,877       20,233   Depreciation and amortization     18,490       181       1,621       20,292   Interest     459       -       -       459   Total costs and expenses     422,742       26,889       35,483       485,114                                     Income (loss) from operations     37,431       4,839       (13,253 )     29,017   Non-operating income     -       -       11,846       11,846   Gain on acquisition of equity method investment     -       -       95,202       95,202   Unrealized gains on marketable equity securities     -       -       570       570                                     Income before income taxes   $ 37,431     $ 4,839     $ 94,365     $ 136,635     31 Table of Contents       Six Months Ended June 30, 2020       Inpatient Services     Homecare and Hospice     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 445,374     $ 24,392     $ -     $ 469,766   Other revenues     561       -       22,791       23,352   Government stimulus income     22,622       2,026       -       24,648   Net operating revenues and grant income     468,557       26,418       22,791       517,766                                     Costs and expenses:                                 Salaries, wages, and benefits     271,595       16,279       16,509       304,383   Other operating     129,104       8,161       5,264       142,529   Rent     16,757       903       2,992       20,652   Depreciation and amortization     19,197       160       1,626       20,983   Interest     748       -       117       865   Total costs and expenses     437,401       25,503       26,508       489,412                                     Income (loss) from operations     31,156       915       (3,717 )     28,354   Non-operating income     -       -       12,392       12,392   Gain on acquisition of equity method investment     -       -       1,708       1,708   Unrealized losses on marketable equity securities     -       -       (40,339 )     (40,339 )                                   Income (loss) before income taxes   $ 31,156     $ 915     $ (29,956 )   $ 2,115     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 and six months ended June 30, 2021 include facilities that began operations from 2019 to 2021. For the three and six months ended June 30, 2020, included are facilities that began operations from 2018 to 2020. For all of the 2021 and 2020 periods presented, there is one memory care facility that is included in the reconciliation.   In June 2021, the gain on the acquisition of an equity method investment is from the acquisition of Caris HealthCare, L.P. See Note 4 for additional detail describing the Caris acquisition. In February 2020, the gain on the acquisition of an equity method investment is from the acquisition of a skilled nursing facility in Knoxville, Tennessee where we owned a prior 25% non-controlling ownership interest before acquiring the remaining 75% ownership interest.   The tables below provide reconciliations of GAAP to non-GAAP items (dollars in thousands, except per share data):       Three Months Ended June 30     Six Months Ended June 30       2021     2020     2021     2020                                     Net income attributable to National Healthcare Corporation   $ 104,883     $ 28,324     $ 126,150     $ 1,472   Non-GAAP adjustments                                 Unrealized (gains)/losses on marketable equity securities     6,489       (20,053 )     (570 )     40,339   Gains on acquisitions of equity method investments     (95,202 )     -       (95,202 )     (1,708 ) Operating results for newly opened facilities not at full capacity     120       112       365       314   Share-based compensation expense     683       823       1,179       1,289   Provision/(benefit) of income taxes on non-GAAP adjustments     (1,896 )     4,971       (253 )     (10,461 ) Non-GAAP Net income   $ 15,077     $ 14,177     $ 31,669     $ 31,245                                                                       GAAP diluted earnings per share   $ 6.80     $ 1.84     $ 8.19     $ 0.10   Non-GAAP adjustments                                 Unrealized (gains)/losses on marketable equity securities     0.31       (0.97 )     (0.03 )     1.94   Gains on acquisitions of equity method investments     (6.17 )     -       (6.18 )     (0.08 ) Operating results for newly opened facilities not at full capacity     0.01       0.01       0.02       0.02   Share-based compensation expense     0.03       0.04       0.06       0.05   Non-GAAP diluted earnings per share   $ 0.98     $ 0.92     $ 2.06     $ 2.03     32 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 and six months ended June 30, 2021 and 2020.   Percentage of Net Operating Revenues and Grant Income       Three Months Ended June 30     Six Months Ended June 30       2021     2020     2021     2020   Net operating revenues and grant income     100.0 %     100.0 %     100 %     100 % Costs and expenses:                                 Salaries, wages, and benefits     59.6       60.0       58.7       58.8   Other operating     27.4       27.1       27.7       27.5   Facility rent     3.9       3.9       4.0       4.0   Depreciation and amortization     3.8       4.0       3.9       4.0   Interest     0.1       0.2       0.1       0.2   Total costs and expenses     94.8       95.2       94.4       94.5   Income from operations     5.2       4.8       5.6       5.5   Non–operating income     2.2       2.2       2.4       2.3   Gains on acquisitions of equity method investments     36.2       -       18.5       0.4   Unrealized gains/(losses) on marketable equity securities     (2.5 )     7.7       0.1       (7.8 ) Income before income taxes     41.1       14.7       26.6       0.4   Income tax provision     (1.1 )     (3.8 )     (2.0 )     (0.1 ) Net income     40.0       10.9       24.6       0.3   Net income attributable to noncontrolling interest     (0.1 )     (0.1 )     (0.1 )     0.0   Net income attributable to stockholders of NHC     39.9       10.8       24.5       0.3     Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020   Results for the quarter ended June 30, 2021 compared to the second quarter of 2020 include a 0.6% increase in net operating revenues and grant income and a 9.9% increase in income from operations. For the quarter ended June 30, 2021, GAAP net income attributable to NHC was $104,883,000 compared to $28,324,000 for the same period in 2020.   The large increase in our reported GAAP net income for the second quarter of 2021 is primarily due to the gain recorded from the acquisition of Caris, a hospice provider. Excluding the gain on the Caris acquisition, as well as the unrealized losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the three months ended June 30, 2021 was $15,077,000 compared to $14,177,000 for the second quarter of 2020, which is an increase of 6.4%.   Net operating revenues and grant income   Net patient revenues increased $11,305,000, or 5.0%, compared to the same period last year.   The total census at owned and leased skilled nursing facilities for the quarter averaged 81.1%, compared to an average of 84.3% for the same quarter a year ago. With the COVID-19 cases significantly declining during the first and second quarters of 2021, the census in our skilled nursing facilities began to increase.  The census in our skilled nursing facilities for the second quarter of 2021 increased approximately 4% from April 1, 2021 through June 30, 2021.   Overall, the composite skilled nursing facility per diem increased 7.8% compared to the same quarter a year ago. Our Medicare per diem rates increased 2.0% and managed care per diem rates increased 4.2% compared to the same quarter a year ago. Medicaid and private pay per diem rates increased 8.2% and 3.7%, respectively, compared to the same quarter a year ago. The Medicaid per diem rate increased significantly due to the supplemental COVID-19 payments that we received from various states to help mitigate the incremental costs in fighting the pandemic. For the three months ending June 30, 2021 and 2020, respectively, $7,094,000 and $3,858,000 have been included in our net patient revenues for these supplemental COVID-19 Medicaid payments.   In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing of $3,712,000 for the three months ended June 30, 2021 compared to the second quarter of 2020. Our homecare operations had an increase in net patient revenues of approximately $3,121,000 for the three months ended June 30, 2021 compared to the second quarter of 2020. In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri. For the three months ended June 30, 2021, the sale of this facility decreased net patient revenue by $2,171,000 compared to the second quarter of 2020.   33 Table of Contents   Other revenues decreased $267,000, or 2.4%, compared to the same quarter last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.   During the three months ended June 30, 2021 and 2020, respectively, we recorded $15,126,000 and $24,648,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.     Total costs and expenses   Total costs and expenses for the three months ended June 30, 2021 compared to the same period of 2020 increased $270,000, or 0.1%, to $249,363,000 from $249,093,000.   Salaries, wages, and benefits decreased $110,000, or 0.1%, to $156,804,000 from $156,914,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 59.6% compared to 60.0% for the three months ended June 30, 2021 and 2020, respectively. With the COVID-19 cases significantly declining during the second quarter of 2021, the COVID-related incentive pay (or combat pay) was significantly reduced in the second quarter of 2021 compared to the same quarter a year ago. But, we continue to face tremendous wage pressure and inflation to retain and attract new partners (employees). Therefore, the wage pressure and inflation increases offset any reduction in salaries and wages from the decreasing of the COVID-related incentive pay. Our Caris acquisition increased salaries, wages, and benefits $1,905,000 in the second quarter of 2021 compared to the same quarter a year ago.   Other operating expenses increased $1,182,000, or 1.7%, to $72,043,000 for the 2021 period compared to $70,861,000 for the 2020 period. Other operating expenses as a percentage of net operating revenues and grant income was 27.4% and 27.1% for the three months ended June 30, 2021 and 2020, respectively. Our Caris acquisition increased other operating expenses $771,000 in the second quarter of 2021 compared to the same quarter a year ago.   Other income   Non–operating income decreased by $368,000 compared to the same period last year, as further detailed in Note 7 to our interim condensed consolidated financial statements.   Gain on acquisition of equity method investments   In June 2021, a gain of $95,202,000 was recorded on the acquisition of the remaining ownership interest of Caris. We previously held a noncontrolling interest in the partnership. See Note 4 for additional detail describing the Caris acquisition.   Income taxes   The income tax provision for the three months ended June 30, 2021 is $2,764,000 (an effective income tax rate of 2.6%). The $95.2 million gain from the Caris acquisition is a non-taxable event and is the primary driver of our effective tax rate being lower than expected. 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.   Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020   Results for the six months ended June 30, 2021 compared to the first six months of 2020 include a 0.7% decrease in net operating revenues and grant income and a 2.3% increase in income from operations. For the six months ended June 30, 2021, GAAP net income attributable to NHC was $126,150,000 compared to $1,472,000 for the same period in 2020.   The large increase in our reported GAAP net income for the 2021 six-month period compared to the same period in 2020 is primarily due to the gain recorded from the acquisition of Caris, a hospice provider. Excluding the gain on the Caris acquisition, as well as the unrealized gains and losses in our marketable equity securities portfolio and the other non-GAAP adjustments, non-GAAP net income for the six months ended June 30, 2021 was $31,669,000 compared to $31,245,000 for the first six months of 2020, which is an increase of 1.4%.   34 Table of Contents   Net operating revenues and grant income   Net patient revenues decreased $15,935,000, or 3.4%, compared to the same period last year.    The total census at owned and leased skilled nursing facilities for the six months averaged 78.9%, compared to an average of 87.9% for the same period a year ago. With the COVID-19 cases significantly declining during the first and second quarters of 2021, the census in our skilled nursing facilities began to increase. The census in our skilled nursing facilities has risen every month in the first and second quarters of 2021 and increased approximately 7.5% from January 1, 2021 through June 30, 2021.    Overall, the composite skilled nursing facility per diem at our owned and leased skilled nursing facilities increased 7.4% compared to the same period a year ago. Our Medicare per diem rates increased 4.2% and managed care per diem rates increased 3.7% compared to the same period a year ago. Medicaid and private pay per diem rates increased 8.4% and 1.1%, respectively, compared to the same period a year ago. The Medicaid per diem rate increased significantly due to the supplemental COVID-19 payments that we received from various states to help mitigate the incremental costs in fighting the pandemic. For the six months ending June 30, 2021 and 2020, respectively, $11,049,000 and $5,532,000 have been included in our net patient revenues for these supplemental COVID-19 Medicaid payments   In June 2021, the Company acquired the remaining ownership interest in Caris, which resulted in net patient revenues increasing $3,712,000 for the six months ended June 30, 2021 compared to the same period a year ago. Our homecare operations had an increase in net patient revenues of approximately $3,625,000 for the six months ended June 30, 2021, compared to the same period a year ago. In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri. For the six months ended June 30, 2021, the sale of this facility decreased net patient revenue by $4,404,000 compared to the same period a year ago.   Other revenues decreased $927,000, or 4.0%, compared to the same period last year, as further detailed in Note 6 to our interim condensed consolidated financial statements.   During the six months ended June 30, 2021 and 2020, respectively, we recorded $37,875,000 and $24,648,000 in government stimulus income related to funds received from the CARES Act Provider Relief Fund. See Note 3 - Coronavirus Pandemic for additional information.     Total costs and expenses   Total costs and expenses for the six months ended June 30, 2021 compared to the same period of 2020 decreased $4,298,000, or 0.9%, to $485,114,000 from $489,412,000.   Salaries, wages, and benefits decreased $2,449,000, or 0.8%, to $301,934,000 from $304,383,000. Salaries, wages, and benefits as a percentage of net operating revenues and grant income was 58.7% compared to 58.8% for the six months ended June 30, 2021 and 2020, respectively. With the COVID-19 cases significantly declining during the first and second quarter of 2021, the COVID-related incentive pay (or combat pay) was significantly reduced for the 2021 six-month period compared to the same period a year ago. But, we continue to face tremendous wage pressure and inflation to retain and attract new partners (employees). Therefore, the wage pressure and inflation increases offset most of the reduction in salaries and wages from the decreasing of the COVID-related incentive pay. Our Caris acquisition in June 2021 increased salaries, wages, and benefits $1,905,000 in the second quarter of 2021 compared to the six-month period a year ago.   Other operating expenses decreased $333,000, or 0.2%, to $142,196,000 for the 2021 period compared to $142,529,000 for the 2020 period. Other operating expenses as a percentage of net operating revenues and grant income was 27.7% and 27.5% for the six months ended June 30, 2021 and 2020, respectively. Our Caris acquisition increased other operating expenses $771,000 in the six month period of 2021 compared to the same period a year ago.   Other income   Non–operating income decreased by $546,000 compared to the same period last year, as further detailed in Note 7 to our interim condensed consolidated financial statements.   Gain on acquisition of equity method investments   In June 2021, a gain of $95,202,000 was recorded on the acquisition of the remaining ownership interest of Caris. We previously held a noncontrolling interest in the partnership. See Note 4 for additional detail describing the Caris acquisition.   35 Table of Contents   In February 2020, a gain of $1,708,000 was recorded on the acquisition of the remaining ownership interest of a 166-bed skilled nursing facility in Knoxville, Tennessee. 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.   Income taxes   The income tax provision for the six months ended June 30, 2021 is $9,997,000 (an effective income tax rate of 7.3%). The $95.2 million gain from the Caris acquisition is a non-taxable event and is the primary driver of our effective tax rate being lower than expected. 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) :       Six Months Ended June 31     Six 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     40,122       154,727       (114,605 )     (74.1 )                                   Cash used in investing activities     (31,995 )     (18,567 )     (13,428 )     (72.3 )                                   Cash used in financing activities     (16,042 )     (26,391 )     10,349       39.2                                     Cash, cash equivalents, restricted cash, and restricted cash equivalents, at end of period   $ 150,587     $ 170,779     $ (20,192 )     (11.8 )   Operating Activities   Net cash provided by operating activities for the six months ended June 30, 2021 was $40,122,000 as compared to $154,727,000 in the same period last year. Cash provided by operating activities consisted of net income of $126,638,000 and adjustments for non–cash items of $79,959,000. There was cash used for working capital needs in the amount of $12,871,000 for six months ended June 30, 2021 compared to cash provided by working capital needs in the amount $102,187,000 for the same period a year ago. We also received cash distributions from our unconsolidated investments of $6,314,000 during the six months ended June 30, 2021, compared to $6,901,000 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 on our marketable equity securities, deferred taxes, stock compensation, and gains on the acquisitions of equity method investments.   Investing Activities   Net cash used in investing activities totaled $31,995,000 for the six months ended June 30, 2021 compared to $18,567,000 for the six months ended June 30, 2020. Cash used for property and equipment additions was $13,143,000 and $12,517,000 for the six months ended June 30, 2021 and 2020, respectively. The acquisition of Caris resulted in cash used of $28,713,000 for the six months ended June 30, 2021. The Company collected notes receivable of $8,405,000 and $1,139,000 for the six months ended June 30, 2021 and 2020, respectively. Sales of marketable securities, net of purchases, resulted in positive cash flow of $1,456,000 for the six months ended June 30, 2021 compared to $69,000 for the six months ended June 30, 2020.   36 Table of Contents   Financing Activities     Net cash used in financing activities totaled $16,042,000 for the six months ended June 30, 2021 compared to net cash used in financing activities of $26,391,000 for the six months ended June 30, 2020. We made principal payments under our finance lease obligations in the amount of $2,178,000 and $2,052,000 for the six months ended June 30, 2021 and 2020, respectively. Cash used for dividend payments to common stockholders totaled $15,990,000 in the current year period compared to $15,948,000 for the same period a year ago.   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 $134,692,000 and our marketable equity and debt securities of $162,317,000 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 $134,692,000 and our marketable equity and debt securities of $162,317,000. We also have substantial value in our unencumbered real estate assets which could potentially be used as collateral in future borrowing opportunities. At June 30, 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.